The chart below shows the percentage of adjusted gross income (AGI) that different income groups of Americans pay in federal income tax. We chose the top categories ($500,000 to $1,000,000, and over $1,000,000) and matched them up with the some middle class numbers ($30,000 to $40,000, and $50,000 to $60,000). The data in these sets comes from IRS Publication 1304.
As you can see, there are two major points: one, the overall percentage both groups pay in federal income taxes has fallen over the last twenty years or so, and two, when Congress makes a major income tax policy change, it affects the top earners much more than other groups.
Adjusted gross income is defined as income minus adjustments, meaning after deductions. Of course in addition to federal income taxes there are employee contributions to Social Security, which are usually 6.2% of earnings (but are 4.2% in 2011 because of the payroll tax deduction) up to $106,800, which subsequently has a greater effect on the income below that limit than above. There’s also Medicare withholding, which is 1.45% of earnings, and since both are set rates, they by nature have greater effect the less you earn.Income taxes are also progressive in nature, meaning that as earners move up the ladder, they pay a higher rate on larger amounts of income, but only the income that reaches the next bracket. So for the 2011 tax year, a single person who has an AGI of $8,500, the limit of the bottom bracket, pays 10% on their taxable earnings. The person who makes $10,000 pays 10% on their taxable income up to that first bracket limit ($8,500) and then 15% on the income in the second $1,500, and so on. The highest rate is 35% on income above $379,150.
On point one, progressives have long pointed out the drop in taxes paid by upper income earners: in 1986 those making more than $1,000,000 paid 40.2% of their AGI in income tax, and in 2009 that percentage was 24.2, after hitting a low of 22.1% in 2006. The drop after the Tax Reform Act of 1986 is evident, then growth after the Budget Act of 1990 and the broken promise of “no new taxes,” the slight continued increase after the Budget Act of 1993 under President Clinton, then a gradual drop in the 1990s until the more pronounced fall after the Bush tax cuts.
The taxpayers in the middle class rungs though, saw a steady decline over that time period. Those in the $50-$60k category went from paying 15.5% of their AGI to federal income taxes in 1986 to paying 6.3% in 2009, and earners who made $30-$40k went from 12.2% in 1986 to 4% in 2009. Simply, many Americans are paying less in taxes over this time period.
The second point here is that as you can see from the numbers, when Congress makes a major change in income tax policy, most adjustments are going to affect the top earners. And not just in a narrative that fits around tax cuts for the rich at the expense of all other taxpayers: the chart also shows increases in the percentage of AGI paid by those with high incomes in times of recession, like in 1990 and 1993 (when taxes were raised) and even after 2007-2008. The obvious exception here is the early 2000s recession, when the Bush tax cuts went into effect, and AGI paid in taxes by the rich plunged as government surpluses disappeared.
Of course, the current (2006-2009) slim increase in AGI paid by high earners could also mean that those in the higher income tax brackets are seeing more money come in, and subsequently have to pay more out in taxes, versus the middle class payers who have seen wages stagnate in the last few years and therefore had to pay less. The Congressional Budget Office has been documenting the rising inequality gap, and this could provide some secondary proof of that trend.
And of course, this chart and analysis is about federal income taxes paid on wages, and for the high end earners, there are many more forms of typical income.