Because of the United States’ progressive tax system, it is difficult to determine who constitutes the “average” taxpayer. Because there are seven different tax bands, with rates ranging from 10% to 37%, one might reasonably anticipate that the average tax rate will be 24.57%. There is a tax bracket that is 24%, which is really convenient. Is it accurate to say that this is what the typical American pays in taxes? To be honest, no. According to one metric, the total tax burden for all taxpayers is 13.3%. According to still another method, the value is more than 28%. This is how everything shakes out.
A measure of the average burden of income tax reports a value of 13.3% for all the taxpayers, although it is quite difficult to get at an average.
The various tax brackets for the federal income tax will range from 10% all the way up to 37% for the year 2022.
In 2018, the richest 50% of taxpayers were responsible for paying 97.1% of all government income taxes. The average rate of income tax paid by these taxpayers was $20,663, and the average rate of income tax paid was 14.6%.
According to a research by the OECD, the “tax wedge” for a typical single worker in the United States in 2021 was 28.4%.
How Different Tax Bands Affect Different Rates
At least in the case of taxpayers filing individually, the tax bracket that applies to income of $89,075 to $170,150 only. These income thresholds change depending on a person’s filing status. The following is a breakdown of the tax brackets for individuals filing a single tax return for the year 2022:
THRESHOLD FOR THE MARGINAL RATE OF TAXATION ON INCOME
10% $0 to $10,275
12% $10,275 to $41,775
22% $41,745 to $89,075
24% $89,075 to $170,050
32% $170,050 to $215,950
35% $215,950 to $539,900
37% or more than $539,900
A single person filing their taxes who has an annual income of $35,000 is exempt from the 24% rate. They would enter the 12% tax bracket, however this would apply solely to income in excess of $10,275. The first $10,275 would only be subject to a 10% tax rate.1
Because they are adjusted on an annual basis in order to remain in line with rising prices, these income thresholds are slightly higher than what was the case in the tax year 2021. For example, the federal tax on income rates in 2022 will vary from 10% to 37%, which means that the range for single filers will go from $0 to $10,275 for the lowest marginal rate all the way up to $539,900 or more for the highest rate.2
Perhaps a more accurate term would be “median.”
It is possible that understanding the tax burden that is typical for American taxpayers will be less difficult. The value that is exactly in the middle of a set of data is referred to as the median. In theory, half of all payers would pay an amount that is lower than the median, while the other half would pay an amount that is higher than the median.
According to the Tax Foundation, the wealthiest fifty percent of taxpayers were responsible for paying 97.1% of all income taxes in the United States in 2018, which is the most recent tax year for which thorough and verified information are available. As a direct consequence of this, the lowest 50% of earners paid only 2.9%.3
The Tax Foundation calculates that the average tax rate for the highest 50% of taxpayers is 14.6%, while the average tax rate for the bottom 50% of taxpayers is 3.4%, and the average tax rate for the entire population is 13.3%.3
However, there is only one perspective on the equation to consider. There is also something that is referred to as the “tax wedge,” and the data that were provided by the Tax Foundation solely reflect income taxes. In addition, a portion of each American worker’s salary goes to pay for Social Security and Medicare. In a strict sense, these are the kinds of things that should be taken into account when calculating an average tax burden.
The Wedge of Taxes
The tax wedges is the ratio of what a typical employee takes home after tax and what their employer’s overall labor expenses are. Total labor costs include not only pay but also taxes, perks, and other charges.4
Annual tax wedges are computed by the Organization for Economic Cooperation and Development, or OECD, which does so for the United States of America as well as dozens of other industrialized countries.5 The tax wedges are calculated based on the taxable income and tax bands of single individuals. The larger the tax a wedge, the less probable it is that some taxpayers may perceive any benefit in maintaining employment.
Finding the Tax Wedge Through Calculations
Calculations of the tax wedge take into account not only income taxes but also FICA taxes, which cover Social Security, Medicare, plus the Additional Medicare tax, if necessary. However, the largest burden that is placed on American taxpayers is that of the federal income tax.
When calculating the OECD tax wedge, both employers’ and employees’ contributions to Social Security and Medicare are taken into account. Even though an employee is exempt from having to pay their employer’s portion out of their own pocket, they still would have been entitled to receive that money even if their company had not contributed. The rate of the Social Security tax that will apply to wages received in 2022 is fixed at 6.2% for employees as well as employers, whereas the rate that applies to income earned through self-employment is 12.4%. Employers and workers each pay 1.45% of their income toward the Medicare levy, whereas those who are self-employed pay 2.9%.6
The Wedge of Taxation in the United States
According to the OECD, the tax wedge for the typical single worker in the United States will expand by 1.2 percentage points, from 27.2% in 2020 to 28.4% in 2021. This increase is smaller than the OECD average for all nations, which will be 34.6% in the same year. In the meantime, the average take-home pay for a single worker in the United States was 77.4% of their gross compensation, which is higher than the average take-home pay across OECD countries, which was 75.4%.7
The Organization for Economic Co-operation and Development (OECD) believes that legislation based on the COVID-19 approach is likely to blame for the reduction in the tax wedge.8
Therefore, how much does this equal in dollars? Using an annual median wage of $53,924 as an example, a tax wedge of 28.4% comes out to around $15,314.42; this indicates that the typical worker has given this amount of money to the federal government.
The income tax, Social Security tax, and Medicare tax are the only three taxes that are included in the OECD tax wedge. It does not include taxes on sales, property, or vehicles, nor does it cover taxes on state income.
Questions That Are Typically Responded To (FAQs)
What is the typical rate of taxation in the United States?
According to the Organization for Economic Co-operation and Development (OECD), the United States had an average tax rate of 22.6% in the year 2021.
How much income tax do you have to pay on one million dollars?
Because of the progressive nature of the tax system, an individual taxpayer who did not have any dependent children and had an annual income of $1 million would be subject to all tax brackets, with a tax rate of 37% applied to the portion of their income that was greater than $539,900. If we assume that there are no credits or reductions of any kind other than the conventional deduction, then the total amount of federal income tax that is owed comes to little more than $335,000, which corresponds to an effective tax rate of 33.5%.