Jessica I. Marschall, CPA
March 12th, 2025
One of the most widely cited statistics in tax policy debates is that a relatively small percentage of high-income earners pay the vast majority of federal income taxes. While this is true, it is essential to recognize that the federal income tax system is highly progressive, meaning that higher earners pay a larger share of their income in taxes. However, this is only one piece of the overall tax burden. Payroll taxes (FICA), state and local taxes, and consumption taxes tend to be more regressive, placing a higher relative burden on lower- and middle-income households.
Who Pays Federal Income Taxes?
According to the latest IRS data and analyses from the Tax Foundation and Congressional Budget Office:
- The top 1% of earners (those making roughly $540,000 and above) pay about 40% of all federal income taxes, despite earning approximately 20% of total adjusted gross income (AGI) in the country.
- The top 10% (those earning around $170,000 or more) pay about 71% of all federal income taxes while earning roughly 48% of total AGI.
- The top 50% of earners pay nearly 98% of all federal income taxes, while the bottom 50% pay only around 2%.
This structure reflects the progressive nature of the federal income tax system, where marginal tax rates increase as income rises. The intent is to ensure that those with the highest earnings contribute the most to government revenues.
However, this does not mean that lower-income earners are not taxed significantly through other means.
The Regressive Nature of FICA Taxes and Its Impact on Low- and Middle-Income Earners
Unlike federal income taxes, payroll taxes (FICA)—which fund Social Security and Medicare—are inherently regressive. This means that lower-income earners pay a larger percentage of their income in payroll taxes compared to high earners.
- The Social Security payroll tax is 12.4% (split between employer and employee at 6.2% each), but it applies only to wages up to $168,600 in 2024.
- Any wages above this cap are not subject to Social Security taxes, meaning high earners pay a smaller proportion of their total income toward these taxes than lower- and middle-income workers.
- The Medicare payroll tax is 2.9% (split 1.45% each between employer and employee) and has no income cap, though an additional 0.9% Medicare surtax applies to wages over $200,000 for single filers and $250,000 for married couples.
For a worker making $50,000 per year, the full 15.3% FICA tax (including both employer and employee contributions) amounts to $7,650, a substantial portion of their earnings. Meanwhile, a high-income earner making $1 million per year only pays the full 15.3% on the first $168,600, significantly reducing the overall tax rate they face on wages.
This structure disproportionately impacts lower- and middle-income workers, as they pay payroll taxes on 100% of their earnings, while those making well above the wage cap see a declining share of their income taxed for Social Security.
Total Tax Burden: Federal, Payroll, and State & Local Taxes
When evaluating the overall tax burden, it is essential to consider not just federal income taxes, but also payroll taxes, state and local taxes, and consumption taxes (sales taxes, excise taxes, etc.).
- While high-income earners pay the bulk of federal income taxes, lower- and middle-income earners bear a higher relative burden from payroll taxes and state/local taxes.
- State and local taxes (which include sales taxes, property taxes, and excise taxes) tend to be far less progressive than the federal tax system.
- Sales taxes, in particular, take up a greater percentage of income for lower earners because they consume a higher proportion of their income on taxed goods and services.
- The Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) help offset some of these tax burdens for lower-income workers, but they do not eliminate the regressive nature of payroll and consumption taxes.
When all taxes are considered, including payroll taxes and state/local taxes, the overall tax system is less progressive than federal income tax rates suggest. Lower- and middle-income Americans may not pay much in federal income taxes, but they still contribute a significant share of their income in other taxes that disproportionately affect lower earners.
Conclusion: A Tax Code with Contradictory Effects
The federal income tax system is highly progressive, with high earners paying a disproportionately large share of total income taxes. However, the payroll tax system and state/local tax structures are regressive, meaning that lower- and middle-income workers pay a much larger share of their earnings toward these taxes compared to high earners.
When politicians or analysts cite statistics about who pays federal income taxes, it is important to consider the full tax picture—while high earners bear the brunt of income taxes, lower-income individuals face a heavier burden from payroll, sales, and excise taxes that consume a significant portion of their earnings.
