The top 1% pay roughly 40% of all federal income tax, but their effective tax rate is lower than you might think

The wealthiest 1% of Americans — those earning over $600,000 a year, though the exact threshold shifts annually — paid about 40% of all federal income tax collected in 2022, according to IRS data. That sounds like they carry the whole load, but the real picture is more complicated. Their effective tax rate (the percentage of their total income that goes to federal tax) is often lower than the rate paid by someone earning $100,000 a year, because most of their income comes from investments and capital gains, which are taxed differently than wages.

The federal income tax system is progressive, meaning higher earners pay higher rates on each additional dollar they make. But "progressive" does not mean the rich pay more of their income in tax — it means the tax rate increases as income increases. A person earning $50,000 might pay 12% of their income in federal tax. A person earning $500,000 might pay 35% on their wages but only 20% on their investment income, bringing their overall rate down.

Key Takeaways

  • The top 1% paid approximately 40% of federal income taxes in 2022, but this reflects their share of total income, not necessarily a higher percentage of their own earnings.
  • Effective tax rates for the wealthy are often lower than rates for middle-income earners because investment income and capital gains are taxed at lower rates than wages.
  • The top marginal tax rate is currently 37%, but most high earners do not pay that rate on all their income because different types of income are taxed differently.
  • State and local taxes add significantly to the total tax burden and vary widely depending on where someone lives.

How the top 1% income breaks down by source

The top 1% earn money in ways that most people do not. While a typical worker gets a W-2 paycheck taxed at the ordinary income rate, the wealthy earn from capital gains (selling stocks or property for a profit), dividends (payments from investments), business ownership, and real estate. Each type of income is taxed at a different rate.

Long-term capital gains — profits from selling an investment held for more than a year — are taxed at 0%, 15%, or 20%, depending on income level. This is lower than the ordinary income tax rates, which top out at 37%. A person in the top 1% might earn $300,000 in wages (taxed at 37%) and $400,000 in capital gains (taxed at 20%), paying a lower percentage on the larger portion of their income. This is why their overall effective rate can be surprisingly low.

may have access to dividends from stocks are also taxed at capital gains rates rather than ordinary income rates. Real estate depreciation and other deductions available mainly to business owners and investors further reduce taxable income for the wealthy.

Marginal rate versus effective rate: why the difference matters

The marginal tax rate is the rate you pay on your last dollar of income. For 2024, the top marginal rate is 37%, which applies to single filers earning over $578,100. But that does not mean someone earning $1 million pays 37% on all of it. They pay 10% on the first chunk, 12% on the next, and so on, until the last dollars hit 37%.

The effective tax rate is the average rate across all income. Someone earning $1 million in wages might have an effective federal rate around 30% to 35%. But if half that income is capital gains, the effective rate drops to 25% to 30%. This gap between marginal and effective rates is one reason the top 1% sometimes pay a lower percentage of their income than middle-class earners.

State and local taxes add a second layer

Federal income tax is only part of the picture. State income taxes range from 0% (in states like Texas, Florida, and Wyoming) to over 13% (in California). Local taxes in some cities add another 1% to 4%. A high earner in California pays roughly 13.3% state tax plus 3.8% net investment income tax (a federal tax on investment income for high earners), on top of federal rates.

Someone in the top 1% living in a high-tax state like New York or California might pay 50% or more of their income in combined federal, state, and local taxes. Someone in the same income bracket in Texas or Florida pays significantly less because there is no state income tax. This is why many wealthy people move to low-tax states when they retire or sell a business.

How the top 1% threshold has changed

The income needed to reach the top 1% has grown over time. In 2000, it was around $300,000. By 2022, it was over $600,000. This reflects wage growth, but also inflation and the concentration of income gains at the very top. The top 0.1% (earning over $2 million) has seen much faster income growth than the top 1% as a whole.

Tax rates themselves have also shifted. The top marginal rate was 70% in 1980, dropped to 28% in 1988, rose to 39.6% in 2013, and is currently 37%. These changes affect how much the top 1% pays in total, but the effective rate — what they actually pay as a percentage of income — depends more on the mix of wages, capital gains, and deductions than on the headline rate.

Why the top 1% pays 40% of income taxes

The top 1% pays 40% of federal income taxes largely because they earn about 20% to 25% of all income in the country. If everyone paid the same rate, they would pay 20% to 25% of taxes. They pay more because the tax system is progressive — higher earners face higher rates. But this does not mean they pay a higher percentage of their own income than everyone else does.

The bottom 50% of earners pay roughly 3% of federal income taxes, not because they are undertaxed but because they earn a small share of total income and have lower tax rates. The middle 50% pays about 57% of taxes. The distribution reflects both the progressive rate structure and the concentration of income at the top.

Frequently Asked Questions

Do the top 1% pay more in taxes than the bottom 50%?

Yes, by a large margin. The top 1% pays roughly 40% of federal income taxes while the bottom 50% pays about 3%. However, this reflects the fact that the top 1% earns roughly 20% to 25% of all income, not that each individual in the top 1% pays more tax than each individual in the bottom 50%.

What is the effective tax rate for someone earning $1 million?

It varies widely depending on income source. Someone earning $1 million entirely in wages might pay 32% to 35% in federal tax. Someone earning $1 million with half from capital gains might pay 25% to 28%. State and local taxes add another 5% to 15% depending on location.

Why do some wealthy people pay less in taxes than middle-class workers?

Capital gains and investment income are taxed at lower rates than wages. A wealthy person earning most of their income from investments may pay 20% on that income, while a middle-class worker earning wages pays 22% to 24%. Deductions and tax-advantaged accounts also reduce taxable income for high earners.

Does the top 1% pay federal taxes, state taxes, or both?

Both. Federal income tax applies to all earners nationwide. State income tax applies in 41 states (9 have no state income tax). Local taxes explore in some cities and counties. A high earner in New York City pays federal, state, and city taxes; someone in Texas pays only federal.