Have you ever wondered who’s telling the truth about taxes? It seems that no matter where you go in this presidential election year, someone is giving you their spin on who is paying too much or too little income tax and how fair or unfair it is. This month seemed like a good time to give you some facts based on actual numbers.
While the information sources vary, the data ultimately comes from either the Internal Revenue Service (IRS) or the Office of Management and Budget (OMB). The latest information from the IRS on tax collections is from the 2009 calendar year. Expenditures are for the 2010 tax year from final tax payments and filings for 2009 that fall within the fiscal year ending Sept. 30.
With that in mind, let’s take a look at the numbers.
According to the Internal Revenue Service, there were 140,494,127 income tax returns with a positive Adjusted Gross Income filed for 2009. To give you some perspective, the estimated population of the United States in 2009 was 305,529,237. This means that about one out of every two Americans files an income tax return. That includes those who show a loss on their return.
The income reported on those tax returns was about $7.6 trillion, and the tax paid was about $866 billion. No matter how you slice it, that’s a lot of money, but it might surprise you to know that this represents only about 25 percent of the total federal budget for the 2010 budget year. The remainder comes from payroll taxes, corporate income taxes and other fees. Approximately 40 percent of the government’s spending for 2010 came from borrowing.
Depending on who you talk to, those who have the highest income in the United States either do or don’t pay their fair share of taxes, but you have to be careful when listening to the speaker. Individual income taxes funded 25 percent of the budget - that’s one way of looking at a discussion about federal taxes. Another way is to look only at revenue and where that is raised.
Federal revenue was actually around $2.2 trillion for the 2010 budget year. This means that the majority of revenue comes from sources other than individual income taxes. Here’s a breakdown from theTax Policy Center:
- Individual income taxes – 42 percent
- Payroll taxes – 40 percent
- Corporate income taxes – 9 percent
- Other taxes and fees – 9 percent
While any discussion of what comes out of your pocket has to ultimately include payroll taxes, this article deals only with the income tax side of the federal fiscal house.
According to the Tax Foundation, if your adjusted gross income is over $344,000, you are in the top 1 percent of income earners. The number is about half that amount for the top 5 percent; $112,000 for the top 10 percent; and $66,000 to be in the top 25 percent. If you are in the top 50 percent of income earners, your adjusted gross income exceeds about $32,000.
When the government talks about Adjusted Gross Income, what it means is your income before any itemized or standard deductions. This amount also is before you take into account payroll taxes withheld from your paycheck or the nondeductible portion of self-employment taxes. The top 50 percent of taxpayers pay about 98 percent of all income taxes. The top 10 percent pay about 71 percent of all income taxes; and the top 1 percent pay about 37 percent of all income taxes. Here’s a better breakdown:
- The top 1 percent of income earners pay 36.7 percent of all income taxes (24.01 percent effective tax rate).
- The top 5 percent of income earners pay 58.7 percent of all income taxes (20.46 percent effective tax rate).
- The top 10 percent of income earners pay 70.5 percent of all income taxes (18.05 percent effective tax rate).
- The top 25 percent of income earners pay 87.3 percent of all income taxes (14.68 percent effective tax rate).
- The top 50 percent of income earners pay 97.7 percent of all income taxes (12.5 percent effective tax rate).
Where does the money go?
In the budget year 2010, the federal government spent about $3.5 trillion, of which $1.3 trillion was borrowed. Approximately 55 percent of what the government spent was classified as mandatory. In budget speak, that means some form of social entitlement program. This includes Social Security, federal pensions, various aid programs, Medicare and Medicaid. According to theTaxPolicyCenter, 58 percent of this mandatory spending is on Social Security (33 percent) and Medicare (25 percent). In 2010, payroll taxes footed the entire bill for the Social Security payments and a large portion of the Medicare costs. Remember that those using the Medicare system also paid premiums.
Discretionary spending accounted for 39 percent of federal expenditures. Theoretically, the term discretionary means spending that is not required. This includes defense and most other federal departments. More than half of the discretionary spending was on defense. Interest payments accounted for 6 percent of federal spending.
So, what’s the point?
This article has shown a lot of big numbers to you. Assuming you haven’t fallen asleep, you might be wondering why this is so timely. It’s simple. Sometime this year, someone is going to ask you to vote for them. Whoever it is will probably throw some version of these numbers at you and claim he or she is on your side. The purpose of this article is to give you a reference point to help you understand what you are being told.
Have a terrific April!