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Who Pays Income Tax and How Much?

October 15th is the day that quarterly tax payments are due for those that file estimated income tax so it seems fitting to comment on the latest tax news. Warren Buffett has made news suggesting tax rates are not high enough. One of the richest men in the world, Mr. Buffet says income taxpayers (only 50% of Americans actual pay federal income tax) need to give more of their hard-earned money to the government because he paid a lower percentage on his income to the government then some of his employees last year.  What he failed to mention was that most of his income was from capital gains and qualified dividends that are taxed at a preferential 15% tax rate. He pays himself a salary of only $100,000 (not much for a multi-billionaire) and has plenty of tax deductions to offset this leaving a very low adjusted gross income on which to pay income tax.  According to his tax return, he earned over $62 million dollars last year, but after deductions, his adjusted gross income was just under $40 million.  That means Mr. Buffet took over $20 million in income tax deductions and still paid over $6.9 million in federal income tax.  A large chunk of his tax deductions were from charitable gifts, which means that he prefers to donate to specific charities rather than pay more tax and let the federal government decide where to spend that money.  If Mr. Buffet wanted to pay more income tax, he wouldn’t have taken $20 million in deductions or he could have simply written a larger check and told the IRS to keep the change.

Meanwhile, the top 10 percent of wage earners pay nearly 70 percent of all income taxes and the richest one percent pay almost 40 percent of their income to the federal government.  Keep in mind that those families that earn $113,000+  (see table below) are in that top 10% and are the “RICH” that some politicians want to have pay more in income tax. 

In addition, almost 50% of Americans do not pay any income taxes at all. Is this fair? Many of these lower wage earners actually receive a tax refund check even though they paid no income tax. This is known as a progressive tax system.

Lastly, next time you here the phrase” tax cut for the rich”, keep in mind that it is not possible to give a tax cut to someone who pays nothing into the system, therefore any tax cut, by definition, has to be given to someone who actual pays tax.  Most income tax payers are referred to as “The Rich.” That probably includes you and your neighbors in DuPage County. 

See tables below for the factual numbers and draw your own conclusion.

45% of Americans don’t owe or pay any U.S. Federal Income Tax

Tax Year 2008

Percentiles Ranked by AGI

AGI Threshold on Percentiles

Percentage of Federal Personal Income Tax Paid

Top 1%

$380,354

38.02

Top 5%

$159,619

58.72

Top 10%

$113,799

69.94

Top 25%

$67,280

86.34

Top 50%

$33,048

97.30

Bottom 50%

<$33,048

2.7

Note: AGI is Adjusted Gross Income
Source: Internal Revenue Service

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