Who pays on Tax Day

Yesterday was the last day for Americans to file their 2023 taxes on time. What is the biggest difference between Tax Day this year and Tax Day in 1980? Millionaires pay a lot less. 

Between 1945 and 1980, American households that made $1 million or more paid an average of 50.1% of their income in federal taxes, according to a new report from Americans for Tax Fairness. This period following World War II was characterized by "substantial economic growth and broadly shared prosperity" with rapid income growth "at roughly the same rate up and down the income ladder." Higher taxes for the wealthy funded "public investments that helped build a thriving economy for all: constructing the interstate highway system, improving public education, facilitating mass home ownership, expanding healthcare coverage."

According to the most recent IRS data, American households with more than $1 million in income now pay an effective tax rate of just 26%. Yes, because of inflation, $1 million has less purchasing power today than it did 44 years ago. But $1 million still exceeds the income of 99.5% of American households. 

While millionaires have seen their tax rates halved, the tax rate for non-millionaires has been fairly consistent. Between 1945 and 1980, the average effective tax rate for non-millionaires was 12.6%. Today, it is 11.5%. 

In 2001, the IRS started tracking the effective tax rate of American households that make $10 million or more. They have a slightly lower effective tax rate than other millionaires. 

The gap in effective tax rates between those American households that make $10 million or more and those that make seven figures likely reflects how the tax code imposes higher taxes on work than wealth. Seven-figure earners typically earn much of their revenue through income from high-paying jobs, and the top marginal income tax rate has ranged between 35% and 39.6% over the last two decades. Those who earn $10 million or more commonly derive some or all of their income through investments, which have been taxed between a 15% and 23.8% rate over the same time period. That's why the top 0.0001% — the 1500 richest households in America that make $118 million or more — pay an effective rate of just 23%. That's less than the regular millionaires. 

The reality is that today, the American tax code barely qualifies as progressive. The Institute on Taxation and Economic Policy (ITEP) produced a study this month that looked at taxes paid at all levels (federal, state, and local) by income. ITEP found that the wealthiest 1% of American households collected 20.1% of total income and paid 23.9% of total taxes. The poorest 20% of American households collected just 2.6% of total income but paid 1.5% of total taxes. 

While the federal tax code, despite the dramatic reduction in rates for millionaires over the last several decades, remains progressive, "state and local taxes in most states are regressive, meaning they take a larger share of income from the poor than from the rich." Many states and localities impose sales taxes and "low-income families have little choice but to spend all their income to cover basic needs." High-income families "can save and invest most of their income, avoiding sales taxes." 

Using impoverished children as political pawns

In 2021, as the pandemic still raged, Congress instituted a historic expansion of the Child Tax Credit (CTC). The CTC was increased from $2,000 per child to $3,600 for each child aged five or younger and $3,000 for each child aged 6 through 17. (The credit phased out for couples making $150,000 or more and individuals making $75,000 or more.) The credit was also made fully refundable, which means even families with little or no income could benefit. It was paid out monthly so that families did not have to wait until Tax Day to see the benefit. 

The policy was a smashing success. Child poverty plunged to 5.2%, a record low. But due to the opposition from corporate lobbyists, Republicans in Congress, and Senator Joe Manchin (D-WV), the CTC expansion expired at the end of 2022. Child poverty quickly increased, spiking to 12.4% in 2022 — that meant 5.28 million additional children living in poverty. 

Since then, there has been bipartisan interest in reviving at least some of the CTC expansion. Senate Finance Committee Chair Ron Wyden (D-OR) and House Ways and Means Committee Chair Jason Smith (R-MO) struck a deal to make the credit refundable for more families. It is a modest and technical change, but it would help about 16 million low-income families with children, with an average benefit of about $630. To attract Republican support, the deal included some business tax cuts, passed in 2017, that had expired or were close to expiring. 

The Wyden-Smith package cleared the House at the end of January by a vote of 357-70. But for months, the Senate has done nothing. 

Senator Mike Crapo (R-ID), the senior Republican on the Senate Finance Committee, claims to be "negotiating" the package, which was already the product of a bipartisan negotiation. Crapo reportedly wants more generous corporate tax cuts and fewer benefits for impoverished children. But efforts to tweak the proposal have not changed Crapo's opposition or the other Senate Republicans following his lead. Wyden's impression is that the proposal is not "something that Senate Republicans wanted to do."

Why? Senator Chuck Grassley (R-IA) said he opposed the package because "passing a tax bill that makes the president look good… [and] means he could be re-elected." In a Wall Street Journal op-ed, Senator Thom Tillis (R-NC) said that expanding the CTC now means "all Republican leverage will be lost" on tax issues regardless of who wins the election. Defeating the Wyden-Smith package would "extend the bulk, if not all, of the Trump tax cuts" in the future. At the end of 2025, Trump's tax cuts for individuals would expire, raising the top income tax rate from 37% to 39.6%.

Crapo and other Senate Republicans, however, have not simply cut off negotiations because harming impoverished children for a chance to help corporations and the wealthy is not a good look politically. But the route they are taking has the same effect. They are killing a modest expansion of the CTC by running out the clock.

The lobbyists who want you to keep paying to file your taxes

Earlier this year, the IRS launched its first-ever free tax filing program, Direct File, in 12 different states. The program, which is funded by the Inflation Reduction Act, is still in its pilot stage. 

At least 100,000 taxpayers used the program to file their federal income taxes this tax season, and so far, the results are fairly encouraging. It’s estimated that in five years, “Direct File would save the average user $160 in filing fees and hours of their time each year, which saves Americans a total of $11 billion annually between filing fees and time costs,” according to a study by the Economic Security Project.

Direct File also makes it easier to claim credits like the CTC. According to the Economic Security Project, the program would “deliver up to $12 billion each year in additional tax credits to low-income families currently missing out.” The group also calculated that the program would generate at least $300 million in savings for the IRS.

Despite its immense potential and early success, tax preparation companies “are continuing to blast Direct File as unpopular and unnecessary.” A lawyer for the American Coalition for Taxpayer Rights – a trade group that represents tax prep giants like TurboTax and H&R Block – told the Washington Post that there is “not a real demand” for the program. But this is misleading. More than 70% of taxpayers said they would be interested in filing their taxes through a free, IRS-provided online tool, according to the IRS’ 2022 Taxpayer Experience Survey. Polls across different states also show that a “massive majority” of Americans, including both Democrats and Republicans, support a free IRS tax return system. 

For years, tax prep companies have spent millions of dollars blocking efforts to make tax filing free and easy. In 2019, ProPublica reported that Intuit, the maker of TurboTax, spent 20 years blocking an IRS-provided e-file service – all while tricking low-income taxpayers into paying for services the company was federally obligated to provide to them for free. Last year, the company spent a record $3.8 million lobbying the federal government. “[M]any of Intuit’s disclosures say it lobbied on the implementation of the Inflation Reduction Act,” Sludge and More Perfect Union reported. 

So far, there has been some accountability. In 2022, Intuit agreed to pay a $141 million settlement to roughly 4.4 million Americans, most of whom were low-income. Most recently, in January, federal regulators ordered the company to “stop marketing its services as free, unless they are free to everyone or exceptions are clearly disclosed.”

Still, problems persist. This month, Senator Elizabeth Warren (D-MA) wrote a letter to the Federal Trade Commission, urging the agency to continue investigating the tax prep software. “Despite lawsuits and settlements stemming from Intuit’s deceptive ‘free’ advertising practices, the company continues to relentlessly upsell TurboTax users,” Warren wrote. “The TurboTax website attempts to divert taxpayers away from free filing options early in the process – and continues to do so throughout their federal and state tax filings.”