C4FE Economic Insights #11

The Center for Free Enterprise's latest Economic Insight is out. Prince Acheampong discusses “Who Bears the Burden? Top Earners and the Reality of U.S. Tax Contributions.”

There is an ongoing movement claiming that high-income earners do not pay their fair share of taxes. A recent Policy Brief by the Brooking Institute builds on Biden’s words from his 2022 State of the Union Address: “Let’s make corporations and wealthy Americans start paying their fair share.” A ProPublica report claims that the top 25 wealthiest individuals in the US pay a “true tax rate of 3.5%.” Whether high earners pay their fair share in taxes is a prominent issue in American discourse and the policy world. However, does data support the claim that the wealthy do not contribute their fair share?

The US has a progressive federal income tax, which means that tax rates increase as income rises so that higher-income earners bear a larger share of the tax burden. As an example, the bottom part of the income would be taxed at 10%, and higher income brackets can be taxed as high as 37%, depending on the income level. This approach is designed to ensure that those who can more easily afford it contribute a higher percentage of their income to subsidize public services and infrastructure. Progressive taxation, by design, places a heavier tax burden on higher incomes, aiming to curb income inequality by collecting a proportionally larger share from those with more capacity to pay. This follows the "ability-to-pay" principle, intended to support government services, reduce income disparity, and fund social programs. The structure is designed to minimize income inequality, but tax breaks, deductions, and loopholes allow many high-income taxpayers to lower their effective tax rates calling into question the progressivity of the system.

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