A: For tax year 2001, more than 72 percent of taxpayers either pay a top marginal rate of 15 percent or don't pay federal income taxes at all. About a fifth of all taxpayers are subject to the 28 percent rate. This means that less than 5 percent of all taxpayers will pay at a marginal federal income tax rate above 28 percent in 2001, with less than 1 percent paying at the top marginal rate of 39.6 percent.
Moreover, looking at the top marginal rate paid by taxpayers artificially inflates the actual tax burden at each level. The "effective tax rate" paid by taxpayers is much lower than their highest marginal rate, because most income is taxed at lower rates and because a substantial part of income is shielded from taxation due to various exemptions, deductions, and credits. In particular:
| Federal Marginal Tax Rates in 2001 (Excluding special low rates on capital gains) |
|||||||
| Top Marginal Tax Rate | Number of units (000) | % of all units | Average total income | Average adjusted gross income | Ave. taxable income w/o capital gains | Average taxable capital gains | "Effective tax rate:" tax as % of total income (with CG tax) |
| Zero | 31,386 | 23.9% | $ 20,800 | $ 10,140 | $ — | $ 5,500 | 2.4% |
| 15% | 63,849 | 48.7% | 35,800 | 32,670 | 16,640 | 1,450 | 6.5% |
| 28% | 29,664 | 22.6% | 83,900 | 79,980 | 56,000 | 3,180 | 13.5% |
| 31% | 3,805 | 2.9% | 168,000 | 157,690 | 113,820 | 10,910 | 17.9% |
| 36% | 1,454 | 1.1% | 306,000 | 281,340 | 207,720 | 25,910 | 21.0% |
| 39.6% | 908 | 0.7% | 1,171,000 | 1,077,100 | 808,730 | 154,750 | 27.4% |
| ALL | 131,066 | 100.0% | $ 57,800 | $ 51,610 | $ 31,990 | $ 4,420 | 13.2% |
| 15% or less | 95,235 | 72.7% | $ 30,900 | $ 25,200 | 11,160 | $ 2,780 | 5.6% |
| NOTES: Top marginal tax rates on regular taxable income are before tax credits. Total income and adjusted gross income figures include realized capital gains. Capital gains are gains taxed at special lower tax rates. *A portion of people shown in the zero and 15% regular tax brackets can pay as much as a 20% tax rate on capital gains. Source: Institute on Taxation and Economic Policy Tax Model, March 2001 |
|||||||
In addition, relatively few "sole proprietorship" tax returns-- small businesses filing the federal Schedule C-- are subject to the top marginal rate. Just under 70 percent of these small businesses either pay a top rate of 15 percent or do not pay federal income taxes at all. About 1.4 percent of these small businesses are subject to the 39.6 percent top rate in 2001.
| Sch. C Business Profits and Taxes Paid | ||||
| Top Marginal Tax Rate | #-000 | $-billions | % with | % of C returns |
| Zero | 2,761 | 25.1 | 8.8% | 20.8% |
| 15% | 6,462 | 81.5 | 10.1% | 48.6% |
| 28% | 2,963 | 71.0 | 10.0% | 22.3% |
| 31% | 612 | 31.7 | 16.1% | 4.6% |
| 36% | 311 | 27.1 | 21.4% | 2.3% |
| 39.6% | 180 | 37.9 | 19.8% | 1.4% |
| ALL | 13,289 | 274.3 | 10.1% | 100.0% |
| 15% or less | 9,223 | 106.6 | 9.7% | 69.4% |
Back to Frequently Asked Questions