Yes, the Top 1 Percent Do Pay Their Fair Share in Income Taxes
In January 2014, I posted what has unexpectedly become one of my most widely-read articles, “What Does It Take to Be in the Top 1 Percent? Not as Much as You Think.” Seeing as it’s now over a year later and most of us have already either filed our federal income taxes or applied for an extension, I thought it would make sense to follow up on last year’s post and tackle a commonly-held misconception about how much the top 1 percent really contributes.
A good place to start is a February 2015 poll conducted by the Pew Research Center, which found that a whopping 72 percent of respondents felt that “some wealthy people don’t pay their fair share” in federal income taxes.
Everyone is entitled to his or her opinion, of course. But in this matter, the facts tell a different story. On the contrary, top-earning Americans pay such a huge percentage of income taxes that the country’s lowest earners don’t have to.
According to the Tax Policy Center, those in the top quintile of earners were responsible for paying 83.9 percent of all income taxes in 2014. Those in the bottom quintile, on the other hand, “paid” a negative rate of -2.2 percent.
To get an even greater sense of just how much top earners pay in taxes, let’s unpack some of the data from the top row, which represents those who earn over $134,300 per year.
At the very pinnacle of this bracket—the 1 percent—is where you’ll find the Bill Gateses and Warren Buffetts and Larry Ellisons. About 3 million Americans—or roughly the entire population of Chicago, the third-most populous U.S. city—are members of this often-maligned group of people. According to the Congressional Budget Office, they have an average annual income of $1,031,900 after paying an average federal individual income tax rate of 29 percent. Collectively, they account for about 17 percent of total U.S. income ($13.7 trillion in 2014), and yet their share of all income taxes paid ($1.4 trillion in 2014) amounts to 46 percent.
If you do the math, you’ll find that these 3 million Americans were responsible for contributing approximately $644 billion in tax revenue in 2014.
Below is another way to visualize it. The combined percentage of those who make between $0 and $49,999 (and who reported filing their income taxes in 2013) is 63.4 percent. Yet they contribute only 6.2 percent of all income taxes.
On the other end of the spectrum, the combined percentage of those who earn $100,000 and above is only 15 percent. Yet they contribute over three quarters of all income taxes.
To be clear, I am not insinuating that low-income earners don’t pull their own weight. It only stands to reason that because they make less, they pay less in taxes. I am merely trying to refute the misconception that the wealthy “don’t pay their fair share,” as the Pew Research poll revealed. Indeed they do, as all of the data show.
Seeking Tax-Free Income
In fiscal year 2014, the government drew in $1.4 trillion, an all-time record.
Close to half of its revenue—46 percent, to be exact—depended on citizens dutifully paying their taxes.
This has been the case since at least 1945. Even as the share of corporate taxes has shrunk and payroll taxes increased over the course of seven decades, the share of individual income taxes has remained pretty steady in the 40- to 50-percent range.
Indeed, it’s every American’s duty to pay his or her fair share, but there are ways to responsibly minimize one’s tax burden.
One such way that’s favored by high net worth individuals is by investing in municipal bonds, which go untaxed at the federal level and often at the state and local levels.
Our Near-Term Tax Free Fund (NEARX) invests in investment-grade munis with an average maturity on the short end of the curve, which is where investors want to be when the Federal Reserve comes around to raising interest rates.
The fund, which has a time-tested history of no drama, holds four stars overall from Morningstar, among 179 Municipal National Short-Term funds as of 3/31/2015, based on risk-adjusted return. It’s also delivered a rare 20 years of positive returns. Out of 25,000 equity and bond funds, only 30 have managed to achieve this same feat.