Saturday, October 04, 2008

The Truth On Income vs. Taxes

Make $32K? You're in the richer 50%
Other new IRS data: While the top 1% of US earners, collectively, make nearly twice that of the bottom 50%, those at the top also pay 13 times more in individual income taxes combined.
By Kiplinger's Personal Finance Magazine

With the presidential election right around the corner, what better time to take a fresh look at how the nation's tax bill is distributed among its citizens?

After all, no matter what the conditions -- war or peace, prosperity or recession -- no issue seems to get under voters' skins more or command more attention from politicians than whether taxes will rise or fall and, frankly, whose ox will be gored.

New statistics from the Internal Revenue Service show that the highest-earning 1% of taxpayers in America make 22.06% of all income reported to the government. That's almost twice the 12.51% of total income earned collectively by the lowest-earning 50% of workers. Yes, 1.4 million taxpayers claim 22% of income earned while 68 million share just 12.5%.

But get this: When it comes to taxes paid, an even wider discrepancy shows itself, in reverse. Those earners in the top 1% pay 39.89% of all federal individual income taxes. The bottom 50% of earners pay just 2.99% of those taxes.
These income and tax-burden breakdowns come from information reported on 2006 individual income-tax returns, the latest of which have been analyzed by the government. Income categories are based on adjusted gross income (AGI), which is basically salary plus investment, rental and business income minus investment losses and expenses such as alimony paid, contributions to retirement plans, moving expenses and a few other costs.

This is the first time that the bottom half of taxpayers have paid less than 3% of the total income-tax bill.

(Note that these figures include only federal income taxes. According to one study, 56% of all wage earners pay more in Social Security and Medicare taxes than they do in income tax, and the percentage soars to 86% if you count both the employer and employee shares of those taxes.)

In 1986, the top 1% of earners reported 11% of all income and paid 26% of the income taxes; the lower-earning 50% made 17% of the income and paid 6% of the nation's individual income-tax bill.

How does your income stack up?

The data also make it easy for you to know how your income stacks up against that of your fellow citizens. The numbers show that an income of $31,988 or more puts you in the top half of taxpayers. Earning a bit more than twice that much -- $64,703 -- places you among the top 25% of all wage earners. You crack the elite top 10% if you earn $108,905 or more.

And $388,807 buys top bragging rights: Earn that much or more, and you're among the top 1% of all American earners.

A Kiplinger calculator quickly shows you -- based on your AGI -- which income category you fall into and what percentage of the nation's tax burden is borne collectively by you and your fellow citizens in that category.

The following table shows the percentage of income earned and tax burden paid by people in each income category:

Measuring the tax burden Income category 2006 AGI % of all income % of income taxes paid
Top 1%
$388,807 or more

Top 5%
$153,543 or more

Top 10%
$108,905 or more

Top 25%
$64,703 or more

Top 50%
$31,988 or more

Bottom 50%
$31,987 or less

Source: IRS

This story was reported and written by Kevin McCormally for Kiplinger's Personal Finance Magazine.

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