There is a common narrative among our nation’s political leaders, media personalities, Hollywood stars, and numerous political pundits regarding our tax system. Undoubtedly, you have heard the argument “rich people” pay little, or at least not their fair share, of the United States’ personal income tax burden. Furthermore, low income to poor Americans pay a disproportionately high amount of total personal income taxes in the United States annually. Now, they exclaim outrageously, the well-to-do are once again taking advantage of the system via the new Trump tax cuts.
The facts, however, tell a different story. To make our case, let’s look at the most important measure of the distribution of any tax burden: the amount and percent of taxes paid by income groups and the tax rate paid by each group.
Northwood University’s McNair Center for the Advancement of Entrepreneurship and Free Enterprise recently examined IRS tax data for 2015, the most current, and the Tax Foundation’s fiscal facts report #570 “a Summary of the Latest Federal Income Tax Data,” released this past January.
According to the Tax Foundation, just over 141 million Americans filed a tax return in 2015. They reported more than $10 trillion in adjusted gross income, and paid just under $1.5 trillion in income taxes. The average tax rate for all taxpayers was 14.34 percent. It is interesting and important to note that the bottom 50 percent of all taxpayers paid an average income tax rate of 3.59 percent while the top 1 percent paid an average income tax rate of 27.1 percent.
In addition, the tax foundation study and IRS data confirm that the top one percent of income earners in the United States in 2015 earned 20.65 percent of all personal income and paid 39.04 percent of all personal income taxes, while the top 10 percent of all income earners paid 70 percent of all personal income taxes in 2015.
Contrary to popular opinion, not only did the bottom 50 percent of taxpayers pay an average personal income tax rate of less than four percent, they paid only 2.38 percent of total U.S. personal income taxes in 2015.
In addition, before the Trump tax cuts, American businesses were burdened with among the highest corporate income tax rates in the industrialized world, which put Americans and American enterprise at a competitive disadvantage. The numbers thus far indicate Trump’s program will have a positive impact on American competitiveness and long run U.S. GDP growth by lowering the corporate and individual income tax rates.
We believe numbers don’t lie, a successful economy must provide financial incentives for people to work hard and to work smart. Therefore, local, state and federal public policy must not overly burden successful people with excessively high income tax rates. Simply put, if you want a prosperous and dynamic economy to form and grow, you must give entrepreneurs and intrapreneurs incentives to take risks and maintain and/or create new jobs and new businesses.
Therefore, it is imperative for local, state and federal governments to not only consider ways to grow tax revenue, but equally important — with our looming $21 trillion national debt — to consider ways to enhance operational efficiency while reducing spending wherever possible rather than increasing taxes.
Dr. Timothy G. Nash is senior vice president and director of the McNair Center for the Advancement of Free Enterprise and Entrepreneurship at Northwood University.