US Taxation System – Who is Paying What and Reaping What?
January 7 2014 Written By:
Almost every US citizen is aware of the fact that US tax system is progressive in nature i.e. the highest money makers pay the maximum in the federal taxes while the benefits are reaped maximum by the lowest earners. This system has its own supporters and protesters and we are not going to discuss the merits or demerits of the system. The following is a discussion about the patterns that are observed in the tax sharing. The data has been collected from Congressional Budget Office and Bloomberg BusinessWeek.
If we break the entire US population into five groups viz. Highest, Upper Middle, Middle, Lower Middle and Lowest, it can be seen that majority of US income is generated by the people in highest category whereas on the other hand, lowest income group shares only about 2% of the total US income.
The federal taxes are collected from the common masses and as expected in a progressive tax system, the highest earning group pays the maximum tax.
But when the tax is collected from the common mass, as per any democratic country would do, the wealth is redistributed amongst the people. Some key points to note here are:
The lowest earners take the maximum out of the US federation tax money. About one third of the total money is spent on the social security services and Medicare facilities for the lowest group.
In addition to the social security and Medicare benefits, when we take into account some incentives, lowest income group shares nearly half the money spent by government. These incentives involve unemployment insurance, Medicaid benefits and the supplemental nutrition assistance program.
As a summed result, the after tax income is increased for the lowest income group. After tax income in this case is calculated as pretax income – federal taxes + all benefits.
What is really amazing here is the effect of redistribution of wealth on income of the lowest earning group! The group which accounted for a mere 2% share in US income before tax is now holding an 8% contribution in US income after the tax. The 6% rise is attributed to the services provided by the government which are actually funded by the federal tax collection.