Who pays the highest tax rates?

Date posted: April 22, 2013

People recently completed their income taxes, and many probably wondered whether they pay more or less on a percentage basis than their neighbors. Do we have any data on who actually pays the highest rates? N.C. State University economist Mike Walden answers.

“Well … you would think that high-income people would pay the highest rates. And, indeed, if you look at particularly the income tax and particularly the federal income tax, what you see is, as you move up the income ladder, what we call the marginal tax rate – the rate on which you are taxed for additional income you earn – does go up. And so rich people do tend to pay, on average, a higher tax rate.

“But we have a new study that came out recently from the Congressional Budget Office, and this has actually been buttressed by other research done by economists, that show that if you’re at the other end of the income scale – that is, say, you’re a household at the poverty level – you can also pay very high implicit tax rates.

“Now what I mean by implicit tax rates, I mean that when you look at someone, say, at the poverty level who earns a little more from working – say $1,000 – yes, they may be taxed a little bit on that, but they’re also going to lose some money in terms of reduced benefits from various programs that they qualify for.

“And this new research from the Congressional Budget Office shows that those losses can be very high. For example, someone at the poverty level who earns another $1,000 could lose anywhere between $500 and $700 of that due to reduced benefits from federal programs they qualify for.

“So, this is clearly a deterrent for those folks to work more – something that we should watch very carefully.”

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