Do the Rich Pay Their Fair Share of Income Taxes?
We often hear that the rich “don’t pay their fair share” of the federal income tax burden, or that recent tax cuts only benefit the wealthy. While these claims make for popular political talking points, the data show a different story.
The chart below shows the total share of the federal income tax burden paid by the highest income earners over the last century. One of the most striking findings is that the wealthy (top 1% of earners) and upper class (top 10%) have seen dramatic increases in their shares of the overall federal income tax burden between the 1980s and today.
Source: Phillip W. Magness, "Taxation and Inequality as Economic History" in G.P. Manish and Stephen C. Miller, eds., Capitalism and Inequality: the Role of State and Market (Routledge 2020). Data compiled from the Internal Revenue Service Statistics of Income (1916–1979) and the Congressional Budget Office (1979–present).
Note: Observed spikes in tax progressivity for 2020–2021 reflect the temporary effects of the COVID-era stimulus check programs, which offset or eliminated the remaining income tax burden on many lower income earners. Estimated top tax shares returned to their pre-COVID levels in 2022.
The century-long pattern of income tax burdens tells an interesting story to further contextualize these results.
At the time of its adoption in 1913, the income tax was only intended to apply to the ultra-wealthy. Lower and middle income earners enjoyed generous exemptions from the IRS, and even upper middle class families faced very small federal tax rates on average. The top 1% shouldered over 70% of the tax burden in this era, and the top 10% shouldered over 90% of the burden.
This pattern changed dramatically in the early 1940s, when President Franklin Delano Roosevelt converted the federal income tax system from a tax on the wealthy to a tax on almost all Americans. In 1943, FDR signed legislation reducing or eliminating almost all exemptions from the income tax for lower and middle class Americans. The IRS also began withholding tax payments directly from your paycheck, in an attempt to ramp up enforcement against tax evaders. Tax rates on the wealthy remained extremely high in this period, but the tax base now included almost everyone who had a job. As a result, the share of the federal tax burden paid by the wealthiest 1% plummeted from over 70% in 1940 to just 20% in 1950. It would remain there for several decades.
Income tax reforms enacted in the 1970s and 1980s began to reverse this pattern. Major overhauls of the tax code spearheaded by President Ronald Reagan in 1981 and 1986 reduced the top marginal rates paid by the wealthiest earners. Parallel reforms also restored generous exemptions to low income earners in the form of credits. The most significant of these measures was the Earned Income Tax Credit (EITC), enacted by President Gerald Ford in 1975 and subsequently extended by legislation under Presidents Reagan, Bush, and Clinton. These credits remain in effect today, and reduce or even eliminate the federal income tax burden on low income earners.
The two patterns—top marginal tax rate cuts on the wealthy, but also significant tax credits for low income earners—have actually combined to make the federal income tax system significantly more progressive than it was in the mid 20th century.
