Pew Research: Do You Know Who Pays Federal Income Tax?
The U.S. federal income tax system is a complex web of regulations and requirements that govern how individuals and corporations are taxed. It's a crucial source of revenue for the federal government, funding various programs and services.
For individuals, federal income taxes are based on a progressive tax system, where higher income earners generally pay higher tax rates. The income tax brackets are divided into several ranges, with different tax rates applied to each range. In addition to income, other factors such as marital status, filing status, and deductions can also impact an individual's tax liability.
However, the progressivity of the tax system tends to decrease for very high-income earners. In 2020, taxpayers with adjusted gross incomes (AGIs) of $1 million or more had an average effective tax rate of over 25%. The highest average effective tax rate was for taxpayers with AGIs between $2 million and $10 million, at nearly 28%. Taxpayers with AGIs of $10 million or more had a slightly lower average effective tax rate of 25.5%, mainly because they often receive more income from dividends and long-term capital gains, which are taxed at lower rates.
In 2020, the Internal Revenue Service (IRS) collected approximately $2.33 trillion in individual income taxes. However, it's worth noting that not all Americans pay federal income taxes. Some individuals, particularly those with lower incomes, may not owe any federal income tax due to various deductions, exemptions, and credits available to them. In fact, some individuals may even receive money from the IRS through refundable tax credits, which can result in a negative tax liability.
Since 2000, there has been a downward trend in average effective tax rates for all but the highest-income taxpayers (AGIs of $10 million or more), with different impacts from major tax law changes:
The Bush tax cuts of 2001 and 2003 benefited the highest-income taxpayers the most, with rate cuts for taxpayers with AGIs of $5 million or more and those with AGIs between $500,000 and $5 million.
In 2013, provisions targeting higher-income taxpayers, including a net investment income tax and Medicare surtax to fund the Affordable Care Act, increased the average effective tax rate for those with AGIs of $5 million or more and those with AGIs ranging from $500,000 to under $5 million.
The Trump tax cuts of 2017 had the biggest impact on upper-middle-income taxpayers, with the most significant rate cuts seen for those with AGIs of at least $200,000 but less than $500,000.
Many large corporations, such as Amazon, Nike, and FedEx, have faced criticism for paying minimal or no income tax in recent years. However, comparing corporate and individual income taxes can be complex. Corporations have the flexibility to report income and taxes differently to the IRS than they do to their investors publicly. Additionally, they can carry forward losses from one year to offset against profits in subsequent years, effectively reducing taxes owed on current year profits. This means that losses from a previous year can offset taxes due on profits in the current year, allowing corporations to manage their tax liability strategically.
Click here to review the full report including charts.