Tax Day: Five Charts on Who Pays, How Much

Adam N. Michel and Santiago Forster

The federal government confiscated $5.23 trillion of Americans’ money in fiscal year 2025. 

That’s a lot of money, and government data show that most of it is paid by the highest-income Americans. It is also not nearly enough to cover the $7 trillion Congress spent last year. 

Here are five charts on where revenue comes from, who pays and how much, how average US taxes compare to those around the world, and why today’s spending puts future taxes at risk.

Most Federal Revenue Comes from Income Taxes

Personal income taxes raise just over half of the federal government’s revenue. However, for all but the top 10 percent of income earners, Americans pay more in payroll taxes on average than in income taxes each year. Payroll taxes account for 33 percent of federal revenue. 

Figure 1 shows that the remaining revenue comes from corporate income taxes, customs duties, and other sources, including excises, estate taxes, and other fees.

Unlike federal taxes, more than half of state and local tax revenue comes from property and sales taxes. While it varies significantly by state, income taxes often account for less than a quarter of subnational revenues.

The Rich Pay the Highest Tax Rates

The United States has the most progressive tax system in the developed world, driven primarily by high federal income tax rates and large exemptions for lower-income taxpayers. 

At the federal level, the top 10 percent of income earners pay more than 60 percent of all taxes and 72 percent of income taxes, shares that have been increasing over time. 

Figure 2 reports estimates from the US Treasury’s Office of Tax Analysis, showing that average federal tax rates rise with income, accounting for income, payroll, corporate, and other taxes.

The lowest-income 20 percent of earners, measured by adjusted family cash income, face average tax rates that are either negative or close to zero. A negative tax rate means the taxpayer is a net beneficiary of the tax system, likely receiving refundable tax credits, such as the earned income tax credit (EITC), child tax credit (CTC), and Obamacare tax credits. 

At the top of the distribution, the top 10 percent of income earners pay an average tax rate of 27.3 percent, which is 7 percentage points higher than the next-highest group. Treasury breaks the highest-income earners into narrower segments, showing that the top 0.1 percent pay the highest average tax rate of 33.4 percent.

The federal income tax system is even more progressive. The latest IRS data on income taxes for the 2022 tax year show that higher-income Americans pay a disproportionate share of income taxes and that the system has become more progressive over time.

Figure 3 shows that as a share of adjusted gross income (AGI), the top half of income earners paid 97.1 percent of federal income taxes. The top 1 percent earned 22.4 percent of total income and paid 40.4 percent of all the income taxes. The top 10 percent earned 49.4 percent of the income and paid 72 percent of the income tax.

Since 2001, average income tax rates have fallen for all five income groups. During this same time, the share of income taxes paid by the top five percent increased from 52.2 percent to 61 percent, while the share paid by all other taxpayers declined. According to the National Taxpayers Union, the top one percent’s share of federal income taxes has more than doubled since the 1980s, reaching 40.4 percent in tax year 2022.

America’s Tax Advantage and the Threat of Bigger Government

The United States remains a relatively low-tax country compared to its global peers. Among 22 high-income nations in the European Union, the US ranks dead last in total tax burden (federal, state, and local) for the average single worker.

Figure 4 shows the tax rate paid by an average single worker in the US and across Europe. Belgium, Germany, Austria, France, and Italy confiscate more than half of their workers’ pretax compensation. An average US worker sends less than a third of their income to the government. 

Middle-class Europeans face high payroll and consumption taxes that dramatically reduce take-home pay and work incentives. The tradeoff is clear: higher taxes make you poorer. In high-tax countries, people work fewer hours and are less likely to work full-time because the government takes a larger share of each additional dollar they earn.

The American tax system is far from perfect. But keeping our overall tax burden low is a key reason why US workers are more productive, more entrepreneurial, and ultimately better off than their counterparts in high-tax countries.

Looking only at current taxes obscures the fact that the US federal government has run a budget deficit every year since the early 2000s, financing higher spending levels through government debt.

Figure 5 shows that spending on interest and other mandatory programs (such as Social Security and health entitlements) will permanently surpass revenues next year, according to the Congressional Budget Office’s recent budget outlook. This leaves Congress to finance all other spending with additional debt.

The current US fiscal trajectory is unsustainable. Eventually, taxes will need to rise, or spending will need to be cut. Large, European-style welfare states cannot be sustainably financed when a narrow sliver of income earners pay the lion’s share of taxes—big government requires high taxes on the middle class.

Instead of raising taxes, Congress should reduce spending to maintain America’s outlier status as a country where the government confiscates less of your paycheck. The only way to ensure taxes remain low is to cut spending and maintain a smaller government.

This updates a previous blog. 

Source: https://www.cato.org/blog/tax-day-five-charts-who-pays-how-much