There always is plenty to disagree about whenever a change in U.S. taxation policy is proposed, and one frequent criticism is that the benefits of proposed tax reductions disproportionately benefit the wealthier taxpayers.
It is a charge one might always agree with, but policymakers always face a balancing act.
On one hand, legislators must ensure that the federal government has adequate financial resources to cover its expenditures. The rest of us do not have that primary concern. Policymakers have to worry about the economic impact of any changes. The rest of us likely are more concerned about perceived fairness.
But tax policy profoundly influences economic behavior. High marginal tax rates can discourage incentives to work, save, and invest. So the trick is to create structures that minimize disincentives while still generating revenue. And since capital “has no nationality,” tax rates often must be adjusted to make the U.S. more attractive for businesses compared to other countries.
The vast majority of federal government revenue comes from individual taxpayers, in the form of Individual income taxes and payroll taxes (social security).
And that’s where we confront complicating issues, namely the actual incidence (who bears the burden of payment). In 2022, for example, the top one percent of taxpayers contributed 40 percent of all federal individual income taxes.
The top 10 percent of taxpayers paid around 72 percent of income taxes.
Conversely, the bottom 50 percent of taxpayers contributed about three percent of revenue.
The point is that it typically is possible to argue that proposed changes are unfair in some major way: either because wealthier taxpayers get more of the benefits or must bear more of the burden; or because lower-income taxpayers or middle-income taxpayers do not receive enough of the benefits.
Policymakers face a different problem: the only place changes are meaningful are at the top: The top 25 percent of filers contribute 87 percent of total revenue.
Income Group | Share of Total Income Taxes Paid (2022) |
Bottom 50% | 3.00% |
50% to 25% | 10.00% |
|
|
25% to 10% | 15.00% |
10% to 5% | 11.00% |
5% to 1% | 21.00% |
Top 1% | 40.40% |
Source: Tax Foundation, "Summary of the Latest Federal Income Tax Data, 2025 Update”
If one wishes to raise more revenue, it has to affect taxpayers at the top. If one wishes to cut taxes, it will disproportionately affect those at the top.
That might never set too well with many citizens, but is a fundamental policymaker constraint. Also, though “soak the rich” might be a nice bumper sticker for some, investment effects matter.
Looking only at public markets, the top 10 percent of U.S. households own about 93 percent of U.S. households' stock market wealth, with the richest one percent owning 54 percent of public equity markets, according to the Institute for Policy Studies, based on Federal Reserve data. The bottom 50 percent of U.S. households own less than one percent of stock market wealth.
The point is that private investment hinges on a small percentage of U.S. households. So policymakers have to balance revenue needs with fairness with maintaining investment incentives. “Soak the rich” might be popular in some circles. It is not so easy for policymakers.
