U.S. Personal Income Taxes 1

What if U.S. personal income taxes were perfectly fair, and everyone paid the same percentage, with no special-interest credits, adjustments, or deductions, and the same tax rate for every type of income? How much would each of us pay?

That calculation should be easy, right? Just take the total of all personal income taxes and divide by the total of all personal income. Unfortunately, this was more difficult to discover than I thought it would be. I couldn't find IRS reporting of total income. The closest reported statistic was adjusted gross income (AGI), which already includes more than a dozen special-interest income reductions.

Naively using IRS tax statistics based on AGI and individual income tax revenue, I calculated 13.8% for both 2007 and 2006 tax years.

Using other IRS tax statistics based only on positive AGI, the rates were 12.7% for 2007 and 12.6% for 2006. A lower overall rate is likely due to eliminating the effect of reducing the AGI denominator with negative AGI tax returns that do not contribute to income tax revenue.

If we were to use total income rather than AGI, the rate would thus be lower than 12.7%. Note that this also excludes all of the people who do not file an income tax return. Including them would lower the rate even further.

So, if everyone paid the same percentage of their income in federal income taxes, the rate would be below 12.7%!

Of course, this considers neither the societal preferences that those with lower/higher incomes not only pay lower/higher taxes, but also pay lower/higher tax rates, nor the myriad of special-interest tax laws that subsidize various encouraged societal behaviors.

IRS tax statistics: http://www.irs.gov/taxstats/index.html