U.S. Taxes And Trends In Wealth Inequality In The U.S.

Wealth Inequality In the U.S. Over Time

This chart, based on the same household net worth data from the Federal Reserve, shows the top 0.1% separately (but is harder to eyeball):

In the 34 years from 1990 to 2024:

*  the share U.S. national net worth owned by the top 1% (currently net worths of more than about $5.8 million, with the current net worth of the top 0.1% consisting of net worths more than $30 million) increased by about 33% (the top 0.1% increased from an 8.6% share to a 13.5% share which is a 57% increase, while the rest of the top 1% increased from a 14.2% to a 16.8% share which is an 18% increase), 

* the share of the next 9% (currently net worths of more than about $1.94 million up to $5.8 million) fell by about 3% from a 37.8% share to a 36.6% share, 

* the share of the next 40% (currently net worths of more than about $193,000 to about $1.94 million) fell by about 15% from a 36.0% share to a 30.5% share, and 

* the bottom 50% (currently net worths of about $193,000 or less including negative net worths since debts exceed assets) fell by about 29% from a 3.5% share to a 2.5% share.

The bottom 50% peaked around 1992 at 4% of total net worth and hit bottom around 2011 at 0.4%  of total net worth in the wake of the financial crisis, and has recovered about half of its losses since it peak since then.

Of course, this is not a zero sum game (although the nominal dollar figures below exaggerate the extent to which everyone has improved their lot):

Adjusting for inflation (234%) and population growth (about 33%) from 1990 to 2024, the per capita net worth in each percentile group has changed in absolute terms as follows in that 34 year time period:

* Top 0.1% up 74%

* Next 0.9% up 67%

* Next 9% up 66%

* Next 40% up 38%

* Bottom 50% up 13%

Changing tax laws were a major driver of these trends

A significant factor in the increased share of wealth held by the top 1% over the last 30 years has been increasingly smaller tax burdens on them.

The strong preference for unearned income and gifts and inheritances over earned income in the tax code makes the effective tax rates of the wealthiest, especially the 1% lower in most cases, than the effective tax rates of the upper middle class and middle class.

The charts below break it down the tax rates on different kinds of incomes, and on gifts and inheritances, over time.

The chart above neglects several additional key tax preferences for certain kinds of income, mostly unearned: 

(1) the unlimited exclusion of income from municipal bonds, 

(2) the exclusion of income from increased cash value in whole life insurance policies, 

(3) the tax free status of accrued but not realized capital gains in assets owned at death, 

(4) tax deferral of capital gains from the sale of investment real estate that are rolled over into new investment real estate investments, 

(5) an exclusion of $250,000 of capital gain on the sale of a principal residence held for at least two years for a single person and $500,000 for married couple, 

(6) deferred or tax free income from various retirement and education investments (most Social Security benefits, defined benefit pensions, 401(k)s, IRAs, Roth IRAs, 529 plans, etc.), 

(7) preferential income tax treatment for stock options and certain other kinds of equity based compensation, and 

(8) the 20% of pass through entity income deduction (I.R.C. § 199A) in tax years 2018-2025.

Tax breaks from international taxation, too complex to review in this post, have also materially help people on the top 0.1% of net worth.

In addition to the federal income tax, wage and salary income is subject to a 7.65% employee and 7.65% employer FICA tax, for a combined 15.3% (and earned self-employment income is subject to a parallel self-employment tax) up to $168,600 in 2024 (the cap is indexed). Above this wage base, there is a Medicare tax of 1.45% employee and 1.45% employer for a combined 2.9% with a parallel self-employment tax.

There is also a federal 3.8% net investment income tax on investments, including the sale of stocks and bonds, for those who earn more than $200,000 if single or $250,000 for married couples (as of 2021), to finance the Affordable Care Act.

Income from marijuana dispensaries is taxed at a punitively high rate due to Internal Revenue Code Section 280E.

Gift and estate tax exclusions and rates over time:

1987-1996	$600,000	37%	55%	$10,000
1997	$600,000	37%	60%[1]	$10,000
1998	$625,000	37%	60%[1]	$10,000
1999	$650,000	37%	60%[1]	$10,000
2000-2001	$675,000	37%	60%[1]	$10,000
2002	$1,000,000	41%	50%	$11,000
2003	$1,000,000	41%	49%	$11,000
2004	$1,500,000	45%	48%	$11,000
2005	$1,500,000	45%	47%	$11,000
2006	$2,000,000	46%	46%	$12,000
2007-2008	$2,000,000	45%	45%	$12,000
2009	$3,500,000	45%	45%	$13,000
2010[2]-2011	$5,000,000	35%	35%	$13,000
2012	$5,120,000	35%	35%	$13,000
2013	$5,250,000	40%	40%	$14,000
2014	$5,340,000	40%	40%	$14,000
2015	$5,430,000	40%	40%	$14,000
2016	$5,450,000	40%	40%	$14,000
2017	$5,490,000	40%	40%	$14,000
2018	$11,180,000 [3]	40%	40%	$15,000
2019	$11,400,000	40%	40%	$15,000
2020	$11,580,000	40%	40%	$15,000
2021	$11,700,000	40%	40%	$15,000
2022	$12,060,000	40%	40%	$16,000
2023	$12,920,000 [4]	40%	40%	$17,000 [4]
2024	$13,610,000	40%	40%	$18,000

Notes to table:

[1] The 60% maximum tax rate actually represents an additional 5% that was added to estates of more than $10,000,000 from the years 1997 to 2001 in order to eliminate the benefit of the progressive tax table. The additional 5% ended at a taxable estate of $17,184,000, which is when the average tax rate reached 55%. So the top marginal tax rate during those years was 60%, but the top average tax rate was 55%.

[2] The federal estate tax in 2010 was actually optional, and estates could elect to pay no estate tax and instead accept a limit on the increase in the income tax basis on assets included in the estate.

[3] The basic exclusion amount was doubled in 2018, but that doubling ends after 2025.

[4] Official figure published in Rev. Proc. Rev. Proc. 2022-38.

Unused gift and estate tax exclusion became inheritable by a surviving spouse starting with decedents dying in the year 2010.

Working Class and Middle Class Taxpayers

The working class and the middle class pay no meaningful federal income tax (and sometimes even receives a net credit) and no gift and estate tax. The poor and the working class pay little federal income tax mostly due to the standard deduction (and previously a per person exclusion from income), the per child tax credit, the earned income tax credit, the exclusion of health insurance from income, the Affordable Care Act subsidy for certain non-employer health insurance policies, higher education tax benefits, graduated tax rates that tax low incomes more lightly, and the lifetime exclusion from gift and estate taxes. Deductions for student loan interest, self-employment health insurance, mortgage interest and state and local taxes also reduce the tax burden for many middle class families.

They do pay FICA or self-employment taxes, however, which greatly offsets the benefit of paying little or no federal income taxes (although they do receive Social Security benefits based in part on the FICA taxes they paid, and received Medicare health care benefits at age sixty-five, in exchange). 

They also pay the "poor man's estate tax", in the form of the estate recovery system for Medicaid nursing home benefits which requires means tested Medicaid nursing home benefits to be repaid with a beneficiary's probate estate.

Federal Excise Taxes And Revenue Sources

In addition to the federal taxes shown above, there are a variety of federal excise and duties taxes on gasoline and other vehicle fuels, on commercial air travel, on alcohol, on tobacco products, on firearms and ammunition, on phone service, and on good imported from less favored nations. Collectively, these taxes have a mostly regressive impact, meaning that the take a larger share of low income people's money than they do higher income people.

The federal government also earns modest amounts of money from miscellaneous sources such as making coins and currency, entering into grazing leases on federal lands, leasing federal mineral rights, and imposing fines and penalties.

International Comparisons

In many developed countries, value added taxes (VAT) and wealth taxes are important, and are largely absent in the U.S. (apart from real property and car taxes) and in many small countries especially islands, customs duties are a major source of government revenue, while they are largely insignificant in the big picture in the U.S. 

The U.S. also does not follow the "no taxation and no representation" model of oil rich monarchies where government services are financed with oil wealth owned personally by the monarch or the royal family, and likewise, has not nationalized oil and gas extraction to the extent of many, mostly developing, countries.

Overall, total tax collections in the U.S. as a share of GDP are low compared to other developed countries, which is one of several important reasons that the U.S. has more wealth inequality than many other developed countries.

Winners and Losers In Federal Taxes And Spending

Generally speaking, "blue states" (i.e. those that vote for Democrats in Presidential elections) pay more in taxes than they receive in federal spending, while "red states" (i.e. those that vote for Republicans in Presidential elections) are subsidized by blue states and pay less in taxes than they receive in federal spending, although this isn't a strict relationship.

This is mostly because "red states" tend to have lower incomes and GDPs than "blue states". 

At the county level, Biden voting counties had 71% of the national GDP while Trump voting counties had 29% of the national GDP, despite having roughly similar populations. It isn't clear how much of this relationship is because income drives political preferences, and how much of this relationship is because partisan differences in policy drive income differences.

State and Local Taxes

In addition to the federal government, various taxes are collected by state and local governments. The most significant are income taxes (often, but not always based on federal income taxes), business income taxes, taxes on retail sales of certain goods and some select services, property taxes on the assessed values of real property, gas taxes, alcohol taxes, tobacco taxes, and motor vehicle registration fees. Some state and local governments tax the value of real estate transfers. There are also a variety of user's fees. Taxes on mineral extraction and gambling and marijuana are significant revenue sources for some state and local governments.

Alaska pays a fixed some of money to every resident annually, currently $1,580 per resident, from its "permanent fund" of oil and gas tax revenues.

The relative importance of different kinds of state and local taxes varies greatly from state to state.

On balance, most state and local tax systems are regressive, meaning that lower income people are taxed at a higher percentage of their incomes than higher income people. 

Generally speaking, "blue states" have higher overall tax rates and more progressive tax systems, while "red states" have lower overall tax rates and more regressive tax systems, although the correlation isn't perfect.

The combined average state and local tax burden from all state and local taxes combined (from here) is shown below (the U.S. average combined state and local tax burden is 10.56%):

State Level Income Inequality

This only partially drives income inequalities between states, however (states with strong economic contributions very high income industries like technology, finance, and insurance also tend to have great income inequality):