Liberals and progressives at the federal, state, and even some local levels are demanding the wealthy pay higher taxes.
And we will surely hear calls for a more progressive tax system as we approach the midterm elections.
But when it comes to federal income tax, the wealthy are about the only ones paying. In fact, the United States arguably has the most progressive tax system among developed economies.
And yet for the American left, the tax system is never progressive enough.
High Earners Pay Most
The Tax Foundation recently released its annual summary of the latest federal income tax data for 2023. It found:
- The top 1% of income earners accounted for 38.4% of all federal income tax revenue.
- The top 5% of earners paid 59.3% of all federal income taxes.
- The top 10% paid 70.5% of all federal income taxes.
By contrast, the bottom 50%—the bottom half of the 153.1 million tax returns filed—paid only 3.3% of all federal income taxes.
The numbers can be even more skewed when state taxes are considered.
The California nonprofit news outlet CalMatters reported that:
“The top 1% of California taxpayers now supplies nearly half of all income tax collections.”
Even if liberals and progressives believed the bottom half of earners should pay no federal income tax, that’s almost where we are today.
But there are significant risks that come with such a progressive income tax system.
Risks of a Progressive Tax
The federal income tax is the government’s primary source of revenue.
According to government projections, federal revenue for 2026 is expected to total approximately $2.48 trillion.
About $1.25 trillion—roughly half—comes from the individual federal income tax.
Social Security and Medicare payroll taxes account for another 35.2% of total federal revenue.
The corporate income tax, customs duties, and estate taxes together contribute only a relatively small share of total tax revenue, despite receiving a disproportionate amount of political attention.
Anything that reduces individual income tax revenue therefore has a significant impact on the federal budget.
For example, during recessions the highest-income earners typically experience the largest investment losses, reducing the amount of income tax they pay.
Even if someone believes wealthy Americans are not paying their “fair share,” forcing them to shoulder an even greater portion of the tax burden increases the government’s financial vulnerability during economic downturns.
Progressive Tax
Because high earners already pay nearly all federal income taxes, the United States already has the most progressive tax system among developed nations.
A recent Cato Institute analysis of a Fraser Institute study ranked developed countries on a scale from 0 to 10, with 10 representing the most progressive tax system.
The United States ranked first among 33 developed countries.
From both a conservative and an economist’s perspective, having the world’s most progressive tax system is not necessarily something to celebrate.
Ideally, tax policy should:
- Promote economic growth
- Raise sufficient government revenue
- Create the fewest possible distortions to work and investment decisions
Still, when conservatives hear claims that “the rich need to pay their fair share,” the data show that high-income earners already pay not only their own share, but much of everyone else’s as well.
Other Taxes
Since making the federal income tax even more progressive has become increasingly difficult, many policymakers are looking at increasing other taxes.
Besides the federal income tax, governments collect revenue through:
- Social Security taxes
- Medicare payroll taxes
- Corporate income taxes
- Import duties
- Estate taxes
State and local governments also rely on:
- State income taxes
- Sales taxes
- Property taxes
- Numerous other taxes and fees
Even consumption taxes such as sales taxes tend to collect more from wealthy households because they spend more money overall.
The good news is that while some blue states continue pursuing higher taxes, many states—including nine Republican-led states this year—have reduced their state income tax rates.
Social Security and Medicare taxes were originally designed as flat taxes with income caps, shared equally between employers and employees.
Congress has repeatedly increased those limits, and the Affordable Care Act imposed an additional Medicare tax on higher-income workers.
Some progressives now want to raise Social Security and Medicare taxes even further or reduce benefits for higher-income earners, effectively creating another tax increase.
Wealth Tax Next?
Since making the federal income tax more progressive has become increasingly difficult, many Democrats have turned their attention to wealth taxes.
Several states—including:
- Washington
- Minnesota
- Massachusetts
- New York
- California
have passed or are considering some form of wealth tax.
Examples include:
- Massachusetts enacted a 4% surtax on annual income exceeding $1 million.
- Washington State is considering a similar 10% tax.
- California has proposed a 5% one-time wealth tax on assets exceeding $1 billion.
However, determining a person’s wealth is extremely difficult—and often subjective.
Much wealth exists in assets such as:
- Stocks
- Bonds
- Real estate
whose values fluctuate significantly, particularly during recessions.
Some proposals would even tax highly subjective assets such as artwork and jewelry.
What Liberals Get Wrong
Supporters of higher taxes often estimate revenue by multiplying the number of targeted taxpayers by the expected amount each person would pay.
Reality rarely works that way.
People relocate.
People restructure their finances.
People shelter income.
As a result, new taxes frequently generate far less revenue than projected.
The larger problem for states imposing wealth taxes is that wealthy residents can—and often do—move elsewhere.
As PBS observed:
“The recent push by left-leaning leaders in blue states contrasts with what’s being done in many Republican-led states, which have been more critical of passing higher taxes on their richest residents and have moved to abolish or significantly reduce personal income taxes.”
Whither Reform?
When Democrats call for tax reform, they generally mean making the current system even more progressive.
But proposed tax increases are unlikely to generate the expected revenue.
Instead, they risk encouraging many of the very taxpayers being targeted—especially high-income earners—to leave high-tax states for jurisdictions with lower taxes.
Infographic Highlights
The U.S. Has the Most Progressive Tax System in the Developed World
Fraser Institute Tax Progressivity Index
| Country | Score |
|---|---|
| United States (High Tax) | 10.00 |
| Canada (High Tax) | 9.68 |
| South Korea | 9.43 |
| United States (Low Tax) | 9.03 |
| Austria | 8.98 |
| Switzerland | 8.39 |
| Japan | 8.14 |
| Spain | 7.40 |
| Canada (Low Tax) | 7.36 |
| Australia | 7.26 |
Half of Taxpayers Paid Just 3% of Federal Income Taxes (2023)
| Income Group | Share of Income Taxes Paid |
|---|---|
| Bottom 50% | 3% |
| 50%-25% | 10% |
| 25%-10% | 16% |
| 10%-5% | 11% |
| 5%-1% | 21% |
| Top 1% | 38% |
Average Federal Income Tax Rate by Income Group
| Income Group | Average Tax Rate |
|---|---|
| Bottom 50% | 4% |
| 50%-25% | 8% |
| 25%-10% | 10% |
| 10%-5% | 14% |
| 5%-1% | 18% |
| Top 1% | 26% |
Your title statement would be more meaningful if it included cohorts’ percentage of total income as well as percentage of total taxes paid. For example, “Top 5% of Americans pay 59% of federal taxes _on x% of U.S. personal income.”_
A wealth tax has a certain appeal if you ignore the downsides. It makes more sense to tax someone who has already made it to the top than one who far below the top but merely climbing rapidly. But implementation is a problem– do you force someone to sell a business or property with sentimental value just to pay the tax bill? And if you do, do you also trigger capital gains taxes on the sale in addition to the wealth tax?
Perhaps the best first step toward wealth taxation is to ensure capital gains are eventually collected by eliminating the step-up in cost basis at death. There is no rational justification for taxing property differently depending on whether it was sold a day before or a day after its owner’s death.
Edit: Based on the two tables at the bottom of the article, I think the title could have been, “Top 5% of Americans pay 59% of federal taxes on 38% of U.S. personal income.”