The word, taxes, alone can make you feel a little queasy, like a pop quiz on a Monday morning. It’s a topic that’s often discussed with a sigh, a shrug, or a healthy dose of outrage. But what exactly are we talking about when we talk about taxes in America? Who actually foots the bill for everything from national parks and highways to social security and defense? The answer, as you might suspect, is a bit more complex and a lot more interesting than you might think. This blog explores the question, ‘Who Pays Taxes in America?’ and other essential questions related to it.
This isn’t a dry, textbook-style explanation. We’re going on a journey through the American tax landscape, exploring who pays what, how the system works, and a little bit of history to put it all in perspective. So, grab a cup of coffee and settle in. Let’s demystify the American tax burden.
Understanding the U.S. Tax System: It’s More Than Just One Tax
Before sorting out the who, let’s sort out the what. In the U.S. tax system, there are many types of taxes that are not simply income:
- Federal Income Tax
- State Income Tax
- Payroll Tax (Social Security & Medicare)
- Capital Gains Tax
- Sales Tax
- Corporate Tax
- Estate and Gift Tax
Each of these will have its own rules, and some people will pay some of these tax types and not others. The most frequently talked about (and debated) tax type is income tax for the United States, which funds everything from national defense to social services.
The History of the Maximum Federal Tax Rate
It’s not difficult to see how you might look at the current Maximum Federal Tax Rate and think to yourself That seems high, but if you look back in history, it’s not that high by historical standards.
The Beginning
The first federal income tax was introduced in 1862 to pay for the Civil War. The first federal income tax started as a progressive tax with a low rate, which was 3% on the portion of taxable income exceeding $600, and 5% on taxable income exceeding $10,000.
World Wars I and II
War is expensive, and taxes tend to follow it. The Maximum Federal Tax Rate was much higher in World War I, as the Maximum marginal rate was 77%. It became even more drastic during World War II when the Maximum Federal Tax Rate peaked at 94% on the portion of a taxpayer’s income exceeding $200,000.
The Aftermath
Well into the latter half of the 20th Century, the tax rates over 90% continued in part due to the costs of rebuilding after the war and the costs associated with the Cold War only after the 1960s did rates fall more consistently.
The 1980s and Beyond
The Reagan tax cuts in the 1980s lowered the over rate much more quickly. The downward trend continued over the longer term. The trend overall has fluctuated but continued downward since the 1980s.
As you can see from the above-mentioned history of American taxes, the landscape has changed over the course of time. This also exhibits the political and economic realities. The same tradition has been going on and on, even in this modern age and time.
Who Pays Taxes in America?
Here is the twist—not everyone pays federal income tax. According to the Tax Policy Center, approximately 40% of American households do not pay federal income tax in any year. But don’t point fingers too quickly—many of those people pay payroll taxes, sales taxes, and state taxes.
The Tax Burden by Different Income Burden
The progressive American tax system makes it so that individuals with high incomes pay more, thus reducing the tax burden on the lower-income groups. But do not think that rich people end up paying all the taxes. Check out the table to understand this better.
| Income Group | % of Federal Income Taxes Paid | Effective Tax Rate |
| Top 1% | 42.3% | 26.0% |
| Top 5% | 62.7% | 23.0% |
| Top 10% | 73.7% | 20.6% |
| Top 25% | 88.0% | 17.3% |
| Top 50% | 2.3% | 3.5% |
What about Payroll and State Taxes?
After knowing about the ‘Who Pays Taxes in America, you must know about the payroll and different state taxes. Lower- and middle-income Americans often pay more Payroll taxes (Social Security and Medicare) than they pay in Federal Income Taxes. Also worth noting is that Payroll taxes are flat, not progressive. That is, whether you earn 30,000 or 130,000 (up to a cap), you pay the same rate.
Sales Taxes are also regressive – enacted in poorer communities, they take a larger percentage of a poor person’s income than a rich person’s income. So while billionaires may pay most of the federal income tax, working-class people have a large portion total tax burden when you consider all taxes combined.
Maximum Federal Tax Rate vs. Effective Tax Rate
You might have heard scary figures like the Maximum Federal Tax Rate of over 37%. This is the highest tax rate in US. It is true – but remember these are marginal tax rates, not effective tax rates, which is what most people actually pay. So, let’s break it down below…
- Maximum Federal Tax Rate (2024):
- 37% on income above $609,350 (single filers)
- 20% on long-term capital gains
- 3.8% Net Investment Income Tax (for high-income earners)
- Top corporate tax rate: 21%
Effective Tax Rate
The tax rate that people actually pay after deductions and credits. The rich often do this legally. Many of them have deductions, charitable donations, and capital gains (that are taxed lower) that they can use to reduce their tax burden.
This is how billionaires like Elon Musk or Jeff Bezos can pay little or nothing in a given year. It’s legal to do, but controversial.
The Highest Federal Tax Rate in History
Let’s take a turn back. In the 1940s and 1950s, the highest federal tax rate was an unbelievable 94% during World War II. Even in the 1960s, the top marginal rate was around 70%.
Today, with the top federal tax bracket at 37%, many people feel that tax rates are high, but historically, they have been much, much higher (at least on paper).
Corporations: Deceptive or Underdog?
Many prominent corporations, Amazon, Apple, and Google, are pushed back against claims that they pay virtually no taxes to governments. Using deductions, credits, and global accounting loopholes, companies can legitimately lessen their tax bill.
In 2020, 55 large profitable U.S. companies paid not a penny in federal income taxes after reporting billions of dollars in profit.
But with a corporate tax rate of 21%, some suggest U.S. companies are at an ever greater disadvantage globally and need to deduct out whatever bills they are allowed to survive.
The Role of Tax Deductions and Credits
Tax deductions can significantly diminish the tax liability of individuals:
- The Earned Income Tax Credit (EITC) helps low-income earners
- The Child Tax Credit helps families with dependent children
- Mortgage interest deductions primarily benefit homeowners (especially wealthy ones)
- Charitable deductions can vastly lower the tax bill of high-income earners
These examples illustrate how we define who actually pays taxes and how much tax they owe. They also demonstrate how tax policy is employed to encourage a certain behavior—i.e., home ownership, saving for retirement, and giving to charities.
So, Who’s Actually Picking Up the Bill?
Most of the federal income tax is paid by wealthy individuals. But when it comes to payroll, sales taxes, property taxes, and state taxes, it becomes a little more equal, albeit regressive.
- The top 10% pay the majority of federal income tax
- The middle class is generally the biggest contributor through payroll and sales taxes
- Lower income groups typically either receive refunds or owe little to no income tax; however still pay consumption and payroll taxes
Conclusion
The American tax system is a sprawling and complex collection of federal, state, and local taxes; taxes on income, taxes on payroll, and taxes on excise. This system of paying taxes is based on progressive taxation to further burden those who earn the highest incomes. While there will be plenty of conversation over how fair, equitable, and efficient our system is, the only thing that will never change is the structure. Hence, it is important for you to know ‘Who Pays Taxes in America.
The next time you partake in the conversation around Income Tax in the United States, the Maximum Federal Tax Rate, or even who is or isn’t paying their “fair share”, you will at least be informed enough to appreciate the complexity of the system. A system that is entirely influenced by a rich history of changing tax policies and fundamentally contributes to the ways in which a country spends money. It is not just some line on a form; it is the economic engine of a country.
FAQs (Frequently Asked Questions)
Who is Required to Pay Taxes in the United States of America?
Ans: The permanent residents of the USA are required to pay income taxes on all of their worldwide income while living in the country.
Who Pays Most of the Taxes in America?
Ans: The top 10% of the income earners general pay around 60% of all federal taxes and 72% of income taxes.
Can an American Citizen Not Pay Taxes?
Ans: No, no American citizen is exempt from paying their due taxes. But in some cases, a citizen might be exempt from filing if they do not owe any tax due to some tax provisions.
Which Country Has No Income Tax?
Ans: Various countries offer tax-free living. In this regard, United Aram Emirates (UAE) is the most popular on the list apart from countries like the Bahamas, Monaco, and Qatar.
Which Country Has the Highest Income Taxes?
Ans: The country with the highest income taxes in the world is the Ivory Coast (60%). Countries like Finland (56%), Austria (55%), Japan (55%), Denmark (55%), and Sweden (52%) also fall in this category.
