To explore this issue, I did three tax returns for the same young couple, John and Jane Doe (some very good friends of mine!) with two young children, and ran 4 scenarios. In the first scenario, I assumed they made $60,000 a year in wages. In the second scenario, I bumped their wages up to $120,000 a year. In the third scenario, I assumed their wages were $600,000 per year. In the last scenario, I assumed $6,000,000 a year. In all the cases, I did not show any Income Tax Withheld, since I was only concerned with their net tax liability. I also took the standard deduction on all returns. I have attached copies of the returns to my website, in case anyone wanted to see the actual calculations. Note: I did NOT use their real Social Security numbers. Or at least any correlation to their actual numbers is just by accident!
In the first scenario (making $60,000) John and Jane did not have any tax liability. They were actually getting a $561 refund, due to the refundable portion of their child tax credits.
In the second scenario (making twice as much at $120,000), they went from owing nothing to owing $6,927. Seven thousand is seven thousand, but it does not seem like a whole lot overall considering they make $120k.
In the third scenario (making $600,000), John and Jane owe $143,644, quite an increase. This is five times the income as $120k, but over 20 times the tax.
In the last scenario (making $6,000,000), John and Jane owe over two million: $2,139,215, not exactly chump change.
According to the tax foundation https://taxfoundation.org/data/all/federal/latest-federal-income-tax-data-2024/ , the top 1% paid 25.9% of all income tax. The top 5% paid nearly 45% of all income tax. The bottom 50% of taxpayers paid only 3.3% of all income tax. Just about any tax cuts help the rich more than lower classes, because the top 50% of the country pays close to 97% of all federal income tax. For more information on historical tax rates, see my 2015 article on the history of taxation in the United States.
Now in truth, I’ve benefited from the tax structure through most of my adult life. When Candy and I first got married, I was working as a minister and was paid $400 a week (we did have a parsonage with utilities paid by the church). Later on, I got a raise and was making $450 per week. We also had our four children between 1999 and 2006, so we benefitted from tax credits and Earned Income Credit, although they were lower then. When I switched to accounting, I started out making $40,000 per year. I did not make over $50,000 until after going out on my own, and of course it took a few years to build my practice. This is NOT to complain. I’m just saying, I know what it is to make less than the national average, especially for a family of six living on one income. My only point is I’m not exempt from knowing what it is to have a family and try to pay bills, etc. I’m also not saying what the tax rates should be for different groups.
I just hear these statements in political cycles that the rich need to pay their fair share. My first question is: what is their fair share?
I decided to run one more scenario. A couple making $60 million a year is paying about $22 million in federal income tax. Maybe that is fair. My only point is the federal income tax system is indeed progressive. Not only do the rich pay most of the taxes. They also pay a higher % of tax than most of the rest of us pay.
Another question I can see others asking might be about ways (loopholes) the rich can use to get around paying tax. For instance, the couple making $60,000,000, could give $10 million to charity. However, it would save them about $3.7 million in tax. If they want to give that money to charity anyways, it is a good deal. But spending $10 million to save $3.7 million in tax does not make a whole lot of sense otherwise.