How Much Money Do The Top Income Earners Make?

President Obama

Welcome top income earners!

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 2010-2014 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

Chart Of The Top Income Earners And Tax Contribution

Based on a previous 1000+ survey study on Financial Samurai in Fall 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 California. All you’ve got to do is hop on a bus or a plane to be where the action is!

20 years ago, I remember making $550 a month working at McDonald’s for $3.65/hour. 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 our 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 and is not allowed to work more than 35 hours a week makes $120,000 a year and gets a $5,000 a month pension when he retires at 55. Let’s not count the $30,000 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 in 2015, 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, is baffling. Zealots are also grouping together those earning ~$30,000 a year with the most destitute!

Inequality is wrong. Whether you are being terrorized by the IRS or being 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 earners, who already pay the most federal income taxes, 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 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!

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Updated for 2016 and beyond

Photo: President Obama and His Dog, Public Domain.

 

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. Sam focuses on helping readers build more income in real estate, investing, entrepreneurship, and alternative investments in order to achieve financial independence sooner, rather than later.

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Comments

    • says

      Please explain why you think working more than 40 hours a week to get ahead is moronic. 40 hours is the average work hours for Americans. If you work more than average, what do you think happens?

        • Madeline says

          ….”become better than average”…how do you propose that a person become that “better than average” person when there are not (and history proves never has been) an adequate number of jobs to provide the necessities required to live independently in our society?

          • Fermi's Paradox says

            Madeline, your comment makes you sound like a crazy person. You are not serious are you?

      • Zach says

        Let’s thank the rich? Seriously the wealth gap is greater than it ever has been. I’m glad my work doesn’t want me to work more than 40 hours a week because I work my ass off in those 40. If you want to get ahead you have to be motivated and willing to spend time outside of work learning new skills though. I spent a lot of my free time learning programming and computer science and now I am lead data programmer at my print company.

    • says

      @RealDealExpert: and yet this recommendation makes lots of of sense. The one way I personally found to get ahead is to run my side gig in addition to my day job. When all is said and done, I easily work 60+ hours a week, and from a financial perspective it is worth it: I have additional income, and it is diversified. If I ever get fired from my day job, I now have a backup.

      But, yes, there is some time sacrifice to be made here!

  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

              That’s an idiotic statement Jay, have you bothered to ever check one of their Annual Reports? Or are you going to say the report is a lie? You would also know that lying in them is a Federal crime. Of course, there is no punishment when the Huffington Post does it though.

            • Jon says

              Fermi, whoever THAT is, is obviously aghast at the idea he has been TAKEN by what he THOUGHT was a fair system. I always figured the system was NOT what it’s presented to be, but when I was informed that this guy was gonna pay way less than I was paying (his income HAD to be enough to pay a mortgage on a home worth 7 figures, and a car that cost him 6 figures, new), because his TAXABLE INCOME was way less than mine, I realized I was right all these years.

          • Jonathan SCHAEFER says

            LOL! If you own a business, there are a myriad of ways to “hide” income, legally. Can you explain how a man, a podiatrist, with three offices in California, could POSSIBLY make enough money to afford a home in a gated community and a 4 year old Mercedes, when his “taxable income” was less than myself, who worked for an auto company and was an hourly employee? America (those who are in the middle 20%) needs to wake up. Things are NOT FAIR. We need to abandon our idea of a “progressive” tax system, and adopt a FLAT TAX, with NO deductions and tax everyone on their HOUSEHOLD INCOME!

            • Fermi's Parados says

              FS above asked how someone doesn’t pay any taxes (presumably without breaking the law, after all, if you are willing to break the law anything is possible, including bank robbery).

              No one has provided anything substantive. FS sounds like he understands the tax code very well, hence his poignant question. Those who make more not only pay more but pay at a higher rate. Yes, there are “business expenses” that are technically deductible depending on what kind of business entity you have and the nature of the expense. But there are strict rules around that, it only goes so far. I am very familiar with them.

              Please get your facts straight.

        • Richard says

          Not really a comment on your letter but I do not see how to get to write a letter without “replying” > In any case I am not interested in AGI I am interested in total income. AGI is a another tax haven If I earn $200,000 in tax free bonds and pay no taxes I still have about $4,000 a week to live on. If I have no deductions, family of 4 and earn 26,000 I also (according to this article pay no taxes..(about $400 a week) so who is better off? Duh…never use AGI in any comparison, it is a sure sign you are rich.

    • 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.

      • Fermi's Paradox says

        That’s a very important point Bill Richards (not to keep continuing this thread but it provokes thinking). I read a study a couple years ago, I think it was done by an Administration or the CBO, but it found roughly 1/2 of money income from those under the official poverty line is NOT reported. They determined this and other findings through direct interview of a large sample, not the typical meta-data analysis of broad reported statistics. Meaning this fact will not come from IRS data for example.

        And it makes perfect sense as well (in case someone wants to raise the BS flag). They not only likely have jobs where this is more frequently the case (e.g., cash work, self employed or working for an individual or small business that can more easily escape reporting requirements), BUT they are motivated NOT to report themselves. By doing so they are able to obtain or maintain greater benefits from the state. You can hardly blame them, they are acting rationally (perhaps not morally).

  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.

      • Rob says

        stock for someone “extremely wealthy” would likely be moved into an irrevocable trust along with any other assets subject to estate tax (i.e. real estate/personal property, etc.) during their estate planning.

    • Jonathan SCHAEFER says

      You BETCHA! And kudos to YOU, Sir, for being honest. I can NEVER get angry at someone who USES the system the WAY it was intended. But, until the electorate is given HONEST numbers, we can NEVER realize just how much (or how LITTLE) money is actually being paid by the top 1….or even 2%. I want to see HOUSEHOLD INCOME become the measuring stick. How much did you TAKE IN this year? From ALL sources. And how much did you receive in refunds? The remainder is how much you actually paid. That, my friend, is the only honest picture, from which we can judge, whether people are paying their fair share of TAXES. In the END, the ONLY fair tax system is one where the household income is computed with the SAME percentage for everyone. No deductions. What a DREAM (one that will never become reality).

    • Jon says

      That kind of thinking is what is saving the rich! We have GOT to stop thinking they need to pay such ridiculous rates. Many pay very little actual cash. The thing that has to happen is the rate structure has got to change. That is the only way to insure everyone pays SOMETHING. If every taxable entity paid, say, 7-8%, with NO deductions, the government would have more money than they could spend! Flat tax rate, no deductions. If you WANT to spend your money, because you have more of it, it will help the overall economy. But no more, where people with billions, get to keep all of it because they spend it correctly. That’s bullshit.

      • Fermi's Parados says

        And your 7-8% would on average be a tax break to the 1% and would be a tax increase to over 50% of people who file tax returns. Just check the IRS website before making unfounded remarks about how much people actually pay in taxes. And it is all based income, not sure what the remark above is about “household income” is. That is effectively what the tax is based on (e.g., married filing jointly).

  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.

      • says

        Specifically, people who have a lot of investment income, long-term, reap huge benefits by only having to pay 28% Capital Gain Tax Rate, rather than the normal 35%+ rate.

        Also huge corporations can move to Ireland or other off-shore locations to enjoy tax benefits while still operating mostly in the US.

        • Fermi's Paradox says

          Jacob, simply check the IRS data, it belies what you say. In terms of income groups, each successive group tax payers with greater income pays a greater % of their income (regardless of source) in taxes (Top 1% > Top 5% > Top 10%, etc. in terms of income earning groups).

          And you are confusing marginal rates with average rates, you are comparing the top marginal income tax rate with a capital gains rate. It is more than likely for most their average tax rate is lower than the 28% you specify, that’s all that matters, really. That’s in the IRS data too.

          Moreover, stockholders own and are responsible for the company in all regards; the income, the cost, the profit AND for the taxes. The corporation also pays taxes on the stockholders behalf, so the combined tax on corporate “profit” or “returns to capital” is very large in this country.

          And as much as you would like to believe companies run from America to incorporate, the number is quite small by comparison.

          Lastly, even if your argument were true, common sense suggests that even the % difference you sight is so small that it in no way explains the differences in after-tax income.

      • Jason G says

        The top capital gain rate is around 23 percent. The capital gain rate for people in the 15 percent bracket is zero. A married couple who is living off investments can therefore take home around $75k and pay no taxes. A non married couple with head of household closer to 90 k if both have their own portfolios. If the married couple have itemized deductions and exemptions they could potentially take home close to 90k to 100k before paying any taxes. If this couple were running a business they could deduct their BMW lease payments, health care costs, and other benefits to help this couple have a break even business. Furthermore this small business can offer a 401k plan and Hsa plan to put away another 22k away tax free. This couple would be in the top 8 percent and pay no income tax. Super wealthy people won’t pay zero income tax, but those who rely on the capital gains rate will pay a lower effective tax than many middle class families. Furthermore wealthy investors pay zero dollars on the appreciation of their assets which is arguably income in a real sense. I hope this helps with the zero tax part…

    • Eric the Viking says

      After working our tails off for 20+ years my wife and I entered the top 1% in our early 40’s and recently at age 49 entered the the top 0.1%. You would never know by looking at us that we have an eight figure net worth. We have no boats, motorcycles, or fancy cars. My car doesn’t even have power seats. We know many other 1%er’s and I can attest that they all pay big taxes. We pay about 43% of our gross income every year in state and federal taxes. Add sales tax, FICA, medicare, and property taxes on top of that and about 50% of our income goes towards taxes. The real problem will be when wealthy couples like us step out of the work force a decade or more before normal retirement age because we are tired of working for the government 5-6 months out of the year. Serious tax reform is needed if this country is to survive another 200 years. I don’t mind paying my “fair share” but the top marginal of 51.4% that we currently pay on much of our income is too high. It is one of the major reasons for our decision to retire in the next couple years.

      • says

        I retired early partly due to high taxes as well.

        I’ve found that making $200,000-$250,000 a year is the ideal income for maximum happiness. Income is enough to do whatever you want, and you aren’t taxed to the point where you feel taken advantage of.

      • Chris says

        Please excuse me if I don’t feel a bit sorry for you or your 8 figure income. How much money does one actually NEED?

  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.

  9. says

    Do you mind if I quote a couple of your articles as long as I provide credit
    and sources back to your website? My blog site is in the exact same area of interest as yours and my users would
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    Please let me know if this alright with you. Many thanks!

  10. Richard Saunders says

    The article starts off by talking about Averages which is very deceptive. It should be using the Median. The average income of 9 people who make a dollar and 1 person making a million is $100,000. The median income of those 10 people is 1.

    • Fermi's Paradox says

      Richard Saunders: The article looks at average rates by many income brackets, so the implications are much more telling than a simple median. It’s a very sound article and well founded. I’ve read quite a bit on the subject.

  11. Jon Gif says

    In my opinion, the only “Fair” tax system is one that is based on consumption, as opposed to income. This would eliminate the need for self reporting, and the majority of the IRS, as we already have a sales tax system established within every state. Therefore, the implementation of a “Federal Sales Tax” would be very simply integrated within the existing systems that are already in place today. This would allow for revenue to be generated from all who consume products within our county. Visitor, criminals, illegal aliens, businesses, individuals, you name it, they are all included as they all consume goods when within the United States. This would stop punishing income earners for earning and saving, while requiring everyone to participate in the tax program.

    Some may comment that we will then be punishing the poorest of the country because everyone must eat and it would be “unfair” to tax someone for buying food. In response to this I would suggest that we eliminate food staples from the “taxable” consumables, although in many states we are taxing food today. Sales Tax Free products would include necessary “staples” such as meat, eggs, milk, cereals, water, etc. but not unnecessary consumables or simply desired treats, such as soft drinks, coffees, candies, etc.

    Additionally, a higher rate could be charged for luxury items or so called “sin” products such as luxury automobiles and boats, or alcohol and tobacco…

    I would be interested in hearing others thought from this perspective.

    • Bruce says

      First and foremost, before we even think about fixing the tax system, we need to fix the SPENDING system. It we stop wasting money on STUPID thing, there would be plenty. Then, it’s a lot easier to fix the tax system when you get to let EVERYONE keep more of what they earn.

      It’s time to REQUIRE a real balanced budget. You enforce it by not allowing ANY government hiring, ANY pay increases for government employees (including step and seniority increases), NO new government programs or renewal of expiring ones, and Congress and the President (and their staffs) get a pay CUT of the same percentage that spending exceeds revenue.

    • Fermi's Parodox says

      Exactly Jon Gif, it’s simple common sense! And is an ethical methodology as apposed to the system of appealing to special interest groups we have today.

    • Rob says

      It’s an interesting concept, but increasing prices and not taxing income has the potential to incentivize an economic stall. A system rewarding you for NOT spending is probably not the best way to foster our economy!

      It also hinders governments ability to coerce industries to invest in new technology (granted the free market should solve this on its own, but its governments job to act as the voice of the people and reward champions of issues like green energy and healthy/sanitary food technologies). Your concept might actually create the ‘cheaper is better’ mindset where price becomes the dictating factor in consumer purchasing–which is debilitating to otherwise healthy competition.

      Just my initial reaction to the concept.

      • Fermi's Paradox says

        Wow, that’s scary Rob. Perhaps learn a little more about how a market works. And by the way, if “green energy” were such a great thing it would (or will) stand on it’s own. And if it takes interest in it to create demand, go out and create that interest. Stop asking government to execute the will of a small minority (who think they know best when it comes to energy) over the desires of the majority. If you like green, fine, go buy it.

        • The Salamander says

          That the market will proactively solve our problems via supply and demand is a fantasy. There is a huge demand for the cure of cancer. Why doesnt the cure just get up and stand on it’s own two feet? Certainly there is a demand, no?

          • nivarion says

            Your example of cancer confuses me. Has the billions of dollars funneled into cancer research by the US government turned up a cure? Can I use that fact to say that the government solving problems is a myth?

            The free market wanted a better way to transport goods from China to the US. It created super freighters. The free market wanted a better way to use American cotton and the cotton gin came about. It wanted a cheaper way (compared to kerosene) to light up our homes and the electric light bulb was funded.

            Time and again a demand for something has created funding for it. Both public and private. With enough funding and time, humanity has again and again solved it’s problems.

            Here’s a question. Can you find me an example of something having a huge demand and getting no private sector funding?

    • Working Forthe Mann says

      You are an idiot. Use tax has been proven time and time again to be regressive. The poor spend most of their income on food, shelter, clothing, necessities. There is little savings, less home ownership.

  12. says

    There is one other group that pays no federal income tax: people who live off investment income, independent of age

    In addition to the standard deduction and personal exemption that allows low-income families to pay no tax (about $20k tax free for married filing jointly), if income comes from dividends and long term capital gains a family can earn another ~$70k a year tax free ($90k+ total)

    This post explains it fairly well: http://www.gocurrycracker.com/never-pay-taxes-again/
    It seems Uncle Sam really wants people to retire early and live off investments

    We also shared our actual 2013 tax return, which can make it easier to see how the theory is applied in practice ($91,752 in AGI, $0 tax)

    If Congress is interested, I have a long list of recommendations to improve the tax system

    • Fermi's Parodox says

      You really should read the article carefully for one, it contradicts itself. And capital gains once realized are taxed, plain and simple (yes, at a lower rate “generally” than your marginal income tax rate, but not always). And if you think you’re going to NOT pay taxes by some maneuvering of investments into qualified dividends, etc., you need to look more closely. And moreover, the “tax free” investments generally have lower returns than taxed investments for the obvious reasons. What maters is your free cash return. There is no free lunch, or should I say it’s pretty difficult to find.

      • says

        Yeah? What is the contradiction?

        I’ve followed the recommendations in that post for the last 2 years and paid $0 in tax on AGI over $90k, while invested in the US stock market and matching returns of the S&P500.

        It seems like the lunch is free (and tax free too.) Turbo Tax agrees

        • Fermi's Paradox says

          Realize the gains as cash, you will pay tax, it’s pretty simple. As long as you do what most people do, even those who don’t read the article, and postpone the gain, you’re fine.

          • says

            Capital gains are taxable events, true. Yet when total income is such that the marginal rate is less than 25%, then the rate applied to long term capital gains is 0%.

            Certainly, following the path that most people do would result in no taxes today, but eventually those gains will be taxed. Postponed as you say. By harvesting the gains along the way, the net tax is zero, both today and in the future

            This is the result of the so-called Bush Tax Cuts and their addition to the permanent tax code as part of the American Tax Payer Relief Act of 2012

            The lunch is definitely free. Here is a concrete example:
            http://www.gocurrycracker.com/the-go-curry-cracker-2013-taxes/

            $44k in capital gain. $28k in dividends. $91k total AGI. $0 tax

  13. johnny says

    The income is important but not the most important. The purchasing power shows the real thing.
    Someone can make $380,000/year and can still be poor. If fundamental needs like food, housing, school, transportation, costs are hundred of thousands/year, no matter how much you make, $3-400,000/year.
    There are out there people in other countries that they make only under $10,000/year and still have a better life than many of us here in US.
    So I would say that a system is fair, if everyone who works at least 40hours/week, gets a pay check enough to pay for good food, housing expenses(mortgage,rent, utilities), school,entertainment,transportation,hygiene,etc and have a little left for saving.
    I do not believe that a union electrician makes $150,000/year. Maybe in a speculative industry.
    Most of the engineers in US with a BS or MS degrees do not make that money.

  14. Deborah says

    YES, Work harder at your minimum wage job, better yet work two minimum wage jobs, 80 hours a week, $7.25 * 80*52, and you, slacker that you are, still will top out at 30k. Don’t tell me that the big wage earners have opportunities that you don’t have, and you know how they slave away at those ego-suffocating jobs. You low wage earners just need to uproot your family and move to a city with high tech jobs…not that you have the skills or education to get any of those jobs….then there’s that spendthrift government, providing benefits to veterans and healthcare to all Americans, monitoring our security, food, water, and air..

    A condescending article that ignores the realities of life for many in the US ….
    At 389K a year, you still expect sympathy?

    • says

      Nobody expect sympathy for those making $389,000+. But people making $389,000 certainly don’t deserve to get attacked and vilified. I’d rather say thank you for paying so much in taxes that gets redistributed to others who have less.

      It’s OK to try and raise taxes on others if you don’t have to pay more yourselves. But as someone who has experienced racial discrimination before growing up in the south as a minority, I can unequivocally tell you that discrimination is NOT OK just because you aren’t being discriminated against.

      How about getting the skills and education to get those jobs? The internet and knowledge is essentially free now.

      • JC says

        Nobody needs to thank anyone for paying taxes: we all know the rules going in (or can look them up), and none us set our own salaries or our own tax rates (unless you’re a politician). It’s the nature of the beast, it’s the law, and it’s part of being a citizen in our great country.

        To feel entitled to a ‘thank you’ when you willingly work here, knowing full well what you’ll be taxed, is pretty obnoxious. That’s like people taking out 100+K for an out-of-state B.A., then complaining and wanting the debt forgiven. It might be even more obnoxious, since (if you’re making 400K) your life is probably much better than the ignorant indebted student’s. I’m sure that student would gladly take your job and salary off your hands and pay your taxes for you.

        • says

          I think saying “thank you” is a cheap and easy way to show appreciation. So, I say “thank you” to as many people as possible.

          A little acknowledgement goes a long way, and I’m supremely appreciative of those who support those who have less.

  15. rcz58z says

    I’d like your opinion and others input on this question:
    I need to park $400k for approx 1-2 years. At which time I would then use it to purchase a house.. however for that 1-2 years, i’d like it to be working for me, but don’t want to lose it either.. I was considering putting it into PPF and/or PGF.. looking at the history of those ETF, they both seem relatively stable when the market fluctuates and they pay a nice dividend.. so it “appears” to me they are somewhat stable and safe investment.

    I’m close to retirement and have other funds invested already, and I just sold my property and will rent until i figure out where I want to live and retire..

    Thoughts and Opinions?
    Appreciate any feedback you and your readers may have.

    • Scott says

      1-2 years is an insufficient time horizon for any equity investment to guarantee you a return. Buy a t-bill or park it in a high yield savings account. The return sucks but if you can’t afford to have under 400k in 1-2 years when you need that money than you can’t afford to take the volatility risk.

  16. DJ an economist says

    This article is somehow misleading. The important point of misunderstanding is that “Income Split Point” is the dividing line of each income layers, and it does not mean average income of the layers. This article does not show the definition of this terminology and relates it to the average income of each layer. My understanding is that it is the bottom line of each layer, from which the next layer begins.

    The average compensation for top 1% in 2011 was $10.5 million, a lot bigger than the split point of $380 thousand something. They are compensated with stock options and other bonuses as well.
    Check this article in Forbes.
    http://www.forbes.com/sites/scottdecarlo/2012/04/04/americas-highest-paid-ceos/

    Tax burden share can have implications, but it is also misleading. Some 15% in America is now living under the poverty line. By the very definition of poverty line, it means the subsistence income that enables poor people merely keep their subsistence.
    http://www.census.gov/hhes/www/poverty/about/overview/

    Should such people pay income tax as well? They may not pay income tax, but they pay the same indirect tax when they buy a Big Mac.
    Regards!

    • DJ an economist says

      I correct the mistake in my previous comment. The compensation of $10.5 million in 2011 in Forbes article was for the chief executives of top 500 companies, and so it does not mean the compensation for top 1%. I don’t know why I was confused at the time. I intended to indicate the misleading concept of the “Income Split Point”, which does not mean the average but the border line of each income layer. Thanks.

  17. Curious says

    US consists of 2 category of retirees. Ones protected by pension, and ones who are not. The web is full of articles on how 401K is same as pension, when it is NOT. It is high time individuals are given more choices to save, with no pension to rely on, in most of corporate world.

    – A request from hard working middle income group, who can never be on Govt subsidies.

  18. Wowwww says

    Ppl on here are so crazy frustrating it’s insane. How can people be so blind. 84% of taxes are paid by the top 20%, which starts around 70,000$ a year. Someone making 389,000/yr should not be taxed at same rate of someone making 20 mill/yr no matter how the income is made. Corporate tax is a joke, not one investor on earth in anything says “let me pay my fair share.” I just don’t understand what people can do with the second billion that they couldn’t do with the first. If everyone is trying to pay as little as possible, and one group of people have unlimited resources to help them, who’s really paying the greatest portion? The richest of the rich are getting richer and richer and are so out of touch due to greed and power that someday our kid’s kids will experience their own ‘French Revolution’ if taxes aren’t reformed.

  19. stephanie says

    OHHH, just “$43 dollars a month”…???!!! I’d be homeless if I had to spend that much more on taxes! I’ve worked my ass off all my life and I am struggling to survive living in San Francisco. Actually, I only WORK in SF. In reality I have to live in Oakland because you assholes have made it IMPOSSIBLE for me to live within an hour of my place of work. Assuming that I can afford anything more than my already month-to-month livelihood is moronic! This is coming from a graduate of a masters program at one of your private institutions you speak of. Sorry my daddy didn’t know any of you techies for me to earn a living wage out here….

    • says

      Wait, so I’m an asshole because you can’t live in San Francisco? How does that work? I’ve paid over $100,000 in income taxes a YEAR that gets redistributed by the government to help society. I donate to my local SF library and volunteer for local community events. How much do you pay in taxes and what do you do?

      I just spent 6 months putting together The Best of Financial Samurai eBook to help empower people to lead better financial lives. If you buy it, all proceeds after expenses gets donated to a charity that help keep Oakland youths off the streets and in the classroom. It’s called Alive & Free. As an Oakland resident, maybe you’d like to pitch in instead of blame others for your problems?

      Here are some other posts you’ll like:

      A Massive Generational Wealth Transfer Is Why Everybody Will Be OK – But, I’m thinking maybe not you?
      Stocks or Real Estate: It Depends On How LUCKY You Are – Are you someone who attributes other people’s success to luck and your success to hard work? If so, you’ll love this post!

      • Serino says

        I am not sure that he is meaning strictly you but more aimed at the people who make comments similar to yours about how people just need to work more and move to higher income areas without taking into account that it isn’t that simple. You may or may not have thought about the difficulty in doing such a thing even though it is good advice if someone can afford it. A large majority of jobs in places that don’t have unions do not allow overtime forcing you to come in late or take long lunches to prevent you from getting it and even writing you up should you accrue more than an hour of it. This limits peoples possibilities to getting a second job which since most companies prevent you from working a second job in the same field can make things difficult. Combine that with the fact that most of these types of people are living paycheck to paycheck and unable to save up the money necessary for a move to a higher income area and working those area may actually cost them more in transportation expenses then what they are earning extra. This is part of the backlash that so many people with money receive because of comments that would be sound advice for someone not struggling just to get by. You hear it time and time again, work harder, work more, move to a better place, I did it why can’t you, just go to college. The worst part is that if you compare payment between jobs a couple decades ago to jobs now the low income jobs, adjusted for inflation, pay roughly the same to within a dime or two while as you advance up the pay increases between the times steadily increase.

        • says

          I hear you. There is no easy solution, and everybody has a different set of circumstances to deal with.

          The one thing we can control is our effort. Never fail due to a lack of effort. Fail due to bad luck or circumstance, but go down fighting until the very end. Work on a side hustle, an X Factor from 4am-7am before work, and then from 8pm – midnight after work. Don’t stop trying.

          Life is reasonably comfortable in America (I’m in Cambodia now where I just witnessed 4 year old kids walk miles to school in 98 degree heat after I asked the driver where they were going). The worst is REGRET for having never tried, and having never tried hard enough.

  20. says

    It’s interesting how your perspective begins to change once you realize how much opportunity is out there. When I was getting through college I always considered a six figure salary as true wealth. The pinnacle of success. Once you start to grind through your career you begin to realize how many income opportunities there are. It just takes determination and diligence to realize your earning potential.

  21. Summer says

    Legally, i don’t pay tax too and my earnings qualify me as the top 1% according to the article above. How Is that possible?

    Step one – give up your American citizenship and take up citizenship in countries where there is no capital gain tax. There are really nice places to live where capital gain tax is zero. Google and you’ll find.

    Then set up a limited liability company to expense away all your taxable income. Engage in as many businesses or professions that generate wealth thru capital gain as you can. There are many different options to suit a wide variety of interests. You just need to do some homework

    That’s it. You can be top 1% earner and legally not pay a single cent of income tax.

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