As Tax Day—April 18—creeps closer, some of us will prepare to write a check to the IRS. It’s not surprising that it gets pushed off; few taxpayers want to pay their taxes early. Data from the Treasury Department shows that there’s typically a boost in receipts beginning in April, representing tax payments, in contrast to an earlier series of outlays in the fiscal year likely tied to tax refunds.
Even early filers may hold onto their payments until the last minute, because there’s no requirement that you have to pay simultaneously with your tax filing. Interest and penalty don’t begin to run until Tax Day, so many taxpayers plan to make payment as close to the due date as possible. I will confess to being one of those taxpayers.
And like many taxpayers, when I do pay, I will probably complain about it. A lot.
But while everyone claims to hate paying income taxes, the data suggests that most of us actually don’t pay them.
Historical Context
Historically, that was the intent: Our current federal income tax system wasn’t created to make all workers taxpayers. In 1913, the year of the first modern tax return, less than 1% of the population paid income taxes.
The first modern federal income tax return (you can see what it looked like here) was only required to be filed by U.S. residents with a net income of $3,000 or over for the taxable year. That works out to $85,974.55 in today’s dollars, quite a bit more than the 2021 tax year filing threshold of $12,550 for most single or married filing taxpayers and $25,100 for most married taxpayers.
But taxes have long been used to pay for government expenditures. And when costs go up, so do taxes. When we entered World War II, the U.S. needed to raise money quickly. Typically, there are two ways to do that: increase the tax rate or increase the tax base. We opted for the latter. The exemption amount was reduced, resulting in nearly 70% of Americans being subject to tax.
Today, due to the 2017 tax law, there is no personal exemption amount. There is, however, a larger standard deduction which sets a basic filing threshold for most taxpayers—and the amount of tax payable could still be reduced. That’s on purpose. As the Tax Policy Center noted in 2018, “The large percentage of people who don’t owe federal income tax is a feature, not a bug, of the revenue code. By design, the federal income tax always has excluded a significant fraction of households through a combination of personal exemptions, the standard deduction, zero bracket amounts, and more recently, tax credits.”
Who Pays Tax?
As a result, many tax filers do not pay tax. Traditionally, the share of those who pay no tax has been in the low to mid-40s. But due to the pandemic, the Tax Policy Center reports that number increased to more than 60% in 2020 and was 57% in 2021.
That’s a number that you’ve probably seen touted quite a bit. But it’s not normal. It’s the result of many pandemic-related factors, including large unemployment numbers and reductions in tax payable due to Covid-19 relief packages. That number is expected to drop back to more traditional rates, or even lower, as we come out of the pandemic.
And of course, these numbers do not reflect the payment of all taxes—there are plenty of other taxes to go around when you consider sales taxes, real estate taxes, self-employed taxes, excise taxes (like those on gasoline), and payroll taxes like Social Security and Medicare. These numbers only reflect federal income tax.
That said, federal income taxes make up the lion’s share of federal taxes. The IRS collected close to $3.5 trillion in gross taxes in 2020. According to IRS data, 53.6% of that amount represented individual and estate/trust income taxes; in contrast, business income taxes made up just 7.5% of the total, while payroll taxes made up 36.3%.
How Much Do We Pay?
Taxpayers who do pay taxes are probably not paying as much as many might assume. The most recent complete data available from IRS indicates that taxpayers shelled out an average federal income tax of $15,204 in 2019, lower than in 2017 and 2018 and representing an average tax rate of just 14.1%. That amount was calculated from nearly 158 million tax returns filed—just over 104 million of those were taxable returns.
That number doesn’t highlight our progressive income tax system. Remember, we don’t have a flat tax, so rates will go up as income increases. It’s worth noting that in 2019, the top 1% of taxpayers paid 38.8% of all federal income taxes. According to the Tax Foundation, the top 1% paid more income taxes than the bottom 90% combined.
Also in that same year, the IRS issued 111,811,000 tax refunds worth a collective $321 billion.
Is That Fair?
When these numbers get tossed about, taxpayers often start debating what’s “fair.” Is the number of taxable returns filed? The average tax rate? The number of refunds? It’s a conversation that we revisit often, and I’ll admit to being a part of it. My husband and I do our share of griping and hand-wringing at tax time. It goes with the territory: Again, nobody wants to write a check to the IRS.
Recent Proposal
A recent proposal from Sen. Rick Scott (R-Fla.), the National Republican Senatorial Committee chairman, suggests that’s not OK—he thinks that more taxpayers should be writing checks. In his 11-point plan, Scott wrote, “All Americans should pay some income tax to have skin in the game, even if a small amount.”
Scott’s plan was short on details—there are no specifics regarding how that would actually work. But it’s been suggested from a Tax Policy Center basic model that the plan would mean more than 80% of the tax increase would be paid by households making about $54,000 or less, and 97% would be paid by those making less than $100,000.
And according to the Institute on Taxation and Economic Policy, the impact would have a definite geographic tilt. The states where more than 40% of residents would face tax increases are largely in the South, including Mississippi, West Virginia, Arkansas, Louisiana, Alabama, Kentucky, Oklahoma, Georgia, New Mexico, South Carolina, and Florida.
The proposal was met with immediate criticism, including from within Scott’s own party. After the plan was released, Senate Minority Leader Mitch McConnell (R-Ky.) declared, “Let me tell you what would not be a part of our agenda. We will not have as part of our agenda a bill that raises taxes on half the American people, and sunsets Social Security and Medicare within five years. That will not be part of the Republican Senate Majority Agenda.”
When asked about Sen. Rick Scott’s agenda, @LeaderMcConnell: “We will not have as part of our agenda a bill that raises taxes on half the American people and sunsets Social Security and Medicare within five years. That will not be part of the Republican Senate Majority Agenda.” pic.twitter.com/XN7q9Kc6b4
— CSPAN (@cspan) March 1, 2022
Scott later walked back parts of the plan, saying that it would not apply to seniors or those who are not “able-bodied.”
What Comes Next
Taxes are always a hot-button issue, and that’s especially true in election and mid-term election years. Scott’s proposal and the blowback highlight real issues that taxpayers often grapple with: Who should pay taxes, and how much should they pay? I don’t expect we’ll resolve that issue any time soon—it’s something we’ve struggled with for more than 100 years—but as we get close to wrapping up tax season, it’s worth considering in context: What is your “fair” share?
This is a weekly column from Kelly Phillips Erb, the Taxgirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.