This may not be the most exciting of my posts but it is one of the most important because it addresses misconceptions about American taxes.
I think it is probably no surprise that I’m not a fan of the healthcare reform plan proposed by the Republicans, but I’m also not a fan of “Obamacare”. I’ll tackle those in a future post, but the debate over one aspect of the Republican plan made me wonder who is telling the truth. Democrats are vehemently arguing that the plan will favor the rich while taking money out of the pockets of the poor and middle class. While at first glance that argument does appear somewhat legitimate I assumed the truth was not quite so simple. That led me to this post.
Who pays taxes? Well…we all do in one way or the other, but again the answer is much more complex. It is easier to begin by reviewing the sources of revenue for the various governments in The United States.
(FYI: I’m about to offer a lot of statistics and other supportive info, so if you get bored you can skip to my conclusion)
NATIONAL GOVERNMENT REVENUE SOURCES
As you can imagine, funding for our national government comes from a variety of sources. In fiscal year 2016 the federal government spent $3.85 trillion while bringing in $3.27 trillion in revenue, meaning it ran a deficit of more than $500 billon. I will not address the consequences of that deficit in this post, but you should be alarmed by the national government’s annual deficit and the current $19.5 trillion debt (too bad my wife and I can’t find a way to pull off spending more than we earn!). Here is where the fed gets its money:
- 56% from income taxes
- 34% from “social insurance” revenue (Social Security, unemployment, and Medicare)
- 10% from taxes on business, fees for using parks, and a variety of other sources.
So the lion’s share of Uncle Sam’s money comes from personal income tax and a large portion also comes from payroll taxes.
STATE AND LOCAL GOVERNMENT REVENUE SOURCES
State governments take in about $1.7 trillion each year, most coming from so called “ad valorem” taxes such as sales tax, property taxes, and taxes on things like alcohol and gasoline.
Local governments bring in approximately $1.35 trillon in revenue . Interestingly, the largest source of local revenue is money they get from the federal and state governments (called “transfers”) with property taxes following close behind. Sales taxes, fees, parking meter fees, etc. make up the rest.
Now the real question and the one raising controversy these days: Who pays the most taxes?
WHO PAYS THE MOST FEDERAL INCOME TAX
The rich pay an unbalanced portion of federal income tax and the middle class also pays a significant portion. This chart from the reputable Pew Research Center paints a pretty clear picture: