Understanding the Tax Burden: Who Pays More and Why?

January 29, 2025

Introduction

Taxation is a fundamental component of government revenue, funding essential public services such as infrastructure, education, and healthcare. However, not all taxpayers contribute equally. Understanding who bears the greatest tax burden—and why—offers insights into economic equity, policy effectiveness, and fiscal responsibility.

1. Components of the Tax Burden

The tax burden is distributed across individuals, businesses, and industries through various types of taxes:

• Income Taxes: The primary source of federal revenue, with progressive rates that impose higher percentages on higher earners.

• Payroll Taxes: Deducted from wages to fund Social Security and Medicare, affecting both employees and employers.

• Corporate Taxes: Levied on business profits, with variations based on industry and revenue.

• Sales and Excise Taxes: Consumption-based taxes that disproportionately impact lower-income individuals.

• Property Taxes: Applied at local levels, primarily affecting homeowners and businesses.

2. Who Pays the Most in Taxes?

2.1 High-Income Earners

• The top 1% of earners contribute approximately 40% of federal income tax revenue.

• Progressive tax policies require higher earners to pay higher marginal rates, reaching up to 37% in the U.S. federal tax system.

• Capital gains taxes disproportionately affect wealthy investors who derive income from assets rather than wages.

2.2 Middle-Class Workers

• The middle 60% of earners shoulder a significant portion of payroll taxes, which fund entitlement programs.

• They also face state and local taxes, sales taxes, and property taxes, contributing a combined effective tax rate of 25-30%.

• Many receive tax benefits such as the Earned Income Tax Credit (EITC) and mortgage interest deductions, reducing overall liability.

2.3 Low-Income Earners

• The lowest 20% of earners pay little to no federal income tax due to standard deductions and tax credits.

• However, they are disproportionately affected by regressive taxes, such as sales taxes and payroll taxes, which take a larger share of their income.

2.4 Corporations and Businesses

• The U.S. corporate tax rate is 21%, but deductions, credits, and offshore tax strategies often reduce the effective tax rate for large corporations.

• Small businesses, particularly pass-through entities, are taxed at individual rates, impacting their financial flexibility.

3. Policy Considerations: Balancing Tax Fairness

Tax policy debates center around balancing revenue generation with economic equity:

• Progressive vs. Flat Tax Structures: Ensuring higher earners contribute proportionally more without discouraging economic activity.

• Closing Loopholes: Addressing corporate tax avoidance and offshore tax havens.

• Sales Tax Reforms: Reducing regressive impacts by exempting necessities or providing rebates for low-income households.

Conclusion

The tax burden is not evenly distributed, with higher-income earners and corporations contributing the most in absolute terms, while lower-income individuals bear a heavier relative burden due to regressive taxation. Policymakers must carefully evaluate tax structures to ensure fairness, economic efficiency, and sustainable government funding.