FACT : Top 1% of Tax payers pay 39.9% of all Federal Taxes

In big government, Obama, taxes on March 2, 2009 at 2:03 pm

July 18, 2008

Summary of Latest Federal Individual Income Tax Data

by Gerald Prante

Fiscal Fact No. 135

The latest release of Internal Revenue Service data on individual income taxes comes from calendar year 2006, a year in which the economy remained healthy and continued to grow, increasing individual income tax collections along with overall average effective tax rates.

This year’s numbers show that both the income share earned by the top 1 percent of tax returns and the tax share paid by that top 1 percent have once again reached all-time highs. In 2006, the top 1 percent of tax returns paid 39.9 percent of all federal individual income taxes and earned 22.1 percent of adjusted gross income, both of which are significantly higher than 2004 when the top 1 percent earned 19 percent of adjusted gross income (AGI) and paid 36.9 percent of federal individual income taxes.

The IRS data also shows increases in individual incomes across all income groups (see Table 3). Just as the highest earners lost the biggest percentage of their incomes during the recession of 2001, so they have prospered the most as the economy continued to rebound through 2006. For example, from 2000 to 2002, the AGI of the top 1 percent of tax returns fell by over 26 percent. In that same period, the AGI of the bottom 50 percent of tax returns actually increased by 4.3 percent. However, since 2002, as the recession has ended, AGI has risen by over 81 percent for the top 1 percent (an average of over 20 percent per year) and 17 percent (an average of around 4 percent per year) for the bottom 50 percent.

In sum, between 2000 and 2006, pre-tax income for the top 1 percent of tax returns grew by 34 percent, while pre-tax income for the bottom 50 percent increased by 22 percent. All figures are nominal (not adjusted for inflation).

This pattern of income loss and growth at the top of the income spectrum is the same during every recession and recovery. The net result has also been a sharp rise in federal government tax revenue from 2003 to 2006 compared to previous years.

The IRS data below include all of the 135.7 million tax returns filed in 2006 that had a positive AGI, not just the returns from people who earned enough to owe taxes. From other IRS data, we can see that in 2006, 92.7 million of the tax returns came from people who paid taxes into the Treasury. That leaves 43 million tax returns filed by people with positive AGI who used exemptions, deductions and tax credits to completely wipe out their federal income tax liability. Not only did they get back every dollar that the federal government withheld from their paychecks during 2005, but some even received more back from the IRS. This is a result of refundable tax credits like the Earned Income Tax Credit, which are not included in the aggregate percentile data here. (For more on the limitations of the data on this page, see the notes below. For a detailed paper on the distribution of the entire U.S. fiscal system, including all federal, state and local taxes, read Who Pays Taxes and Who Receives Government Spending? An Analysis of Federal, State and Local Tax and Spending Distributions, 1991 – 2004.)

Including all tax returns that had a positive AGI, taxpayers with an AGI of $153,542 or more in 2006 constituted the nation’s top 5 percent of earners. To break into the top 1 percent, a tax return had to have an AGI of $388,806 or more. These numbers are up significantly from 2003 when the equivalent thresholds were $130,080 and $295,495. Top incomes in 2006 are also continuing to surpass the peak they reached in 2000. At the height of the boom and bubble, $313,469 was the threshold to break into the top 1 percent, and then it fell to $285,424 in 2002 only to finally recover fully in 2005.

The top-earning 25 percent of taxpayers (AGI over $64,702) earned 68.2 percent of the nation’s income, but they paid more than four out of every five dollars collected by the federal income tax (86.3 percent). The top 1 percent of taxpayers (AGI over $388,806) earned approximately 22.1 percent of the nation’s income (as defined by AGI), yet paid 39.9 percent of all federal income taxes. That means the top 1 percent of tax returns paid about the same amount of federal individual income taxes as the bottom 95 percent of tax returns.

Average tax rates increased once again in 2006 as the economy continued to grow, even though there were no significant pieces of tax legislation enacted in 2006. Overall, the average tax rate for returns with a positive liability went from 12.1 percent to 12.45 percent from 2004 to 2005 and then up to 12.60 percent for 2006. (This does not include any refundable credits.)

The 2003 tax cut was the second in three years, and although tax rates are lower, the federal income tax still remains highly progressive. The average tax rate in 2006 ranges from 3.0 percent of income for the bottom half of tax returns to 22.8 percent for the top 1 percent.

*Source: Internal Revenue Service, http://www.irs.gov/taxstats/indtaxstats/article/0,,id=133521,00.html (“Individual Income Tax Returns with Positive Adjusted Gross Income (AGI) Returns Classified by Tax Percentile – Early Release”)


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: