How does the distribution of federal taxes change if Social Security and Medicare taxes are included? Readers asked this question after reading this week’s Tax Report column, which says that the top 20% of earners in the U.S. are paying more than 80% of federal income taxes.  The estimated breakdown for 2014 comes from the nonpartisan Tax Policy Center, a Washington-based research group.  The answer is that the federal tax burden does shift downward when those payroll taxes are included. That’s because millions of middle- and lower-income Americans pay far more in such social-insurance taxes than they do in income taxes.  With these taxes included, people in the bottom 40% pay nearly 5% of federal taxes—rather than the negative percentage when you look only at income tax.  People in the middle 20%—those earning $47,300 to $79,500—also see their share of federal taxes rise, to about 11% from 6%. (The income figures from the Tax Policy Center include untaxed amounts for employer-provided health coverage, tax-exempt interest and retirement-plan contributions and growth, among other things.)  The tax share for people at the next level—$79,500 to $134,300—also rises, to about 17% from about 13%. But as noted in the story, the tax share of the top 20% shrinks when social-insurance taxes are included, falling to 67% from 84%.  The reason: Everyone pays the same basic percentage of both Social Security and Medicare taxes on wage income, which is often split evenly between workers and employers. While the 2.9% Medicare levy applies to all income, the 12.4% Social Security tax was capped at $117,000 in wages last year. (The Medicare tax figures don’t include the 0.9% additional Medicare tax on some high earners.)  “Payroll taxes claim a larger share of income for lower earners, compared to those in the top 20%,” says Roberton Williams, an income-tax expert at the Tax Policy Center. (The Center publishes a comprehensive table that also includes information about people in the top one-tenth of 1%.)  Strictly speaking, these levies are different from the federal income tax, because paying them brings the promise of a future benefit, he adds.  The tables included in the Tax Report for federal income tax also don’t include the effects of federal excise taxes or state and local income, sales or property taxes. Sales taxes, in particular, are generally a larger share of income for millions of lower-income households than they are for higher earners.
Readers asked how the U.S. tax burden is shared among different income groups when payroll taxes as well as income tax are considered. Here's the answer.