The good news: nearly 50% of American households (47%, to be precise) won’t pay any federal income tax in 2009.
The bad news: the remaining 50% (or so) will have to foot the bill for everyone.
You can thank (or blame) the new economic recovery package for bumping the percentage of taxpayers who won’t be paying a wee bit higher (about 10%).
But don’t just start pointing fingers at the working poor. While it’s true that the majority of those who are paying no federal income tax this year make below $30,000 annually, up to 10% of households making between $75,000 and $100,000 also qualify. New tax breaks, refundable credits, exclusion of a portion of unemployment benefits, and state and local sales tax deductions account for much of the zero income tax for 2009.
It’s important to note that these figures don’t include payroll taxes (Social Security and Medicare). On average in 2009, taxpayers will pay an average of 8.4% of their income in payroll taxes. If you take those taxes into account, only 24% of households will pay no tax.
Payroll taxes often get left out of the “who pays tax?” equation. While it’s true that the top percentage of wage earners pay most of the federal income taxes as a percentage of income, they are also among the lowest in terms of payroll taxes. The top 1% of income earners report 16% of total income but pay less than 4% of payroll taxes. That’s because contributions for Social Security are capped at $106,800. If you make more than that, the overage is not subject to Social Security; this is referred to as a regressive tax (our “regular” income tax system is said to be progressive). Additionally, much of the unearned income in the country (dividends, etc.) is attributable to the very wealthy; unearned income is not subject to payroll taxes.
The lower 60% of income earners report 25% of income but pay about 33% of payroll taxes. Those somewhere in the middle pay the rest (of course).
How does this play out in terms of averages? In 2009, the average federal tax rate paid as a percentage of income in the US is 18.2%. The top 0.1% wealthiest taxpayers will pay an average of 27.9% (not as high as I would have guessed) while the very poorest taxpayers actually “pay” a negative tax (this is due to refundable credits like the EITC and the Making Work Pay credit).
In terms of all federal taxes, and not just income tax, the top 20% of income earners will report more than half of total cash income but will pay a whopping 2/3 of all federal taxes (including income, estate, etc.).
Of course, this data can be manipulated a million different ways (look, I already started!) and you can bet it will continue to be throughout the next election. For now, it’s just something to munch on. You can read the entire Tax Policy Center report here (downloadable as a pdf).