A look at who is really paying their 'fair share' as tax season looms
As April 15th (18th) approaches, US citizens grow more nervous, even paranoid. In the State of the Union on February 7, 2023, Joe Biden stated that the tax system is not fair. On the surface, we agree. But our sense of helplessness against the IRS escalated when the current administration signed the Inflation Reduction Act (August 2022) that provides 87,000 more agents to the IRS and a budget of $80 billion to conduct more audits.
Although we were assured that audits would not occur on persons earning less than $400,000 or on small businesses, Treasury Secretary Yellen contradicted the administration in her testimony before the Ways and Means Committee, stating that “... 90% of new audits under the Inflation Act will be on families and small businesses, not ‘billionaires and tax cheats’." This was affirmed by the Government Accountability Office (GAO).
On March 10, 2023, Yellen requested another $29 billion for IRS enforcement funds. Even more audits?
Since that is an issue only resolved in the future, let’s turn to current US government data to determine who pays their “fair share.”
Erica York published on January 26, 2023, the most recent data from the Tax Foundation (the nation’s leading independent tax policy nonprofit organization). In her opening statement, she reiterated that our tax system is progressive, meaning that those who earn more, pay more.
Her key points:
“In 2020, taxpayers filed 157.5 million tax returns, reported earning nearly $12.5 trillion in adjusted gross income (AGI), and paid $1.7 trillion in individual income taxes.
“The average income tax rate in 2020 was 13.6 percent. The top 1 percent of taxpayers paid a 25.99 percent average rate, more than eight times higher than the 3.1 percent average rate paid by the bottom half of taxpayers.
“The top 1 percent’s income share rose from 20.1 percent in 2019 to 22.2 percent in 2020 and its share of federal income taxes paid rose from 38.8 percent to 42.3 percent.
“The top 50 percent of all taxpayers paid 97.7 percent of all federal individual income taxes, while the bottom 50 percent paid the remaining 2.3 percent.”
When does a taxpayer join the “top-1%” club? Currently, when the AGI is $548,336 or higher. In 2020, they earned 22.2% of total national AGI and paid 42.3% of all federal income taxes. Did they pay their fair share?
The taxpayers earning less than $42,184 (the bottom 50% of taxpayers) paid on average income tax rate of 3.1%. Did they pay their fair share?
Google reported that the top 1% of taxpayers paid $723 billion to the federal government while the COMBINED bottom 90% paid a combined total of $450 billion. Who paid their fair share?
What does it mean to have a progressive tax code? We have tax brackets. People who earn less money, pay their taxes at a lower tax rate. The more one earns, theoretically, the more one pays. That is the “marginal tax rate.”
In reality, the “effective tax rate” is what each person pays. All tax payers start calculating their tax payment at the lowest level and add each partial tax obligation until they reach the top bracket for their AGI. The top 1%-ers do NOT calculate their taxes at the top bracket only.
As taxpayers, we elect the standard deduction or itemized deductions before arriving at our AGI. Itemizing deductions favors the wealthier taxpayer—they earn more, spend more and have more eligible deductions to lower the AG, sometimes called loopholes. Loopholes are legal if they are a part of the tax codes passed by Congress and signed by the President.
What is your “fair share?” Determine your AGI and then calculate your tax obligation at the marginal tax rate—the highest bracket at which you find your AGI. Then start at the lowest rate and progress up (progressive tax) for your effective tax rate. Which is closer to the amount you will be paying as per your tax consultant or tax program? Which reflects your “fair share?”
This is the opinion of Times Writers Group member Phyllis E. VanBuren, a lifelong learner and enthusiastic educator, who values family, friends, faith, honesty, liberty and integrity. Her column is published the fourth Sunday of the month.
This article originally appeared on St. Cloud Times: A look at who is really paying their 'fair share' as tax season looms
