By T N Ashok
NEW YORK: The commonly held belief that the middle class in the U.S. pays more taxes than wealthy millionaires on average is not absolutely incorrect if one looks at the way the tax is structured in favour of investors and against fixed income groups.
The wealthy pay a higher percentage of their income in taxes: that’s about 16% and the fixed income group pay 15% of their income on the average. But investors have a greater amount of access to tax benefits in a way the salaried classes do not have. So the rich eventually pay less. The wealthiest 10% of households, with incomes of at least $169,800, pay about three-quarters of the nation’s total tax bill.
The top 1% pay the highest effective federal tax rate, at 25.9%, though this rate has declined over time. When considering state and local taxes, popularly known as SALT, the wealthiest can pay over 45% of their annual income in taxes, and potentially upwards of 60% with taxes paid abroad.
Middle-income families have a lower effective tax rate: Those in the middle income bracket pay about 26% of their income in taxes on average. This range is even narrower for many, falling between approximately 5% and 13% for middle-income families.
The top 0.1% may pay a lower tax rate than other groups: Some analyses suggest that the wealthiest 0.1% (those with at least $3.8 million in annual income) may have a slightly lower effective tax rate (25.7%) compared to the top 1% (25.9%). This can be due to various factors, including the type of income they receive (e.g., lower-taxed capital gains) and access to tax strategies.
The question of whether the rich are paying their “fair share” is subjective and often debated. Different types of income are taxed differently: A significant difference lies in how the wealthy earn and pay taxes on their income. A large portion of their income may come from capital gains, which are taxed at a lower rate than ordinary income (like wages and salaries).
The wealthiest: Benefit from tax loopholes and deductions that may not be available to typical wage earners, especially those with income derived from capital gains. They also see lower tax rates on capital gains compared to ordinary income. Low-income households: Receive refundable tax credits, resulting in a negative total federal tax burden on average.
Middle-income and upper-middle-income households: Some analyses suggest they may pay a higher tax rate than the top 0.1%. Salaried workers may be at a disadvantage compared to the wealthy due to having less access to tax write-offs and deductions, and facing higher tax rates on earned income.
The system is different from India where the government has given options for tax breaks to the middle classes on a variety of incomes. It’s important to remember that the tax system in the U.S. is complex, and the impact on individuals can vary based on their specific financial situation and income sources.
Coming to the extended benefits under the Trump’s Big Beautiful Bill, it seeks to extend and make permanent the tax breaks it gave to the rich in 2017. The impact of the Tax Cuts and Jobs Act of 2017 (TCJA) on different income groups and whether it created a faultily structured tax system are complex issues with varying perspectives and analyses.
Many analyses suggest that the TCJA disproportionately benefited higher-income individuals and corporations. For example, some estimates indicate that the top 1% of households will receive a significantly larger share of the tax cuts compared to lower and middle-income groups.
Proponents of the TCJA argue it delivered tax relief to middle-income families, citing increases in the standard deduction and child tax credit, as well as lower individual income tax rates. However, some analyses suggest that these benefits were modest and that other provisions of the law, such as the repeal of personal exemptions, partially offset these gains for some middle-income households.
There are differing views on the overall economic impact of the TCJA. Some studies suggest it did not significantly boost GDP, wages, or investment as promised by proponents. Others argue that the lower corporate tax rate, a key component of the TCJA, led to a lower cost of capital and boosted the economy.
The TCJA introduced new rules and regulations, potentially increasing compliance costs for taxpayers. This complexity might make it harder for low- and middle-income households to navigate the tax system effectively.
The TCJA resulted in substantial revenue losses, which some critics argue were irresponsible given the nation’s fiscal challenges. The TCJA permanently reduced the corporate tax rate, a change that some studies indicate primarily benefited shareholders and high-paid executives rather than the majority of workers.
It’s important to note that different organizations and analyses present varying perspectives on the TCJA’s impact and structure. Some argue it was necessary to stimulate economic growth and benefit all income levels, while others maintain it was primarily designed to benefit the wealthy and exacerbated income inequality. In summary, the TCJA’s impact on the middle class and billionaires, as well as its overall structural fairness, remains a subject of ongoing debate and analysis. (IPA Service)
