How Much Money Do The Top Income Earners Make?

Americans are rich by world standards. With an average per capita income of ~$48,000, America ranks in the Top 10 in the world. The other nine include Qatar ($88,300), Luxembourg ($80,000), Singapore ($57,230), Norway ($52,230), Brunei ($47,500), Hong Kong ($45,000), Switzerland ($41,800), Netherlands ($40,800), Australia ($39,632), and Austria ($39,100). The data comes from the IMF (2011), and the World Bank and CIA World Factbook collect and corroborate similar data.

If at birth, you had the mental capacity to choose where you’d like to live for most of your life, one of these 10 countries should probably be on your list thanks to proper infrastructure which allows for opportunity. Even if you end up being the most mediocre producer, you are still miles ahead of much of the world. Too bad many of us can’t pick where we want to grow up and earn a living. As such, it’s nice to understand how we compare against the rest of the world to give us some perspective.

If everybody earns $1 million a year, being a millionaire isn’t very special anymore. At the same time, if everybody earns under $20,000 a year, the income level for poverty must be redefined. Everything is relative. Let’s learn about each others’ incomes shall we?

WHAT THE TOP 1%, 5%, 10%, 25% and 50% MAKE IN AMERICA

Based on the Internal Revenue Service’s 2010 database below, here’s how much the top Americans make:

Top 1%: $380,354

Top 5%: $159,619

Top 10%: $113,799

Top 25%: $67,280

Top 50%: >$33,048

SUMMARY OF FEDERAL INDIVIDUAL INCOME TAX DATA, 2010

Based on a previous 1000+ survey study on Financial Samurai in Spring 2014, about 80% of readers are in the Top 25% ($67,000+). Good to know that many of you are doing well. The table also tells us a number of things about equality or inequality, namely that the top 1% of tax payers pay 38% of all income taxes yet only have a 20% share of total AGI. Furthermore, the top 50% of tax payers pay practically all of the nation’s federal taxes (97.3%) while commanding 87.25% of total AGI. This table from the IRS is the source for the often politically bantered argument that 47% of American income earners pay zero federal income taxes.

If you do another little exercise and compare the top 25% of American income to the Top 10 per capita income countries in the world, you can once again see how lucky most of us are. If only we could get all American wage earns to pay some taxes, it would go a long way to help shoring up our budget. Congress constantly holds the nation hostage by bickering over whether to cut $10 billion here, $50 billion there. All we have to do is make those who earn above the poverty line who pay no federal income taxes pay just $43 a month and we’d raise $60 billion a year right there for example!

Let’s have everyone contribute to the welfare of our country. We are all in this together! For those who are just struggling to keep their heads above water, let’s lend them a helping hand.

WHO ARE THE 47% WHO PAY NO FEDERAL INCOME TAXES?

The Tax Policy Center’s Donald Marron said they fall into three main groups:

The working poor. The earned income tax credit and the child credit can help families making $50,000 or more pay no taxes or get money back. About 60% of those not paying income taxes do contribute to payroll taxes, meaning they must have some source of earned income.

The elderly. An increased standard deduction for those over 65, and an exemption on part of Social Security earnings, means that many older Americans pay no income taxes. Please remember though that the elderly have paid their dues through decades worth of federal taxation during their careers.

The low-income. A family of four claiming only the standard deduction and personal exemptions pays no federal income tax on its first $27,000 of income.

As you can see, being poor or elderly likely means you don’t pay net federal income taxes. We’re all going to grow old one day, so let’s give this group a pass. The elderly paid into the system, so let’s take care of them. I don’t think any of us would rather be poor so we can pay no federal taxes, so let’s give them a pass too. This leaves us with a low-income group that may have made some suboptimal decisions such as having children while not being able to support themselves. Children are estimated to cost anywhere from $100,000 to $500,000 from the ages of 1-18. Perhaps having multiple children on a low income is not ideal. But, how do you deny passion?

NO REASON TO EVER COMPLAIN

If you work in America, you can see from a top down and bottoms up perspective you’re doing fantastic. If you are in the bottom 50% of Americans who earn less than $33,048 a year, know that you can earn more if you want to. Half the battle is just moving to a vibrant location such as the San Francisco Bay Area where billions of dollars are flowing in due to technology innovation. It’s not like you have to brave the high seas to reach America. It’s not like you need to ride a horse for three months to get from New York to get to California. All you’ve got to do is hop on a bus or a plane to be where the action is!

I remember making $550 a month working at McDonald’s for $3.50/hour, 20 years ago. With wages 3X higher now, I’d be pulling in $$1,650 a month or $20,000 a year! Tack on another side hustle that pays $1,200 a month and I’m in the top 50%. So where are these side hustles you say? You can find a plethora of opportunities on sites like Craigslist.

If you are only working 40 hours a week or less and complaining why you can’t get ahead, you need to seriously re-evaluate your work ethic and expectations. Anybody can do it, you just can’t be delusional enough to think that you’ll be able to compete, when everybody in the world who wants to get ahead is working 60+ hours a week and getting paid much less to boot! Spend some time online understanding global wages from our biggest competitors in China and India. In order to maintain or incomes, we must constantly be updating our skills.

There are plenty of six figure jobs out there for the taking. You just need to have the desire, motivation, work ethic, and perseverance to get there. Did you know the San Francisco police chief makes $320,000 a year? Furthermore, when he retires, he’ll probably get a $200,000 a year pension for life! It’s not just doctors, lawyers, venture capitalists, bankers, movie stars and athletes who make healthy sums of money. Even my friend who is a union electrician who is not allowed to work more than 35 hours a week makes $150,000 a year and gets a $5,000 a month pension when he retires at 55. Let’s not count the $50,000 a year he makes doing side jobs with all that free time. There are six figure earners in practically every single industry, including the non-profit industry!

Back to my point where if everybody earns a million dollars a year, nobody is rich. Living in San Francisco, it certainly feels like most are in the top 5% of income earners ($159,619). I’m sure many who live and work in Manhattan, and potentially LA and Chicago feel the same way. The cost of living is expensive out here, and that’s predominantly driven by high wages. Combine two income earners with these amounts, and you can really start understanding why surpassing what the government deems as wealthy ($250,000) is so easy. 

LET’S THANK THE RICH FOR ALWAYS PAYING MORE 

As the economy continues to recover, it’s likely that the top 1% of income earners will likely pay an even higher percentage share of overall income taxes than their share of income justifies. If things were fair, the top 1% would only have to pay 20% of total income taxes since 20% is their share of total income. Alas, the rich pay almost double what they owe.

On the flip side, the bottom 50% who earn 12.75% of total earnings only pay 2.7% in total taxes. But, as we learned above most of the bottom 50% are elderly or poor. Just how protesters wrongly group together the top 1% who make over $380,000 with the ultra rich who make millions of dollars a year, zealots are also grouping together those earning ~$30,000 a year with the most destitute!

Inequality is wrong. If you are being terrorized by the IRS or protected by the nation’s military from nuclear war, you should pay taxes. If you get to drive on interstate highways, you should pay taxes. Discrimination is not OK, just because you aren’t being discriminated against. In other words, it’s not right to always go after a group of income earners who already pay the most federal income taxes already if you don’t pay any taxes, or aren’t willing to pay more taxes yourself!

If we can increase the breadth of tax collection by our spendthrift government, we will ensure that every citizen has a vested interest in moving our country forward. Trying to squeeze people even more when you’re paying little to no taxes very is a throwback to tyranny.

Let’s stop demonizing the top income earners. Instead, how about just being appreciative of those who pay the most taxes, donate the most to charity, and hire the most people? Always fight for equality. It will set us free!

Recommended Actions For Increasing Your Wealth

Manage Your Finances In One Place: The best way to build wealth is to get a handle on your finances by signing up with Personal Capital. They are a free online software which aggregates all your financial accounts in one place so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 28 different accounts (brokerage, multiple banks, 401K, etc) to manage my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing, how my net worth is progressing, and where my spending is going. The best feature is the free 401K Fee Analyzer which has saved me over $1,700 a year in portfolio fees I had no idea I was paying. They also have a free Investment Checkup tool which analyzes your portfolio for risk. Personal Capital takes less than one minute to sign up and is the most valuable tool I’ve found to help people achieve financial independence.

Maximize Your Savings Online: Put your savings in an online savings account that yields close to 1%, or 100X the average money market account. Online savings banks can offer rates much higher than bricks and mortar banks because they don’t have the same overhead costs. Accessing your money online is easy. But having your money in an online bank also helps take away your temptation to always spend.

Check Your Credit Score: Everybody needs to check their credit score once every six months given the risk of identity theft and the fact that 30% of credit scores have errors. For over a year, I thought I had a 790ish credit score and was fine, until my mortgage refinance bank on day 80 of my refinance told me they could not go through due to a $8 late payment by my tenants from two years ago! My credit score was hit by 110 points to 680 and I could not get the lowest rate! I had to spend an extra 10 days fixing my score by contacting the utility company to write a “Clear Credit Letter” to get the bank to follow through. Check your credit score for free at GoFreeCredit.com and protect yourself. The averaged credit score for a rejected mortgage applicant is 729!

Updated: 7/24/2014

Photo: President Obama and His Dog, Public Domain.

Best,

Sam

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. Eric G says

    Beware, beware jumping to political conclusions about the relative tax contributions of money classes in the US to the society at large. First off, I offer me as an example of just how misleading things can be:

    I am probably in the peak years of my income generation, but I funnel it through a business. Between work and investment appreciation my net worth increases about $30k/month. My total federal+state+local income taxes are zero. They have been for years, and will continue to be zero for years. Moreover, inheritance tax planning will likely hide my assets for two more generations. In 70 years my grandchildren will pay a hefty income tax that will buff the charts like the one in this article, but the years of untaxed compounding will be hidden. Shall we use 10x appreciation ?

    Don’t kid yourselves, folks. Well off people hide massive amounts of money from the AGI.

      • Jay says

        It’s because of his ‘business expense’ when he file for tax return. It’s a loophole that all the rich exploited because the tax regulations are create by the rich. :)

        • dan says

          Bull.

          Show me how your business makes money and does not pay taxes. What type of legal entity is it?

          How do you calculate your net worth?

    • Fermi's Paradox says

      I doubt this is a real post, particularly knowing something about the tax code and the statistics in question.

      Please tell us a little how you are able shield such income, as you say it’s not illegal.

      Or is it essentially real estate appreciation that is adding to your net worth (as apposed to cash income)?

    • Darrelb says

      What nonsense. You’re anonymous. Tell us how you do this. You are full of it.

      The sad part is, people hear this kind of thing and they believe it. Guarantee he can’t tell us how he does this, because he doesn’t.

  2. says

    Hi Sam,

    My thoughts is that if a person who is 80 years old and has $1 million dollars compared to someone who is 30 years old and has $1 million dollars has different worth. Someone who is 30 and has that much money has the most important asset in the world, TIME, to build on that wealth.

    An old wisdom insight is that most 80 year old people would trade their $1 million to be 30 years old again.

    Blair

    Professorsavings.com

  3. Tom says

    Unless your business lost a boatload of money earlier and you have tons of deferred tax credits that are somehow still operational I can’t see you being taxed 0 all the time.

    However, with “loopholes” and clever tricks to transfer wealth like real estate appreciation, life insurance, or maybe out right entering a legal grey/black area that got banks like CS in trouble you can definitely minimize your tax bill to far below the maximum 40% bracket for top earners. Its a bit harder to get below the 15% capital gains but I’ve read you can do stuff like wait till you die to pass appreciated stock to your heirs so its gets a markup without being taxed. Since I’m not in any way a financial advisor or estate planner I’m sure there’s plenty of other small things you can do that add up.

    For most Americans, these things are just not worth it as you’d have to actually hire a good financial advisor/ estate planner (most of whom charge sizable fees and make 6 figures + anually). But if I ever get rich enough and haven’t succeeded in lobbying the UN to impose a 75%+ wealth tax on the world and rigorously prosecute capital flight for tax avoidance purposes, I’m definitely taking advantage of as many of these loopholes as I can.

    • says

      It’s interesting you say that Tom, because I’m currently consulting with Personal Capital, a digital wealth manager who employee Registered Investment Advisors to help with estate planning, investing, and so forth. Their highest fee is 0.95% on assets over $100,000 a year, and goes down from there.

    • John says

      If someone holds stock till death and extremely wealthy the fair market value of the stock is included in the estate of the deceased. Yes the family will get a step-up in the value of the stock, but could be taxed in the estate if over the gift/estate tax exemption amount. Estate tax is 40% currently, so yeah there’s that…

      Good estate planning will contribute that to a family partnership or another entity and gift the partnership interest at a discounted rate prior to estate issues arising.

  4. Fermi's Paradox says

    Again Tom, I have my suspicion that Eric’s post is not entirely accurate.

    Aside from that, the data FS provides is the data, from the IRS, it’s elsewhere in many places and easy to validate if readers care too. E.g. the top 1% paid on average $280,000 in Federal income taxes while the bottom 50% paid about 400 bucks. It’s all there.

    So if Eric is somehow suggesting that there is some kind of grand conspiracy out there wherein the wealthiest in our society are somehow escaping taxes (in significant numbers) and as such do not show up in the data… well, I wish someone would provide a little more proof (as apposed to some anecdotal example). I guess that’s the case with conspiracies, there’s little or no proof.

    A good exercise for everyone is to hang-out somewhere that successful people gather, say some bar in a very nice restaurant in a wealthy neighborhood. Then just politely ask people about themselves and how they became successful, they will be flattered. Then find a watering hole where you know people are not very “economically well off” (be careful of course). Ask the same questions, but do it ever so subtly as to not offend. Then just compare the answers.

    All of this is no mystery.

    • says

      Good tip. If more folks can be willing to open up their minds and look to see how wealthier people got to where they are, instead of just shoot them down for being lucky or whatever, I think more people will get wealthier!

      Get a mentor, listen, ask people who’ve been there, done that.

      • Fermi's Paradox says

        FS, thanks again for a well balanced and objective website on a subject (money and wealth) that can be so contentious.

        And much of the mystery, hysteria and misinformation about wealth creation is due to this false egalitarian ethic that permeates every aspect of our society today. Yes, everyone is entitled to equal opportunity, but that NEVER produces equal results and never will – simply because individual people are in fact different from one another and that leads to different outcomes (e.g., beliefs, ambition, willingness to take risk, preferences for certain life endeavors, culture, cognitive ability and so on).

        All too often people make certain life decisions, take certain paths in life, engage in certain behavior, don’t recognize they lack requisite traits, abilities, etc. all which ends up hindering their “success” or at least as they perceive it. They then blame “the system” or the successful or any number of externalities other than themselves. The reasoning goes: “if everybody is equal then anyone who has more must have obtained it at the expense of someone else or it is otherwise ill-gotten.”

    • dan says

      I agree, I here hear people say all the time the rich pay less in taxes, they use Warren Buffet as their example.

      I ask them to point me to the location in the tax code that the rate decreases. It does not. It never decreases. Then they state well he makes all his money on investment, and capital gains is lower, well yes, but its even with capital gains the rich pay more on capital gains.

      The fact is the press has done a great job of saying the rich are bad, corporations are bad. Maybe people should be upset with how the government spends the money they takes from people.

  5. Paul Liimatta says

    I’m tired of hearing the ways to produce more revenue for the government when there’s so much waste reported and inappropriate funding in the 100s of billions along with IRS workers who owe billions in back taxes. It’s preposterous the effort in trying to raise any taxes before the waste is handled through a combination of law changes, policy, sending civil servants and bankers to prison for crimes that undermine our economy.

    All that money would probably add up to 500 billion at least, start there!

  6. Deniece says

    I worked for the IRS in data entry for awhile and I can personally attest that the wealthy are often paying less taxes. I hand entered and coded paper tax returns and was shocked how a family of 4 making 20-30k would frequently be paying less than someone making well over 100k. I can’t say how it happened because I was younger and didn’t really understand tax codes, but I was the one typing in the numbers and the “amount paid” by many, many wealthy taxpayers was frequently less than the poorer families. I remember distinctly my shock and outrage after I saw the pattern emerge.

    • Jay says

      “I hand entered and coded paper tax returns and was shocked how a family of 4 making 20-30k would frequently be paying less than someone making well over 100k.”

      This is right, unless you think someone making over 100k should pay less? Why are you shocked?

      When you said rich paying less, I would assume you are saying in terms of effective tax rate, not the whole amount. The fact is the top 5% earners are contribution over 80% of tax revenue for the govt.

      • Fermi's Paradox says

        In reading her post, Deniece mentions she entered the “amount paid”, presumably accompanying the return she hand-entered. So it is not surprising that in some cases an earner with less AGI paid more than a higher earner simply because they did not withhold appropriately. The higher earner may have a tax consultant so they can maintain proper withholding, especially considering the higher dollar penalties they may pay vis-à-vis the lower income earner. After all, we are debating with a data entry clerk at the IRS.

    • FermisParadox says

      Deniece: all you have to do is go to the IRS website, there you can see the “effective” or average tax rate and amounts (actual dollars) filers pay for various income brackets. BOTH the effective rates and dollars paid GO UP with increasing income bracket. Of course, there are unique cases where you can compare individual filers and this is will not hold true, partly because our tax system is so complex. But on average (which is what we are talking about) higher income equals a higher bracket AND greater tax paid.

  7. Tom says

    This is a tired talk show theme. Take a look at effective tax rates for all taxes combined, including state, local, sales etc. And you will find that most poor and middle class are paying a higher rate than the wealthy.

    Also note that this country has some of the highest measures of income and capital inequality of any wealthy country in the world and you’ll realize the poor aren’t doing so well and the rich are getting by just fine. I don’t think we need to increase taxes on the poor at this point.

    • Fermi's Paradox says

      Tom: the tired talk show theme is exactly what you are trying to get people to believe.

      The fact that it is a meme, continually broadcasted by so many doesn’t make it true. Go check the CBO website for what you are looking for (combined taxes), it’s out there. All Fed, State and local incomes taxes are progressive or at a minimum flat. Sales and transactional taxes are what they are, those with greater income spend more or have assets that are taxed more. So even at an “equivalent rate” they are higher (and of course, in absolute dollars, higher income earners pay much, much, more). Moreover, the lower income brackets not only pay fewer taxes (if at all on a net basis) but often receive direct dollar benefits (e.g., earned income tax credits) and a whole host of non-cash benefits those paying substantial taxes are not “entitled” to.

      Yours is a very old and unjustified argument.

  8. FermisParadox says

    Tom: the tired talk show theme is exactly what you are trying to get people to believe.

    The fact that it is a meme, continually broadcasted by so many doesn’t make it true. Go check the CBO website for what you are looking for (combined taxes), it’s out there. All Fed, State and local incomes taxes are progressive or at a minimum flat. Sales and transactional taxes are what they are, those with greater income spend more or have assets that are taxed more. So even at an “equivalent rate” they are higher (and of course, in absolute dollars, higher income earners pay much, much, more). Moreover, the lower income brackets not only pay fewer taxes (if at all on a net basis) but often receive direct dollar benefits (e.g., earned income tax credits) and a whole host of non-cash benefits those paying substantial taxes are not “entitled” to.

    Yours is a very old and unjustified argument.

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