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Why You Don’t Pay as Much Tax to the IRS as You May Think

This article is intended to inform people where their tax dollars are really going to and how much tax they really pay compared to everyone else. 

As a teenager (and even as a young adult in my twenties), I was always surprised when people my age would make a statement that could be summarized as, “I don’t want my tax dollars to go to (insert government program here).” This always baffled me because these were people with minimum wage jobs living off of their parents’ money. What taxes were they talking about?

I couldn’t blame them that much because their parents were fairly wealthy and they didn’t really understand how much of an impact programs like Medicare, Social Security, food stamps, or unemployment had on people who heavily relied on these services.

But what really baffled me was their insistence that they were somehow paying for these services with the small amount of tax that was coming out of their paycheck.

This article is not meant to throw shade or be insulting to any particular demographic, but is intended to inform people where their tax dollars are really going, and how much taxes they pay compared to everyone else.

About 50% Don’t Pay Federal Income Tax

Right off the bat, nearly 50% of Americans don’t pay federal income tax – and that’s a good thing. For starters, 24% of Americans are under the age of 18. That means half of the 50% are either too young to have a job or don’t make enough money to pay federal income tax. The remaining are a mixture of people who are retired, unemployed, or don’t make enough income to pay federal income tax.

But these people still pay taxes in the form of payroll taxes, property taxes, state income taxes, sales tax, and federal excise tax.

The Top 10% Pay 70% of All Federal Taxes

Since the bottom 50% of Americans don’t pay federal income tax, that means this tax has to be paid by someone. The top 10% of income earners pay roughly 70% of all federal income taxes. That makes sense considering nearly half of all income is earned by the top 10%. To make it into the to 10% you’ll need a household income exceeding $133,000.

Even more so, the top 5% pays roughly 60% of all federal taxes. To make it into this group you’ll need a combined household income of $188,000. Going even further, the top 1% pay roughly 40% of all federal income taxes. The cutoff to make it into the top 1% is roughly $465,000 in annual household income.

Let’s put this in perspective: If there were 100 people in the U.S., then 1 person would pay 40% of all the taxes, the next 4 people would pay 20% combined, the next 5 people would be 10% combined, the next 15 people will pay 15% combined, the next 25 will pay 15% and the remaining 50 will pay relatively nothing.

What Does This All Mean?

As shown above, the wealthiest households pay the majority of all federal income taxes. If the wealthiest Americans make a disproportionate amount of income, then you would expect them to pay a disproportionate amount of taxes.

These are the households that can complain about government spending because they are funding the majority of the U.S. budget. When we talk about tax reform and entitlement reform, it’s not for the majority of Americans. Nearly 75% of taxpayers won’t be substantially impacted by tax reform because they simply don’t make enough income.

A drop in the corporate tax rate won’t impact a salaried employee making $50,000 a year, and neither will a drop in the capital gains rate. These are all provisions that will sway the tax liability by millions of dollars for the top earners. So the elimination of an entitlement program with a subsequent tax cut could mean thousands, if not millions of dollars to the top 1%. Meanwhile, this would equate to a few cents a day for the average American.

What If We Eliminated Food Stamps?

So let’s use an extreme example. Let’s say you’re making $50,000 a year and pay roughly $5,000 in federal income tax. You have no deductions or credits, so you pay an effective rate of around 10%. What if the U.S. government eliminated the Supplemental Nutrition Assistance Program (SNAP) and gave the equivalent tax cut to all Americans? Would you expect to get a substantial tax benefit? Not necessarily.

The tax cut would equate to about $130 tax savings (roughly 33 cents per day). So the elimination of a program that helps feed over 45 million people in the U.S. wouldn’t even give you enough money to get a coffee at Starbucks every other week.

Where is My Money Going?

Don’t believe me? Then see for yourself – National Priorities Project has this cool calculator that allows you to see exactly where your federal tax dollars are going. Simply enter the amount of federal tax you paid last year and you’ll get a detailed breakdown of where your money is going.

Jeremias Ramos is a CPA working at a nationally recognized full-service accounting, tax, and consulting firm with offices conveniently located throughout the Northeast. Jeremias specializes in tax and business consulting with focus areas in real estate, professional service providers, medical practitioners, and eCommerce businesses.

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