The Individual Income Tax is still the largest source of revenue to the federal government; in fiscal 2014 it accounted for 40 percent of all federal revenue. But huge swaths of Americans don’t pay personal income taxes. In fact, Congress treats Americans with comparable incomes quite differently: some pay income taxes while others don’t. One way to throw light on such glaring inequalities is by figuring (preparing) the tax returns for various incomes of earners who meet certain profiles, such as being unmarried.
With an income of $110,299, it is possible that an unmarried taxpayer could owe the IRS $21,064 in personal income taxes for 2015. That income tax bill is the maximum provided for in the 2015 Tax Table. To verify that, click on the instructions for the 2015 1040 form, go to page 88, and look at last line in the Tax Table. That line applies to the above income minus the standard deduction of $10,300, and it means that our taxpayer has an effective tax rate for the federal individual income tax of more than 19 percent.
An income of $110K in 2015 should put one in the middle of the Fourth Quintile: the 61-80 range: the next-to-highest fifth of incomes. I’d imagine it would be right at the 70th percentile of incomes. However, our taxpayer’s effective rate of 19 percent may be 5 points higher than the average effective rate of those in the 95th through the 99th percentiles, which in 2014 covered incomes of $261K to $615K (see this chart for 2014 data). Moreover, our taxpayer may have an effective rate that is more than three times the average effective rate for his own quintile, which in 2014 was 6.2 percent.
In 2014, an income earner got out of the Lowest Quintile if she had an income of $24,191. In 2015, an income of $24K could garner an unmarried person a tax bill of $1,598 and an effective rate of 6.65 percent. That is a higher effective tax rate than the average effective rate of the Fourth Quintile in 2014. (Somehow, I’m just not feeling the equality.)
For several years now, government data has shown that the bottom two quintiles of income earners have had a negative effective income tax rate, which means they get more from the feds in “refundable tax credits” than they pay in personal income taxes. But there are income earners in the bottom 40 percent who do pay income taxes. Consider this profile: an unmarried income earner who has no dependents, who cannot be claimed as a dependent by another taxpayer, and who is under age 25 (and therefore ineligible for the EIC, earned income credit). She will have a tax liability in 2015 with an income of $10,305; that’s her income minus the standard deduction, which leaves a taxable income of $5 and a tax bill of $1.
However, had she been 25 years old and had that same income, she would be eligible for an EIC of $344, and the IRS would send her a check for $343.
Given the profile above, $10,305 is the lowest income in 2015 that produces a tax liability, and it’s an income that would probably place one in the bottom decile. Given our profile, an income of $11,450 will fetch an income earner a tax bill of $116 and an effective rate of more than 1 percent.
For 2015, a total income of $40,050 can get a taxpayer with our profile an effective tax rate of exactly 10 percent. Don’t believe me? Then click on the instructions for the 2015 1040 form (above), go to page 80, and look in the Tax Table at the line for taxable incomes of $29,750, (that’s the $40,050 income minus the standard deduction). You’ll see that our taxpayer owes the IRS exactly $4,005 — an even 10 percent.
$40,050 should be the lowest income in 2015 whereby a taxpayer with the above profile would get an effective tax rate of 10 percent. That income will probably still put one in the next-to-bottom quintile. But here’s what’s disturbing: the average taxpayer with $40K of income has a much lower effective rate than 10 percent. The Tax Policy Center shows that for incomes of $30K-40K in 2013, 49.3 percent of “All Tax Units” had zero or negative income tax liabilities, including 23.7 percent of unmarried filers. All you need is a bunch of deductions, dependents, and refundable tax credits, and the feds will send you a check rather than the other way around.
In 2014, an average effective tax rate of 10 percent for a group didn’t emerge until above the 90th percentile. Indeed, the average effective tax rate for allindividual income tax filers in 2014 was 9.2 percent, even though the lowest statutory rate was 10 percent. Yet, we have these irregularities, these anomalies, where taxpayers in the Second Quintile have higher effective rates than some in the top 10 percent, and where people at the bottom are paying income taxes while some in the middle don’t.
Given that the average tax filer in the Second Quintile had an effective tax rate in 2014 of negative 1 percent, what if everyone in that quintile had to pay a flat tax of positive 1 percent? That would constitute a 2 percent tax hike for the average tax filer in that quintile. But our taxpayer with the $40,050 income would get a 9 percent tax cut, from 10 to 1 percent, and would get to keep $3,604 more of his income. But here’s what’s nifty about having everyone in the next-to-bottom quintile paying a flat 1 percent personal income tax: they would, for the first time in years, be a net contributor of income tax revenue to the federal treasury.
In January, I reported on the top 400 income tax filers in 2012. The top statutory income tax rate for unmarried people in 2012 (35 percent) kicked in at taxable incomes of $388K. So if an unmarried person earned $1M in 2012 and took the standard deduction only, the tax rate on about $600K of her income would have been the full 35 percent.
Yet, the Top 400 income tax filers in 2012, some with incomes of $1B, had an average effective rate of 17 percent. Look at Table 3 (Average effective tax rate) on the last page of the IRS report “The 400 Individual Income Tax Returns Reporting the Largest Adjusted Gross Incomes Each Year, 1992–2012.” What you’ll see is that there was quite a range of effective tax rates for the Top 400 income tax filers in 2012. There were 32 filers whose effective rates were under 10 percent and 30 filers whose effective rates were over 30 percent. Apart from the possibility that that last group needed to hire much better lobbyists, what Table 3 shows is that there are striking inequalities even at the very top.
Hillary Clinton wants to raise taxes. But how about fixing the above irregularities first? Unfortunately, Mrs. Clinton seems quite comfortable with a tax system where people with identical incomes can have vastly different income tax liabilities. Democrats can’t honestly squawk about inequality when they’ve “institutionalized” it in the income tax.
Jon N. Hall is a programmer/analyst from Kansas City.