Income Tax
Income tax as a percentage of income (based on anecdotal evidence found in the Internet, so believe it or not):
| Effective Tax Rate | Class | Annual Income |
|---|---|---|
| 0-10% | very low-income class (the poorest) | well below $20K |
| 10-20% | low-income working class (the poor) | below $30K |
| 20-60% | working middle class (most people) | between $30K and $60K |
| 30-70% | working upper class (professionals: doctors, lawyers, accountants) | above $100K and even up to several millions |
| 40-70% | managers of big companies | between $200K and $10M, sometimes more |
| 15-20% | small business owners | below $1M |
| 10-15% | investors, retirees | below $1M |
| 5-10% | the rich | between $5M and $30M |
| 4-6% | the super-rich or the ultra-rich | above $30M |
The effective tax rate in the table above includes: federal income tax, state income tax, Social Security, Medicare, unemployment insurance, and employer match of all these. The sales tax and property taxes are not included.
The main reason for such disparity is the payroll tax. The average effective tax rate as reported by IRS was about 12% in 2006. The effective tax rate would be more than twice as high as reported if the payroll tax and taxes unvisible to the employee were included, such as unemployment insurance tax. What's more the base for calculating the effective tax rate would be much higher because employer match is exclusive.
It's worth to notice that the richer one is, the more options one has. For example the ultra-rich can hire the best professionals to manage their taxes.Those provessionals find loopholes in the tax law and know how to exploit them as much as possible. The rich, the business owners and the managers of big companies have all kinds of so called perks (perquisites). Some of them don't even need to spend any money on living expenses. All costs like: car, travel, restaurants, lodging, health, dental, life insurance and even jewelry and entertainment costs can be deducted as a "business expense" and paid with the pre-tax money by the company they own.
The two differences between the rich and the working class are:
- the rich live on pre-tax money, the poor live on after-tax money
- the rich want to have nothing in their name and they want to control everything, while the poor want to have everything in their name and they end up having nothing
The government will never change or fix this situation. It's not even because the ultra-rich give the most money in lobbying and election donations, and all politicians are deep in their pockets. It's because it always was this way and most probably it always will be. No matter how complicated the tax system will be, the rich will find the way to avoid taxes. It's better to acknowledge this fact and learn how to exploit it.