Who Pays Taxes 2015

Whenever there is an attempt to enact across-the-board reductions in the federal income tax burden, complaints invariably ring out that the benefits of the tax cuts largely go to the wealthiest. This is because we have a progressive tax system built on the principle that low income earners are spared from having to shoulder income taxes, but as individuals move up the economic ladder, they are asked to pay more. New detailed data released by the Internal Revenue Service about Tax Year 2015 shows that this is indeed the case: half of all filers paid less than 3 percent of all income taxes and the top 25 percent of income earners pay over 86 percent.

The top 1 percent of earners paid 39 percent of all income taxes, down slightly from the previous tax year’s 39.5 percent share. The amount of taxes paid in this percentile is nearly twice as much their adjusted gross income (AGI) load.

In 2014, the top tenth of earners paid 70.9 percent of all taxes – the highest level in our data spanning back to 1980. The figure dropped 70.6 in 2015, the third highest level. And as recorded since 2009, the top half of all filers were responsible for over 97 percent of all income taxes.

Compared to 2014, the bottom half of earners shouldered a marginally heavier share of the income tax burden – rising from 2.75 to 2.83 percent. This reflects a slight improvement in the economy. The IRS also reported that in 2015: income reported from salaries and wages was up nearly 5 percent; the number of returns reporting unemployment compensation dropped by 17 percent; and, the number of filers subjected to the dreaded Alternative Minimum Tax grew by 4 percent.

The marginal share paid by the lower earners may have been stunted by the burdens imposed by the Affordable Care Act’s individual mandate. Starting in 2014, the mandate requires that people must purchase health insurance coverage or pay a tax penalty officially known as the “Shared Responsibility Payment.” While the number of filers subject to the tax penalty decreased from 8 million to 6.5 million, the average penalty spiked from $210 to $470. Total receipts from the tax penalty grew by 84 percent in 2015. Nearly 3.3 million of those who signed up for health insurance coverage and received a federal subsidy underestimated their income and had to repay a portion of the advance premium tax credit they had received.

The distribution of the tax burden is an important issue impacting the debate surrounding tax reform. Advocates for lower across-the-board level of taxes are attacked because the benefits will naturally go to those who are currently paying the bulk of income taxes. Others still argue that the wealthy are not paying their “fair share” of income taxes without acknowledging the current burdens. There is also the challenge of delivering “middle class” tax cuts given the top-heavy tax load under the current system.

A responsible tax system eases the burden on those at the bottom striving to work their way up. But it also should be careful that the marginal rates at the higher levels don’t provide disincentives to greater earnings and productivity.

Historical Who Pays Income Taxes data is available here.