The wealthy are often criticized for not contributing their fair share of taxes. But an examination of income taxes reveals that the wealthy actually contribute more than their fair share.
This is a graph showing the percentage of income tax paid by different income groups from 2001 to 2021. In 2001, the top 1% paid about 33% of all income taxes. By 2021, this group would pay about 46% of all income taxes.
You may be wondering, “Isn't it natural that the wealthy pay a significant portion of their income taxes?” After all, they have the highest income! ” But when we talk about fairness, true fairness means that the wealthy pay the same percentage of their total income in income tax.
The wealthy should not be vilified because of a portion of their income tax.
In 2021, the top 1% of U.S. earners accounted for “only” 26% of the country's total income, but they paid 46% of the total tax burden.This shows that Wealthy people paid 15% more than what was considered their fair share..
So perhaps we need to reevaluate our tendency to denigrate the wealthy, especially when it comes to income taxes. On average, their tax rate was 24%.
We operate under a progressive income tax system, with marginal federal income tax rates increasing with income level. To refresh your memory, here is a summary of the income tax brackets for 2024. The lowest federal marginal income tax bracket starts at 10% and gradually increases to 37%. In addition, there is a state income tax for residents of states that impose such taxes.
If you earn in the top 1% of your income, you may be under a lot of stress
If you fall into the top federal marginal income tax bracket, you are likely devoting a significant amount of time and effort to your job and under considerable stress.
I have met many families making $500,000 to $1 million in W2 income. These people include doctors, bankers, lawyers, small business owners, executives, and engineers, many of whom work 50 to 80 hours a week and have little time for leisure.
Their high incomes serve as a reward for their hard work, but they often find themselves being heavily taxed for their efforts. After working 12 hours a day for 20 straight days to heal people, you may not be satisfied with giving the government more money than you can keep.
I was one of those people for a lucky few years when I worked at an investment bank. Despite having a sizable income, I face chronic stress and experience physical discomfort such as back, leg and jaw pain, which ultimately affects my overall well-being. I did.
I strongly encourage everyone to strive for the highest possible income to see if it is worth paying the highest marginal income tax rate. This way you can get first-hand perspective.
What about the bottom 50% of earners and their taxes?
The bottom 50% of earners earned just 10% of total income in 2021, but paid only 2% of total income taxes, for an average tax rate of 3%. That's a pretty favorable ratio!
Ultimately, I decided to quit my job in finance and join the bottom 50% of earners for the sake of my health and well-being. Earning a high income was not worth it.
This was a major adjustment, as our income initially fell significantly, by about 85% in the first 12 months. But thanks to hedonic adaptation, I gradually got used to the change.
Additionally, after being free of chronic body pain within 6 months, I realized that sacrificing a higher income was a blessing. My body has healed. The health benefits of early retirement are enormous.
Looking back, I enjoyed being in the bottom 50% of earners even though I knew what it was like to earn more. Not only did I pay a fair amount of income tax, but I also gained a new sense of freedom.
Instead of rushing to get on a plane on a Sunday afternoon for a short meeting with a client in Denver, I was able to relax in Golden Gate Park and spend some time reading a good book.
Ideal federal marginal income tax rate: 24%
Over time, with the help of the bull market, I gradually built up passive income and online income. Through this process, we found that the optimal federal marginal income tax rate to pay is approximately 24%.
At a tax rate of 24%, you can make a significant contribution to the country's development without feeling unduly burdened. At the same time, you will also earn enough income to maintain a comfortable lifestyle.
For tax year 2024, individuals in the income range of $100,526 to $191,950 and married couples with incomes of $201,051 to $383,900 fall in the 24% marginal income tax bracket. These income thresholds are typically adjusted annually to account for inflation.
It's comfortable to maintain an upper-middle class lifestyle on an annual income of $300,000. Additionally, you can avoid the 8% jump in federal marginal income taxes that would result from entering the next tax bracket of 32%.
Related: How ordinary people can reduce their taxes like the rich
Wealth is what you want to build to minimize income tax
It may not be immediately obvious, but the top 0.1% of the truly wealthy do not build their wealth primarily through income. Instead, they build wealth by owning stock in companies, including their own.
As long as you refrain from selling your assets, you can avoid paying capital gains taxes. In order to access their wealth, the ultra-wealthy often borrow from their own assets to finance their lives.
As of 2024, the estate tax threshold is $13.61 million per person or $27.22 million per couple. This essentially means that an individual or couple can inherit this amount of wealth without incurring inheritance tax, which is typically set at 40%.
A variety of strategies exist to manage inheritance taxes on these basis, including GRATs, dynasty trusts, and other methods. However, the easiest way to avoid inheritance tax upon death is to gradually withdraw as much of your assets and gifts as possible during your lifetime.
Get busy building passive income to replace active income
If you have accumulated enough assets, holding them for more than a year will result in lower capital gains tax rates on distributions and asset sales. Dividend income from qualified stocks and bond income may be taxed at lower rates as well. This acts as another incentive to increase your net worth rather than maximizing your income.
The most striking contrast is between the W2 federal marginal income tax rate and the long-term capital gains tax rate, which are 32% and 15%, respectively. Ideally, you can accumulate enough capital to replace income in the 32% range and earn passive investment income, with a tax rate of only 15%.
I'm aiming for over $300,000 after blowing up my passive income in October 2023 to buy a new home. It will take three to five years to recoup the loss of $150,000 in passive income.
Approximately half of the working population pays no income tax
We often blame the wealthy for a variety of issues, but what about the approximately 47% of working Americans who pay no income taxes? They contribute through sales taxes, FICA taxes, and other levies. However, the same applies to those who pay income tax.
It's worth thinking about how much stronger our country would be if people who currently pay no income taxes regularly contributed even small amounts, say $500 a year. If so, more people would be interested in our country because everyone would be in the game.
About 167 million Americans are currently employed, and if only the 78 million people who pay no income taxes contributed $500 each year, they would earn $39 billion. Doubling that amount to $1,000 per person would bring the total to $78 billion, which could be used to address homelessness, provide jobs for unemployed veterans, support child services, and other critical needs.
The wealthy already pay a significant portion of their income taxes, but they also face high inheritance taxes when they die. Instead of focusing on the wealthy, perhaps we should focus on tax-efficient ways to increase our own income and build wealth.
reader questions
Do you think the rich pay their fair share? If not, how much more do you need to pay? How much of your income do you pay in taxes? Do you think you are paying your fair share? Should we strive to broaden the range of income tax payers in our country?
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