Knowing what the average tax rate is in the United States seems like an easy question to answer right? However, the U.S. progressive tax system makes it difficult to pin down what an ‘average’ taxpayer pays yearly on taxes. Taxes can be difficult but, here’s a guide from the Tax Crisis Institute to help you better understand what the average tax rate is in the U.S.
Why It’s Hard to Find an Average Tax Rate
As previously mentioned, the progressive tax system makes it hard to find a definitive ‘average’. Tax brackets range from 10% to 37%, of which there are seven, which may lead you to believe that 24% would be the obvious average. Plus, there is a 24% tax bracket, so is that what the average American pays?
The answer to that question, in short, is no. The 24% bracket applies only to single taxpayers with incomes from $84,200 to $160,725. The 24% rate won’t affect a single taxpayer earning $35,000 a year because they’re in the 12% tax bracket. However, people earning under $9,700 is taxed at just 10%.
As you can see, taxpayers will pay different taxes based on their tax bracket. This makes the term ‘average’ a slippery concept to grasp in the tax world. That’s why it’s well believed that the ‘median’ might be better.
Finding the Meidan
It’s easier for us to understand the ‘median’ tax burden of taxpayers rather than the ‘average’. This median will fall right in the middle of what taxpayers are paying. Half of the taxpayers will pay less than the median figure while the other half will be paying more.
The Tax Foundation estimates that the top 50% of taxpayers pad 96.96% of all federal income taxes in 2016. That means that the bottom 50% only paid 3.04% of all federal income taxes. However, this is only part of the story.
There is also something known as the ‘tax wedge’ and these findings by the Tax Foundation only reflect income taxes. Social Security and Medicare also take a percentage of Americans’ average earnings. These should be taken into account as well.
The Tax Wedge
The tax wedge is the ratio between what you pay in taxes and what you would have taken home if you didn’t have to pay said taxes. In other words, what you would have earned had you not paid taxes is referred to as ‘total labor costs’ for the employer. This is what the employer would have paid you if taxes weren’t in the equation at all.
The Organization for Economic Co-operation and Development calculates these wedges annually. These calculations are based on pay and tax brackets on single taxpayers. The goal behind this calculation is to figure out how much the average taxpayer is paying in taxes per year.
Calculating This Wedge
Tax wedge calculations include the factors mentioned above, Social Security, Medicare and the Additional Medicare Tax. The taxpayer loses the most to the federal income tax, which takes 14.9% of their wage. This takes up about 50% of the overall tax wedge.
The tax wedge uses both the employers’ and the employees’ shares of Social Security and Medicare. This is because even if an employee doesn’t have to pay out of pocket for their employer’s share, they still would have made that money if the employer didn’t have to make that contribution. Social Security takes up 12.4% of a worker’s pay.
What is the U.S. Tax Wedge
The Tax Foundation found that the U.S. tax wedge was 29.6%. This is less than the average of all countries that are tested, which has an average of 36.1%. The United States tax wedge has actually decreased in recent years.
It’s important to keep in mind that these calculations don’t take into account the other taxes you may pay throughout the year. This includes sales taxes, property taxes, state income taxes, etc.
So What Are the Averages?
As we mentioned earlier, taxes can be complicated and it can take years of study to fully comprehend them. It may feel as though we just threw a bunch of numbers and terms at you that you have never heard before. Here are some of the important takeaways:
- On average, the single American taxpayer contributed 29.6% of their earnings to income taxes, Medicare and Social Security
- According to the Tax Foundation, the average income tax rate for all Americans was 14.20% in 2016, the last year this data was fully available
- The average American family paid an average of 24% in taxes in 2017, less than the single American
As mentioned earlier, with so many different variables, it is difficult to come to a conclusion of what the average tax rate is in the United States. Finding the median and using the tax wedge is an effective way to keep a tab on all of the important variables that go into paying taxes. While it may seem as though you pay a ton in taxes, Americans usually pay less on average than most other countries.
You Shouldn’t Have to Stress About Your Taxes
Tax season can be stressful for all of us and with your busy schedule, you shouldn’t have to overly stress about how you’re going to pay your taxes. The Tax Crisis Institute stands as the leader in tax relief services and giving people an alternative option to overpriced tax layers. We have nearly 30-years worth of experience helping people protect their finances, assets and work out complications with the IRS.
We proudly serve the Bakersfield, Orange County and Los Angeles, California areas as well as the Las Vegas, Nevada area. Our goal is to get you the best possible result for you and your family when you’re in need of tax help. Contact us today for a free consultation to find out how we can help you!