How much do the rich actually pay in taxes?

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Patricia Young asks:

It is said that the top 10% in U.S. wealth pay more in actual dollars in taxes than the bottom 50%. But what percentage of each group’s income is actually paid?

The top tax rate may be 37%, but loopholes and deductions in our tax system mean that the wealthiest Americans pay far less than they’re expected to.

“When it comes to the wealthiest folks, what you see is, yes, they're paying more tax than the poorest folks. But are they paying as much tax as they could pay to help run the country the way that we run it? And the answer to that is probably not,” said Anthony Infanti, a law professor at the University of Pittsburgh.

The top 1% paid an average tax rate of more than 26% in 2022, while the top 5% paid 23% and the top 10% paid more than 21%. Meanwhile, the bottom 50% paid a rate of almost 4%, according to the Internal Revenue Service. But a ProPublica study looking at the 25 wealthiest people in America found that they only paid a tax rate of 3.4% between 2014 and 2018.

The tax burden within each percentile group ranges greatly, according to a 2024 study from the Yale Budget Lab, a nonpartisan policy research center. The top 1% of earners pay an effective tax rate between 3% and 45%, the study found. An effective tax rate is the amount that taxpayers actually pay after factoring in deductions, credits and exemptions, while the statutory tax rate is the legally required percentage each tax bracket is supposed to pay.

Higher-income earners are more likely to pay a lower tax rate than their statutory rate. Ninety-five percent of Americans earning more than $578,000 paid taxes that were lower than their expected rate, while only 25% earning less than $11,000 paid less than their expected rate, according to the Yale Budget Lab.

That's because higher earners benefit from provisions in the tax code, like the mortgage interest deduction, which allows homeowners to deduct the mortgage interest they paid on the first $750,000 of their mortgage debt. Those who make income above $250,000 can also skirt the 3.8% net investment income tax if they own and are employed by certain businesses.

Eliminating the provisions that lead to lower effective tax rates would raise $560 billion this year.

It’s a “meaningful amount of money” that’s larger than the annual budget for the extended Trump tax cuts and it’s nearly triple the amount of tariff revenue that went to the government last year, said John Ricco, one of co-authors of the Yale Budget Lab study.

“To be clear, though, lots of those provisions are things that Congress and in some sense the public have, over time, decided are worthwhile initiatives to try to incentivize certain behaviors,” Ricco said.

Infanti at the University of Pittsburgh pointed out other features of the tax code, or lack thereof, that benefit the wealthy — like the fact that unrealized gains aren’t taxed.

“If you invest in assets, say you buy some stock, as long as you don't sell the stock, you're not going to pay any tax on any of the gain that builds up in the stock,” Infanti said.

You can then use these unrealized gains to borrow loans, Infanti explained.

The federal estate tax also enables individuals to transfer up to $15 million in assets to their heirs tax-free, or $30 million for married couples. In 2001, the amount for married couples stood at just $1.35 million.

“Those are all things that are available to everybody, but disproportionately benefit the wealthy and allow for huge accumulations of wealth,” Infanti said.

Michelle Layser, a law professor at the University of San Diego, said she thinks the tax system “has room to be more progressive,” which is when your tax burden increases as your income goes up, and that enforcement efforts should be more focused on high-income earners.

“The rate of compliance and potential for tax avoidance is much higher for somebody who's a very high income, top 1% type earner than for your average American and certainly for your low-income Americans,” Layser said.

The wealthy often place their money in offshore accounts, and the IRS has to rely on cooperation from other countries to properly audit them, Marketplace previously reported.

“One of the appeals of the income tax in general is that we think that income is a reflection of people's ability to contribute to the government, “ Layser said. “So it does make sense to tax people with higher incomes to a greater degree than people with lower incomes. And I think that there are points in our system where it's not clear that that is happening.”

A person’s income tax bracket can’t tell you the whole story.

“The tax system looks progressive on its face, but when you start delving into all the details, it is far less progressive than what it looks like,” Infanti said.