Understanding Federal Taxation in the United States: Who Truly Pays?

Every year, the conversation around federal taxation in the United States reignites, with debates over who bears the brunt of the tax burden and how fair the current system truly is. According to recent data, about 22% of Americans actually pay their fair share in federal taxes. This means that a significant portion of the population does not contribute to federal income tax, while the rest shoulder a substantial tax burden.

The Tax System Simplified

When it comes to federal taxes, the effective tax rate is often misunderstood. The marginal tax rate is only applied to the last portion of income earned, which means that a married couple earning around $100,000 per year actually pays taxes on only a small fraction of that income. For instance, in 2021, such a couple would pay taxes at a rate of about 11%, translating to an excess of $10,000 in federal taxes. This flat tax regardless of the actual income earned means that many Americans believe they are paying more than their fair share.

Who Avoids Federal Income Tax?

According to the Office of Management and Budget (OMB), more than 52% of Americans do not pay any federal income tax at all. These individuals can include a wide range of people, from students and retirees to those who qualify for generous tax credits. In fact, about 40% of Americans receive back money from the government based on their tax credits, meaning they take home more in tax refunds than they pay in taxes.

Income Tax in Context

While federal income tax might be one component of the tax burden, it is crucial to consider the entirety of the taxes paid. Many Americans have to account for other forms of taxation, such as state income tax, sales tax, real estate taxes, personal property taxes, and sin taxes. This raises the question of how much of a household's income is truly consumed by taxes, which can be as high as 50% or more. Additionally, there is the capital gains tax and the estate tax which further add to the financial strain.

The Bailout Effect

A significant portion of the population not paying federal income tax can lead to other types of dependence. Many of these individuals receive benefits from the government, often more than what they would have contributed in taxes. Alexis de Tocqueville, in his 1830s masterpiece "Democracy in America," warned that one of the greatest threats to democracy was when citizens voted for benefits that exceeded what they paid in taxes. Today, a majority of benefit recipients do not pay into the system, and this imbalance is exacerbated by the Democrats' calls for the wealthy to pay a "fair share." The wealthiest 1% pay a staggering 47% of all tax revenue, while the top 10% pay more than 80% of the gross revenue. This means that calls for higher taxes on the wealthy are not only misguided but also false.

Tax Shelters and Loopholes

It is important to recognize that even those who pay significant amounts of tax often exploit shelters and loopholes. The tax code in the United States is complex and ever-evolving, providing numerous opportunities for legal tax avoidance and optimization. The wealthy are often in a better position to navigate these intricacies, which allows them to minimize their tax burden. Despite this, the tax system still relies heavily on the contributions of the wealthy, ensuring the continuation of vital government services and social programs.

Conclusion

The tax system in the United States is a complex and multifaceted issue that involves understanding not only who pays taxes but how much and on what basis. While it is true that a significant portion of the population does not contribute to federal income tax, this does not mean the tax system is broken or unfair. The current system, with its various deductions and tax credits, protects those who are in need while ensuring that those who can afford to contribute do so. The wealthy pay a substantial amount of taxes, but they take advantage of opportunities to minimize their burden legally. The burden of tax reform should be directed towards ensuring a more equitable and efficient system for all citizens.