Since the end of World War Two, government revenue from income taxes has been a major source of tax revenue for the United States. In the post-war decades, the Tax Reform Act of 1986 fundamentally changed the federal income tax structure, resulting in much lower rates for almost all taxpayers. Today, income taxes are raised through graduated rates that increase at certain levels of taxable income.
The current federal income tax structure consists of seven tax brackets. Taxpayers with the highest incomes, for instance, pay 37 percent of their income in taxes; those with the lowest incomes, on the other hand, are taxed at just 10 percent of their total earnings. The average American, with a combination of wages and other taxable income, can usually expect to face an effective tax rate of 17 percent in 2020.
In addition to federal taxes, taxpayers must also comply with the income tax laws of their respective states. State income taxes range from no tax at all (in the case of states like Texas and Washington) to more than 16 percent in the highest taxed state of California. Generally speaking, those living in lower-income states often have the advantage of a more favorable tax environment compared to their wealthier counterparts. This is because the federal government typically allows lower rates on lower incomes—especially those within lower brackets—than on higher incomes.
Further complicating the picture is the fact that many Americans are subject to certain deductions and credits when filing their federal and state income taxes. These include deductions for such things as charitable donations, mortgage interest, health care costs, college tuition and child care expenses. Some taxpayers may even qualify for special credits designed to help them save money on taxes, such as the Earned Income Tax Credit, which is available to low-income earners.
Ultimately, individuals are responsible for filing their own taxes and complying with the various laws that govern tax filing. While statutes and regulations may change from year to year, one thing generally remains the same: everyone is still responsible for paying their share of taxes, regardless of their income level. In doing so, individuals play a vital role in preserving crucial government services and ensuring that essential social programs are funded.
In the coming years, it will be critical for the federal government to strike the right balance between taxation and government spending in order to sustain a strong and healthy economy. With the right combination of taxes and spending, the U.S. can continue to offer its citizens a high quality of life.
