Perryman: Federal income tax is progressive. Is it fair?

Internal Revenue Service headquarters in Washington, D.C. (AP Photo/Susan Walsh, File)

In fiscal year 2023, the U.S. government collected about $4.7 trillion in total revenue, with roughly half ($2.35 trillion) derived from the much-maligned personal income tax. We don’t have a detailed breakout yet, but the Tax Foundation recently released an analysis of individual income return statistics from the Internal Revenue Service (IRS) for 2021. Given the attention that taxes always manage to muster in election season and our current fiscal excesses, it’s worth a brief review.

The income tax system is progressive, meaning that those with higher incomes pay more in both absolute and percentage terms. The bottom 50% of taxpayers (those making less than about $46,600) paid an average of 3.3% of their incomes, while the top 1% paid 25.9%.

The top 1% of taxpayers had adjusted gross income of $682,600 or more and paid an average of $653,700 in income tax. The top 5% earned at least $252,800 and paid an average of about $187,500 in taxes, with the top 10% earning at least $169,800 and paying almost $108,300. The top 10% of income levels pay 75.8% of income taxes, with the top 50% paying 97.7%.

A common refrain during political season is that the top 1% of taxpayers don’t pay a fair share. About 1.5 million returns comprised this echelon; they paid 45.8% of total income taxes (more than $1 trillion). The very highest earners (the top 0.1% which have at least $3.8 million in income) paid $542 billion, or 24.7% of the total collected.

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The share paid by those with high adjusted gross incomes is large and rising. Moreover, refundable tax credits (which are distinct from refunds due to withholding exceeding the amount owed) result in millions of people actually receiving money from the IRS. Thus, while (1) some wealthy individuals are certainly able to exploit quirks in the system to reduce their liability and (2) payroll taxes and other revenue sources increase the overall share borne by those in lower brackets (particularly workers), the income tax generally achieves its objective of being a progressive source of federal revenue.

A key reason for accurately evaluating income taxes is to avoid mistakes as we seek to put the country on a path toward long-term financial sustainability amidst spiraling debt and deficits. Much of the often-heated rhetoric is simply not true, and, thus, not productive. From an economic perspective, taxes should be structured to maximize efficiency and cause the least disincentive to productive activity. They should also be equitable. We are approaching a time when the U.S. must get its fiscal house in order with respect to both revenue and spending, and we would all be well-served to do so from a position of knowledge. Stay safe!

Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com), which has served the needs of over 3,000 clients over the past four decades.