Effective tax rates, now in color!

UPDATE 9/26: Looks like the TPC has “retracted” the estimates below citing an error “which involved rollover distributions from 401(k)s and similar retirement plans, caused us to significantly overstate the income of some high-income taxpayers and thus understate the tax rates they paid.” I don’t know how much of a difference this will make, but I suspect that the overall distribution will only be moderately effected, and only at the very top. I’ll post the new results when the TPC makes their correction.


The table below, adapted from a Tax Policy Center table here, shows the effective federal tax rate people pay in different income categories. (The “effective” rate is simply the total taxes paid divided by income, and will be lower than the statutory marginal rate because there are a variety of deductions, credits, and tax preferences in the code.)

See below as I’ve added some color to the table to help show how rates vary with income levels. Darker reds represent lower effective rates, and darker greens represent higher rates.

Paul Krugman (and others) have used this data to demonstrate that even though, on average, millionaires pay a higher effective rate than the average of those in the middle, there are still many millionaires that pay less than most in the middle class. For example, at least 25 percent of millionaires pay a lower effective rate (12.6 percent or below) than most people making between $40,000 and $50,000 (13.1 percent or higher).

When interpreting the Buffet principle, we need to decide what rate to use to set as a minimum rate for millionaires. For example, do we want millionaires to pay on average more than the middle on average? If so, we’re already there.

Click figure to enlarge

Or do we want to ensure that all millionaires pay more than the middle-class pays on average? If so, then we need to change the tax code so that millionaires pay something like a minimum of 13 percent, if we set the “middle-class” at the $30,000-$75,000 range. This would mean an increase for about a quarter of millionaires.

Or do we want to ensure that all millionaires pay at least as much as just about anyone in the middle class? In this case, the target would be closer to  a 25 percent effective tax rate, increasing taxes on about half of millionaires.

The spirit of the Buffet rule is clearly not the first category – the outrage stems from the fact that some significant fraction of millionaires do indeed pay less than a large share of the middle. This points to policy changes that would indeed increase revenue from many of those at the top (at least a quarter, and perhaps as much as half or more) that have found ways to lower their tax share to levels that are below many in the middle class.

  • $17160930

    John –
    Thanks for the table in effective tax rates.  However, have you seen that the Tax Policy Center is redoing their tables that you cite as the source?  Is your info pre or post their redo?

  • Gail Greer

    Should you include government income support from food stamps to Unemployment Insurance, Medicare and Medicaid and Social Security in calculating the distribution of income and wealth in the U.S.?  If not, why not?

  • girlwithahead

    Thank you this was really helpful to understand who is paying what on average and if we are doing a wealth transfer or a regressive taxation policy.  I think when we add in taxes such as sales tax, gas tax, property tax, we might find the system a bit more regressive.  But it is not as unfair as either side has made it out to be.  

  • CenTexDem

    If one add’s the total tax bill of sales, property, payroll, franchise, and give credit to the poor who pay property taxes via their rent, you will find that the effective tax rate of the rich is very low in comparison and they pay taxes out of their want while every one else pays these taxes out of their need.

  • CenTexDem

    All forms of income including capital gains need to be taxed at the same rate to avoid this travesty of justice where a good 1/4 of the very wealthy pay less in taxes than the payroll tax alone paid by small business.

  • Diacro

    The 400 richest people have more wealth than the ‘bottom’ 150,000,000.

  • First of all, I thought the multi color chart was not easy to understand, because almost all charts on this subject break up incomes by quintile + top 5,1%
    Using quintiles of tax paid (at least, I think thats what it is showing – for people making <10K, the lowest 60th percentile pays 5.2% in taxes) is bad, cause people expect something else; also it is a lot of wasted space, you could have done this with a mean and std dev or something like that
    what about the imputed corp income tax ?
    Greg Mankiw posted a few days ago on this, and citing CBO numbers, said the rich pay a lot more, cause the CBO counts the imputed corp income tax [a few days later, mankiw posted an item from koltikoff, where the std line was given – corp taxes should be abolished cause they are just passed thru to consumers. seems kinda contradictory, but whatever)

    finally, I am really, really sad that epi, and all the other lib econ types, don't recognize that the payroll tax holiday is death to soc security.
    what if the holiday is not rescinded (recent history on the bush cuts shows how hard it is to rescind cuts for the wealthy, cuts favored by a majority of americans)?
    then either soc security will hve huge funding issues, or the short fall will be made up from gen rev, breaking one of the main political pillars of support – that the public sees soc sec not as a welfare or transer program, but as a fair you work you pay you get program

    I am really shocked that liberals are not speaking out on this, and 30 years from now think this will be recogniszed as a great betrayal of workers by overpaid professionals, sitting in tax sheltered nonprofits on their 529 plans
    maybe thats ad hominen and snarky, but i really don't get your silence on this

  • clarenceswinney

    Our 5% own 62% net wealth
    Your 80% or 112,000,00 lazy loons own 15% and we want it We deserve it.
    Our 20% own 93% of financial wealth
    Your 80% or 112,000,000 inept goof offs own 7% and we want it. All of it.
    Our 25% take 67% of all individual Income
    Your 50% of 70,000,000 undeserving take 13% and we want it. We earned it. It is ours.

    You are calling Jesus? Ha Ha Ha.
    That brown skinned lover of the poor cannot harm us.
    You are calling Congress?
    Ho Ho Big Joke. We own them. Have you never noticed big $$$$$$$$$ BUYS ANYONE?
    You are calling “our” White House. We own it. We started in 1980 with good old Ron then good old Busheloon capped it off and now we own it 100%. Ours! You dummy.
    You will go to the press? Wow! Are you out of the loop. We own it. All.

    We are now in control we are now known as
    viva la $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$
    clarenceswinney madmadmad at Inequality in America
    political historian lifeaholics of america cswinney2@triad.rr.com