In 2013, most Americans will contribute nearly the same proportion of their total income toward major taxes: around 20%. The only outliers are the bottom and top groups: the bottom fifth of earners will pay 11% in taxes while the top 1% pays 31%, after we account for all major federal, state and local taxes.
We call the burden of all these taxes – income, sales, property, capital gains, Social Security and Medicare minus reductions – the comprehensive effective tax rate; the effective rates we detail below also consider income more holistically, including both capital gains and wage-and-salary income. Analyzing the US taxation system with this metric, NerdWallet found that:
- The U.S. has a relatively progressive tax system. The bottom quintile pays 11% in taxes while the top 1% pays 31%.
- 57% of America is taxed around 20%. This includes a broad swath of income groups, from those in the 41st percentile to the 98th; these groups will earn, on average, from $42,900 to $253,700 a year.
- Sales and excise taxes are among the most regressive. They take 7% of the bottom quintile’s income, while the top 1% pays out just 0.9% in those taxes.
- The bottom quintile spends 80% of its income on sales-taxable goods, while the top 1% spends just 10%.
Average comprehensive tax rate for a married couple filing jointly
Despite climbing tax rates, capital gains are still a boon for the wealthy
The top 1% makes quite a bit through capital gains: that’s stocks, bonds and investments in real estate. And that’s $304,357 in earnings, or an average 23.45% of this group’s total income. By contrast, the bottom quintile earns 99.55% of their income through wages and salary and just 0.45% from capital gains.
Because those gains qualify for lower rates, the wealthy are able to offset a progressive federal income tax.
On the same token, because capital gains are a relatively large chunk of the top 1%’s income, those lower rates are especially attractive. This point is most clear when we compare the top 1%’s earnings to that of the bottom quintile. In regular wage income, the top 1% makes about 93 times more. And in capital gains: 320 times more.
Social Security, Medicare and sales and excise taxes disproportionately burden the poor
The Social Security tax is a flat 6.2% on wage-and-salary income, although it’s capped after the first $113,700 in any American’s earnings. This compensation limit means that the bottom 80% of earners will, in fact, contribute 6.2% of their wage income, while top earners will pay just 0.5% to Social Security.
Medicare operates in a similar way: it may technically be a progressive tax on the higher end, with a marginal tax rate of 2.35% for couples earning over $250,000 in wages, but it’s less progressive than the federal income tax. When we look at income more holistically, as total income earned, including capital gains, Medicare begins to look even less progressive.
The sales tax, a flat levy on certain purchases, is regressive because lower income households tend to spend a greater percentage of their income, rather than saving or investing. Because 73% of their income goes toward taxable goods, an additional 7% of the bottom quintile’s income will go toward sales and excise taxes, too. And the top 1%, which spends 9% of its total income on such items, will pay 0.9% in sales tax.
When we include capital gains in gross income, we see that income is taxed at a flat rate. Progressive taxes like the income tax are mitigated by regressive taxes like Social Security, Medicare and sales and excise taxes.
Because the top 1% earns a great portion of their income from capital gains, a significant portion of their income is shielded from the effects of a progressive federal income tax.
|Income Group||Pre-tax income||Capital Gains Tax||State Income Tax||Property||Sales & Excise||Federal Taxes less Reductions: Income, Social Security, Medicare|
NerdWallet defines income as wage-and-salary income as well as capital gains. In our analysis of the tax burden on each income group, we studied national averages on all taxes listed below, in the “Sources” section.
The latest state-and-local-tax data was for income earned in 2010, so NerdWallet analyzed the tax burden on 2010 income with 2013 rates. Here, we should note that this national average may be markedly different from a given state’s. This is because of the variability in state-and-local policy on income, property and sales taxes.
Of particular note are states like Washington, which levies no income tax and, instead, looks for revenue in sales and property taxes. In that state, the bottom quintile pays 13% of its income in sales taxes – nearly double the national average of 7%.
Capital gains data from the TPC was in 2011 dollars, so NerdWallet adjusted for inflation from 2011 to 2010, with CPI data from the Bureau of Labor Statistics.
For sales-tax calculations, we assumed that the 2012 average rate would remain constant through 2013, at 9.61%.
For tax reductions, NerdWallet used 2012 data and then adjusted for the Pease phase-out on itemized deductions and exemptions, effective this year. We assumed that the full $186,695 claimed by the top 1% were itemized deductions applicable to this phase-out.
NerdWallet considered the following taxes in this study, with data courtesy of the sources listed below: