(By Mani) Individual tax collections are an essential component of the functioning of the federal government. Of all the revenues collected by the federal government, individual income taxes make up the largest share at 47 percent of total federal government revenues.
This election cycle has been dominated by discussions about tax reform. In particular, who is paying the largest share of taxes?
The most reliable source of tax collections data is the IRS's annual tax statistics data.
We look two metrics to gauge which income brackets pay more in income taxes using 2010 tax data. The first metric is the share of total income taxes paid by each income level. The second metric is the total taxes paid by each income level as a share of total adjusted income.
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"While somewhat different than effective tax rates, this metric accounts for the large differences in number of taxpayers across income groups as well as the income earnings across these groups," Wells Fargo economist John Silvia wrote in a note to clients.
The first of these metrics is the percent of total income taxes paid. Those earning $200,000 or more a year pay 52.2 percent of all income taxes, but only earn 28.2 percent of the total adjusted income produced in the country.
On the other hand, those individuals making between $50,000 and $200,000 per year in adjusted gross income make 50 percent of the nation's total income, but only pay 41.1 percent of all the individual income taxes collected. The bottom income group ($0-$49,999) earns 22 percent of the nation's income and pays 6.6 percent of total income taxes.
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Another way to look at the disparities in taxes paid across the income spectrum is to compare the aggregated total amount of taxes paid as a share of adjusted gross income by each income group.
"The greatest number of taxpayers is in the $50,000-$199,999 income bracket which in aggregate has paid 10 percent of their income in taxes," Silvia said.
In contrast, the top income bracket in aggregate paid around 22 percent of their adjusted gross income in taxes, while the lowest income bracket paid 3.6 percent of their income in taxes.
Moreover, the importance for tax policy cannot be understated, and it can dramatically affect consumer behavior through incentive effects.
"While increased taxes on any group has negative economic effects, the reality of the current federal fiscal situation dictates that a balanced approach of spending cuts in tandem with raising rates and expanding the base of taxpayers is needed," Silvia noted.
In other words, since we are all in this together, everyone must participate in funding federal government operations in some form, whether it includes a loss of some benefits at the lower end of the income spectrum, or middle and upper income individuals having to pay higher tax rates.