Do rich people REALLY pay more taxes???

Question

My friend and I were having a discussion about pro athletes and he wondered what the point of huge contracts were if they were paying so much on taxes. Now granted, when it comes to the $$$ amount, rich people pay more by far, but my friend thinks that the rich pay a 50-60% tax rate. I said I highly doubted that, otherwise, what would the point be of being rich??? I have heard many times that the rate goes down after the $100K- $250K mark. So who is right???

Answer 1

You are both right and you are both wrong.

The rich do pay more in taxes. The progressive tax scale, where higher income pays a higher percentage, causes a portion of this to happen. However, the highest end of the scale is at 35%. Also, not all of a person's income is taxed at the higher rate.
The first $7,825 of taxable income is taxed at 10%
from $7,826 to $31,850 is taxed at 15%
from $31,851 to $77,100 is taxed at 25%
from $77,101 to $160,850 is taxed at 28%
from $160,851 to $349,700 is taxed at 33% and
anything over $349,701 is taxed at 35%.
Also, an individual's entire income less deductions is subject to federal income taxes. It does not stop at some predetermined amount. Social Security taxes (FICA) that gets taken out of your paycheck, does stop at a predetermined amount. For 2007, I believe that amount is somewhere around $94,000 in gross income.

However, because the rich have more to spend and invest, they usually have a larger amount of money that is deductible, so the overall percentage of their income that is taxed may vary. Investments can also affect the tax rate of high incomes. Long-term capital gains (gains on investments held for more than one-year) are usually taxed at the capital gains rate of 15%.

That being said, according to the latest data from the IRS, individuals earning in the top 1% of all earners paid an average tax rate of 23.49% of their income. Lower incomes paid far, far less.
http://www.taxfoundation.org/taxdata/show/250.html

Answer 2

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RE:
Do rich people REALLY pay more taxes???
My friend and I were having a discussion about pro athletes and he wondered what the point of huge contracts were if they were paying so much on taxes. Now granted, when it comes to the $$$ amount, rich people pay more by far, but my friend thinks that the rich pay a 50-60% tax rate. I said I...

Answer 3

Yes, the wealthy pay the lion's share of all income taxes. No question about that.

The highest Federal tax rate is 35%. Nobody pays more than that. So you get to keep 65¢ of every dollar, worst case. As long as the tax rate is less than 100% you'll always be better off with more money. State taxes do add to that but the highest are 10% or so and most are much less than that.

Pro athletes and to get screwed in one way that most taxpayers never have to worry about. When they travel on the road they have to pay state taxes on the money they earn in the states where they play. That does complicate things significantly for them. Many actors and other entertainers have the same thing to deal with.

Answer 4

the rate doesn't go down. at a certain point, it hits the "high" mark (35 or 36 percent...something like that...you have to earn a lot to get that high), and then stays at that percentage regardless of how much higher earnings go. it does say that the more money you make, the more percentage you pay until you hit this mark. seems a bit odd to me. tax people who earn more money with a higher percentage? i'm not in that category, but i still don't think it's fair.

the other thing is that many wealthy people earn their money on capital gains instead of direct income. the tax rate for capital gains is much lower than the income tax rate, so they will end up with 15% tax instead of 35% tax. if you earn enough money, you can afford to pay a good tax person to help you out. one day i hope to get that far.

Answer 5

There are two kinds of rich people.

People like pro athletes, Hollywood actors etc. and some professionals (highest-paid surgeons, lawyers) pay close to 35% income tax on whatever they make.You need to make 350k per family to get into 35% tax bracket. On top of that, they pay state income tax (up to 10.3% in California), Social Security / Medicare (most likely 2.9%).

There's also the "other" kind of rich people - owners of successful businesses, investors - these generally use all kinds of tricks to minimize their taxes. Two basic methods are minimizing taxable income and maximizing fraction of income that comes from capital gains.

For example, a company owner might buy himself a car with company money and write it off as a business expense. So instead of paying $50,000 for a BMW from his after-tax salary, his company pays for it with pre-tax money.

Rich people (of the second kind) make a lot of money in the form of long-term capital gains (real estate, stocks). These gains are taxed at 15% at the federal level, and you don't have to pay state tax or medicare/social security on them.

Answer 6

You are correct and your friend is wrong. The top tax rate is now 35 percent. Rich people do pay more in taxes overall for sho! Imagine the property taxes on some of the mansions they live in!!

Answer 7

The rate goes up until it hits 35% for federal - that's the top federal rate at this time, and once you hit that, all income higher is taxed at that rate, it doesn't go down if you make over a certain amount.

State and local taxes add to that - and for employees, social security and medicare.

Answer 8

food is not taxed. Retail and electronics and appliances are taxed (other things too) so stop buying cellphones, games, iphones and their connections. Who is "they"? They are the companies/businesses who need to survive so if you're stealing at Walmart during the night sure Walmart has to raise the prices of other things they sell to make up for that. The answer then is to "stop stealing". And yes, when people ask for wages of $15 an hour the stores can't afford that so they have to cut peoples work hours to half time. while you might have a beef against Dems you need to get your facts straight first.

Answer 9

in general, your friend is right. the tax systems in north america are generally known as being "progressive", meaning the higher your income, the higher your personal tax rate (i.e. as a percentage of income). for example, if you make $40K, you may pay income taxes at approximately 20% of your income. however, if you make a million dollars, you may pay income taxes at approximately 35% of your income.

having said that, there are legitimate tax planning strategies that high income earners can employ to reduce the amount of taxes they ultimately pay. best to consult with a tax attorney or accountant to find the best strategies that are suitable for your personal needs.

Answer 10

This is why the very rich have very powerful tax lawyers who know exactly how to find legal loop holes so they don't have to pay those big taxes.