In the United States, the federal tax system is designed to be progressive – higher incomes are ostensibly taxed at higher rates than lower incomes. In theory, this means the wealthy should shoulder more of the tax burden. However, when we examine effective tax rates (what people actually pay after deductions, credits, and income mix), the picture changes dramatically. Investigative analyses have shown that America’s richest residents often pay only a tiny fraction of their vast wealth in taxes. For example, a ProPublica review of IRS records found that billionaires like Jeff Bezos, Elon Musk, and Carl Icahn reported paying no federal income tax in certain years. In contrast, an ordinary household earning around $70,000 (the U.S. median) pays roughly 14% of its income in federal taxes.
Public data reveal wide disparities even among those with similar incomes. A recent Yale Budget Lab analysis reports that among the top 1% of income earners, some individuals pay as little as 3% of their income in federal taxes, while others pay up to 45%. Eighty percent of the filers in the top 1% bracket were found to pay between 16% and 37%. By contrast, middle-income families (those around the 50th percentile) typically pay in the range of 5–13% of their income in federal taxes. This means that identically situated taxpayers can end up with very different tax bills depending on the types of income they have (wages vs. investments) and which deductions or credits they use.
In short, while statutory tax brackets for wages range up to 37% (plus an additional 3.8% surtax on investment income for the wealthiest), the actual taxes paid by those at the top can be far lower than these rates suggest. For instance, ProPublica found that the 25 richest Americans averaged only a 15.8% federal income tax rate on $86 billion of reported income from 2014–2018. That effective rate is lower than what a single worker earning $45,000 typically pays when you include Social Security and Medicare taxes. These facts underscore a core tension: many Americans pay a significant share of their earnings in taxes, while the wealthiest, by dint of how the code is written, often pay a much lower share of their income or wealth.
Taxes on Labor: Payroll Contributions and Income
The disparity begins with how labor income (wages and salaries) is taxed. Every American worker pays payroll taxes for Social Security and Medicare, totaling 12.4% + 2.9% = 15.3% on earned wages (split equally between employee and employer). Crucially, the Social Security portion (12.4%) only applies up to an annual cap ($160,200 in 2023). As a result, lower- and middle-income workers pay the full rate on most of their pay, while high earners pay no Social Security tax on wages above the cap. For example, in 2021 the cap was $142,800, meaning earnings above that were exempt from Social Security tax. In practice, this makes the Social Security tax highly regressive: an American earning over the cap effectively has a much smaller fraction of total income subject to that tax than a minimum-wage earner does.
Economic analysts have highlighted how this structure shifts more tax burden onto the poor. For instance, one report notes that Americans earning under $10,000 pay about 14.1% of their income in payroll taxes, whereas millionaires pay only about 1.9%. In other words, the lowest-income workers pay a far higher percentage of their incomes in Social Security and Medicare taxes than the richest Americans do. To compound this, earnings from investments (like dividends, interest, and capital gains) are not subject to any payroll tax at all. Wealthy individuals who live off investment income or who borrow against their assets avoid paying into Social Security and Medicare on that money, shifting the entire payroll burden onto wage earners.
Even within payroll taxes, the funding formulas favor higher earners in the long run. Social Security benefits are capped and skewed so that lower-wage workers receive a higher payout relative to what they contributed, making Social Security slightly progressive as a benefit program. But the tax payment side is regressive up to the cap. The Economic Policy Institute reports that due to rising wage inequality, a steadily shrinking share of total U.S. earnings are subject to the Social Security tax. In 2021 only about 81.4% of all wage income was covered by the tax cap – the lowest proportion since the early 1970s. This trend not only erodes Social Security’s funding base but also means high earners contribute a smaller share of their income to the program over time. (Medicare’s payroll tax, by contrast, has no cap, but it too is only levied on earned income.)
Sales taxes and other consumption taxes (state and local sales, excise, and property taxes) further tilt the burden downward. Virtually all taxpayers, rich and poor alike, pay sales tax on consumption, but because lower-income families spend a higher fraction of their income on taxed goods, these levies end up regressive. State and local systems in particular often worsen inequality: one study found the poorest 20% of residents pay more than seven times their income in state and local taxes compared to the wealthiest 1%. Nationwide, the bottom quintile pays about 11.4% of income in state/local taxes versus just 7.2% for the top 1%. In sum, taxes on labor and consumption in the U.S. tend to extract a larger share of income from low- and middle-earners than from the rich, despite the federal income tax’s intended progressivity.
Federal Income Tax: Deductions, Credits, and Effective Rates
Turning to federal income tax, the statutory rates for wages do progress from 10% up to 37%, and the tax code does include some provisions to relieve poorer households (notably the Earned Income Tax Credit and Child Tax Credit, which give low earners refunds). However, the wealthy also have access to a host of deductions, credits, and loopholes that can drastically reduce their taxable income. Mortgage interest, property taxes, and charitable giving are deductible for those who itemize, meaning homeowners and those making large donations enjoy big tax breaks. For example, CEOs or business owners can often deduct expenses like private jet flights or luxury offices, writing them off as “business expenses”. By contrast, a teacher buying classroom supplies gets only a modest $300 deduction. This imbalance allows higher earners to shelter a significant part of their income, shrinking their federal income tax bills.
Congress’s tax policies in recent decades have further favored the wealthy. Over the 1980s–2000s, policymakers repeatedly cut top marginal tax rates. The highest bracket was 70% in the 1970s, dropped to 50% in the 1980s, and reached as low as 35% by 2003 (now 37%). As these statutory rates fell, high-income taxpayers benefited disproportionately. At the same time, numerous targeted tax expenditures were created or expanded. The Mortgage Interest Deduction and the State and Local Tax deduction (SALT) mainly help those in the upper half of the income scale. Long-term capital gains and qualified dividends receive a maximum 20% rate (plus 3.8% surtax, for 23.8% total), far below the top 37% bracket for ordinary income. Many small business owners and investors can also take advantage of tax-favored accounts and retirement plans that reduce taxable income.
The result is that high-income filers’ effective tax rates often lie well below the headline rates. According to IRS data, although individuals in the top percentiles have higher income tax bills in dollars, their overall effective federal tax rates (federal taxes paid divided by income) are often lower than one might expect. For instance, IRS statistics show that in 2018 the top 1% of earners paid an average federal tax rate of around 30%, whereas the bottom quintile averaged near 0% or even negative (due to refundable credits). A recent Yale study notes that similar-income filers can have very different effective rates because the wealthy can exploit deductions and preferential rates. If you made $10 million and paid $2.5 million in taxes, your effective rate would be just 25%, even though part of that income might have faced the 37% bracket.
Furthermore, some large-scale tax cuts have explicitly targeted the investments of the wealthy. The 2017 Tax Cuts and Jobs Act introduced a new 20% deduction on “Qualified Business Income” from pass-through entities (sole proprietorships, partnerships, S-corporations). Conservative estimates find that over half of the benefits of this deduction flowed to the richest taxpayers. In its first year of effect (2018), the average QBI deduction was about $8,000 for filers overall, but for the ~15,000 taxpayers with over $10 million incomes it averaged over $1 million. This kind of policy can cut the top marginal rate on business profits from 37% to roughly 29.6%, effectively giving wealthy business owners another tax cut.
In short, the structure of the income tax code often allows those with sophisticated tax planning and certain income types to pay far less on every dollar earned than ordinary wage earners do. A veteran tax policy expert has noted that “the existing tax code implements lower tax rates for certain kinds of personal income, like capital gains and business profits, compared to wage earnings”, and permits deductions that only some taxpayers can claim. This unequal treatment of income types tilts the system toward the asset-rich.
Favoring Capital: Capital Gains, Dividends, and Carried Interest
A major factor in why the wealthy often pay a lower share is the different treatment of capital income. Capital gains (profits from selling assets like stocks, bonds, or real estate) are taxed only when realized and at lower rates. Long-term gains face at most 20% (23.8% including the Net Investment Income Tax), whereas ordinary wage income can be taxed up to 40.8% for top earners. Moreover, inflation is not accounted for, so wealthy individuals can turn nominal price increases into tax-exempt windfalls.
Because only realized gains are taxed, the ultra-rich can let their fortunes grow virtually tax-free. For example, instead of selling stock and paying taxes, billionaires often borrow against their holdings to finance lifestyle expenses. This means even as their wealth surges, they avoid the capital gains tax by not selling. ProPublica’s investigation into IRS data found multiple years where people like Jeff Bezos and Elon Musk paid zero federal income tax by relying on borrowed funds rather than realized income. The analysis noted that “the wealthiest can — perfectly legally — pay income taxes that are only a tiny fraction of the… hundreds of millions, if not billions, their fortunes grow each year”. Even under conventional measurement (based on declared income), those billionaires’ effective rates were remarkably low.
A notorious loophole in this area is the “carried interest” provision. Private equity and hedge fund managers earn fees for managing investments, but these fees are often classified as capital gains. Under current law, this means managers pay the 23.8% capital gains rate on those fees instead of up to 40.8% as ordinary income. In practical terms, this lets billion-dollar fund managers pay almost half the tax rate of a typical worker earning the same money as salary. Because of this, proposals have been made (e.g. the Carried Interest Fairness Act) to tax such income as ordinary wages to level the playing field. Until closed, carried interest is a vivid example of how the tax code legally privileges the rich.
Municipal bond interest and many other forms of capital income also enjoy tax-exempt or tax-favored status, whereas wage income does not. For wealthy households holding large portfolios, these benefits accumulate. And when assets pass from one generation to the next, they benefit from stepped-up basis: for tax purposes, inherited assets are revalued at market price at death, erasing any capital gains accrued in the decedent’s lifetime. The result is that heirs often pay no capital gains tax on the increase in value that occurred before they inherited. The Treasury estimates this loophole costs about $58 billion in forgone revenue in 2024 — roughly one-quarter of all capital gains tax revenue. Importantly, most of this benefit goes to the very wealthy: in 2019, 56% of stepped-up basis tax savings (about $22 billion) went to estates in the top 20% wealth tier, and $7 billion of that to the top 1%. Critics call stepped-up basis an unfair advantage that lets billionaires pass on untaxed gains to their heirs, compounding wealth concentration.
Because of all these factors, capital income for the wealthy often ends up taxed at a dramatically lower effective rate than labor income. The OECD notes that across advanced economies, dividends and capital gains generally face lower effective tax rates than wages. U.S. tax policy exemplifies this: high-income Americans earn most of their money through assets, and those assets are either deferred or taxed at reduced rates. The Congressional Budget Office has documented how capital income is heavily concentrated in the top 1%, meaning the top earners reap the largest share of these preferential tax benefits.
Corporate Taxes and Pass-Through Businesses
Corporate profits also factor into who ultimately pays taxes. The federal corporate tax rate was slashed from 35% to 21% in 2018. Historically, U.S. corporations faced some of the highest tax rates in the world (well above 50% in the 1950s–60s). Today, while the U.S. statutory rate (21%) is about average among OECD countries, the effective rate paid by large corporations is often much lower. In 2022, firms paying over $100 million had an average effective tax rate of only about 16%. Meanwhile, corporate tax revenues have shrunk as a share of GDP: by 2022 they were just 1.3% of the U.S. economy, substantially below historical norms. Part of this decline is due to lower rates, but also to the growth of pass-through entities and to generous tax breaks for multinationals (the U.S. allows deductions for many foreign earnings and capital investments, costing roughly $188 billion in lost revenue in 2024).
Many small businesses, startups, and even some large partnerships are taxed as “pass-throughs” (LLCs, S-corporations, partnerships). In these cases, profits bypass the corporate tax layer and flow directly to owners’ personal tax returns, taxed at individual rates. By 2018, more than half of U.S. business income came through pass-throughs. This reduces the total taxes collected on business profits, since individual rates on that income (especially after deductions like the 2017 pass-through deduction) can be lower. In effect, prosperous business owners often dodge the 21% corporate tax entirely. In fact, one analyst noted that increasing taxes on pass-through profits (beyond 20% higher rates) would mainly fall on the business owners themselves – not workers – because small portions of such taxes are paid out of payroll.
Altogether, the move toward pass-through taxation and the decline in corporate tax enforcement means that capital and business income often escape a full tax bite. Average Americans paying payroll taxes and income taxes shoulder a disproportionate part of total federal revenue. Some budget projections suggest that if corporate and high-income taxes were raised to earlier levels, government receipts would rise substantially. Conversely, continuing the current lax regime lets wealthy business owners keep much more of their profits than if their income were taxed at standard corporate-plus-personal rates.
Loopholes, Tax Shelters, and Offshore Strategies
For the very rich, legal strategies and global tax mechanisms often further shrink tax bills. Wealthy individuals routinely use tax shelters—complex financial arrangements designed to exploit gray areas of the code. For instance, family offices (private wealth management firms for high-net-worth individuals) can set up limited partnerships that defer taxes indefinitely. Self-dealing in family trusts, transfer pricing schemes among related companies, and other tactics enable wealthy families to shift income out of taxable categories.
Offshore tax havens are another piece of the puzzle. Investigative reporting (e.g. the Panama Papers and Paradise Papers) exposed how politicians, celebrities, and business moguls hide assets abroad to avoid taxes or scrutiny. While U.S. citizens are subject to tax on worldwide income, enforcement has been historically weak for offshore income. One recent push in Congress, aided by the 2017 FATCA law and enhanced IRS funding, is trying to close these loopholes.
The IRS itself acknowledges that wealthy Americans are responsible for a disproportionate share of the “tax gap” – the difference between taxes owed and collected. By one estimate, the top 1% of earners account for about 28% of that gap (roughly $163 billion per year). In response, Congress has pumped new resources into the IRS’s high-income audit divisions. Early results from 2023 showed the IRS opened thousands of new cases on millionaires and billionaires, recovering millions of dollars in previously unpaid taxes on things like luxury expenses. But even with stronger enforcement, the complexity of offshore and corporate loopholes means many wealthy taxpayers can still legally minimize taxes far more effectively than ordinary workers can.
Inheritance, Trusts, and Dynastic Wealth
Wealth preservation through generations also matters. The U.S. imposes an estate tax (a form of inheritance tax), but only on very large estates, and even then with a top rate of 40%. With an exemption threshold now around $13 million per person, most middle-class estates owe nothing to the IRS. Beyond the estate tax, the stepped-up basis rule allows heirs to avoid capital gains tax on unrealized gains before death. As noted earlier, this benefit overwhelmingly favors the wealthy: in 2019, more than half of the tax savings from stepped-up basis accrued to the top 20% of estates.
Wealthy families also employ trusts, family partnerships, and gifts to shield assets from taxation. Dynasty trusts can hold wealth for generations, avoiding repeated taxation (in fact, some are structured to bypass even the generation-skipping tax). Complex gifting strategies can move assets out of one’s taxable estate without losing control. Retiring CFOs at major firms may take much of their compensation in stock, then transfer shares to trusts for children, skipping tax on capital gains. These techniques are largely unavailable to ordinary wage-earners, who cannot shift the title of their salary or home to a trust in the same way.
Historical Shifts in Tax Policy
To understand today’s landscape, it helps to see how tax policy has changed over time. In the mid-20th century, the highest marginal income tax rates were well over 90%, and inheritance taxes were steep. Over the last 50 years, political forces (especially after the 1980s) dramatically cut taxes on high incomes and corporations. For example, the top individual tax rate was 91% in the 1950s and ’60s, came down to 70% by 1980, and now stands at 37% (plus 3.8% surtax). The corporate tax rate has likewise shrunk from 50% in the 1960s to 21% today.
Some reforms were explicitly designed to benefit wealthier taxpayers. The Reagan and Bush tax cuts trimmed brackets and eliminated the alternative minimum tax for many, reducing high-earners’ bills. The 2001 and 2003 Bush cuts lowered rates and opened up new deductions. The 2017 tax overhaul doubled the estate tax exemption and introduced the Qualified Business Income deduction mentioned earlier, giving substantial relief to heirs and business owners. Each time these laws passed, the share of total taxes paid by the rich tended to fall. (By one broad measure, the share of federal revenue from the corporate tax has generally declined since the 1960s.)
At the same time, labor’s share of national income has stagnated or shrunk while capital’s share has grown. This means a larger slice of national income comes from capital owners (who can access preferential rates) rather than wage earners. Meanwhile, social insurance taxes have been tightened in ways that affect low earners more. For instance, policymakers have often resisted raising the Social Security cap, so over time a smaller portion of total wages is taxed as inequality grows.
In short, decades of policy changes have favored investment income and estates. Tax provisions that were intended for “lower and middle income” (like the Child Credit and EITC) were expanded, but loopholes for high income, capital gains, and family wealth were preserved or enlarged. The net effect is a U.S. tax system that technically remains progressive by income, but whose many exceptions ensure the poor bear an outsized share of the total burden.
The Influence of Wealth and Lobbying
Policy choices don’t happen in a vacuum. Rich individuals and corporations wield enormous political power through campaign contributions, lobbying, and think-tank funding. As one Congressional report noted, *“wealthy people across this country wield enormous political power in terms of lobbyists, think tanks and organizations created to entrench their financial advantage”*. Major donors and corporate interests spend vast sums to shape tax policy in their favor. For example, when Massachusetts voters proposed a millionaire’s tax in 2022, opponents (backed by billionaires) poured at least $14 million into the campaign to defeat it. Meanwhile, pro-tax-fairness coalitions had to out-raise them with money from unions and workers to succeed.
On the federal level, wealthy donors and business groups often rally against tax increases, arguing (with varying success) that such hikes will harm economic growth. Meanwhile, they push for new cuts, tax holidays, or credits that benefit their industries. The revolving door between tax-writing committees and private sector tax law firms further amplifies this effect. It’s no accident that the richest Americans pay far lower effective tax rates: they have direct influence over crafting the rules. Policymakers beholden to their interests have repeatedly enacted tax breaks that only the rich can use, such as subsidies for private jet fuel or extenders for capital gains provisions.
Public accountability for these dynamics is limited. Because average voters pay the bulk of payroll and income taxes on wages, they often do not see themselves in battles over tax breaks that primarily aid capital. Moreover, complex loopholes (like carried interest or international profit shifting) are obscure to most and can evade media scrutiny. Meanwhile, as the ICIJ reports, the IRS lacks the resources to fully audit the ultra-wealthy. Experts have pointed out that until 2022 the IRS’s richest divisions were chronically understaffed, leaving “a major hurdle” in catching complicated abuses. Only with a recent influx of $80 billion (spread over several years) is the IRS trying to hire lawyers and accountants to match the sophisticated teams hired by billionaires. The outcome of this tug-of-war between enforcement and avoidance will partly determine whether the rich continue to skirt much of the tax burden.
International Perspectives
While this analysis focuses on the U.S., it’s useful to note how other countries handle similar issues. Among advanced economies, the U.S. stands out for having no broad wealth tax and relatively low top marginal rates on income and estates. Some European countries have inheritance taxes (with rates often 20–40% on smaller fortunes) and a wealth tax (for example, Norway taxes net wealth, though France abolished its wealth tax in 2018). Many OECD countries set higher income tax brackets (often 45–50% top rates) than the U.S., but they also provide more comprehensive social benefits, and sometimes have surtaxes on the very richest.
Most countries also dedicate large payroll taxes to fund pensions and health care, but they often cap these at higher levels or index them differently. For example, in Germany and France social security contributions are levied on all wages (with only modest ceilings) meaning high earners pay the same rate on nearly all income as the middle class. Contrast that with the U.S., where the cap on Social Security means millionaire CEOs avoid the largest portion of that tax.
That said, the general pattern of tax-advantaging capital is not unique to America. An OECD report finds that across its member countries, effective tax rates on dividends and capital gains are generally lower than on wages. In many places, corporate income is also favored through deductions and credits. The U.S. has also agreed to a global minimum corporate tax (15%) under the OECD’s Pillar Two rules, aiming to curb profit-shifting to tax havens. However, even under the global minimum, rich shareholders ultimately benefit from these preferences: the global tax only applies to companies, not to individuals who still enjoy dividends and capital gains exclusions.
In summary, the disparity between how labor and capital are taxed is a common international issue. The combination of progressive income tax schedules with regressive payroll taxes and low capital taxes means that everywhere, but especially in the U.S., wage earners often end up paying a higher share of total taxes than wealth-holders do. Economic comparisons suggest that taxing wages more heavily than wealth tends to exacerbate inequality. For instance, one global survey shows nations with more progressive capital gains or wealth taxes generally have lower inequality than those relying mainly on regressive consumption and payroll taxes.
Consequences and Policy Implications
The result of these tax structures is a situation where, effectively, the poor and middle class “pay taxes” to a much greater extent than the ultra-wealthy do. This raises questions of fairness and economic efficiency. When capital owners can legally shield much of their income, workers must make up the shortfall for funding public services. That can erode trust in the system: when teachers, nurses, and small-business owners see billionaires paying minimal taxes by comparison, public support for tax laws can wane.
Policy experts argue that if the goal is fairness and revenue, the government should consider reforms such as raising or eliminating the payroll tax cap, equalizing tax rates on different income types, and tightening loopholes for the rich. Proposals include taxing capital gains at the same rate as wages, ending stepped-up basis (so heirs pay capital gains on inherited assets), imposing a net worth tax on the ultra-rich, or increasing estate taxes. The International Consortium of Investigative Journalists (ICIJ) suggests that globally taxing billionaires could help fund public goods and reduce inequality. Domestically, progressive economists advocate for restoring higher top tax brackets (some propose rates above 50% on multi-million dollar incomes) and closing the carried interest and private trust loopholes.
Whatever the solution, it would require overcoming the political obstacles. The long struggle in state legislatures (like Massachusetts and Washington) to impose higher rates on millionaires demonstrates how difficult it is to change entrenched advantages. Still, voter sentiment often supports taxing the rich more: a majority of Americans say the wealthy do not pay their fair share. If lawmakers heed this and act, tax policy might shift. But until then, the structural features of the system — payroll taxes, capital gains preferences, sprawling deductions, and limited enforcement — will continue to leave wage earners carrying a heavier burden as a share of income than the asset-owning rich.
In sum, the phrase “the poor pay taxes and the rich don’t” reflects a hard truth about legal burdens: ordinary workers and consumers fund a large share of government through payroll, sales, and income taxes on labor, whereas the wealthy employ financial strategies and code provisions that greatly reduce their tax share. Understanding this requires looking beyond headline rates to the full tapestry of tax rules. It’s only by examining effective tax rates, loopholes, and enforcement that we see how much less the richest Americans contribute relative to their resources, and what changes might rebalance the load.