Final answer:
The U.S. federal income tax is progressive with higher earners typically paying a higher percentage of their income. In 2018, the top 1% of households paid an average rate of 25.4% but had an effective rate of 20.4% due to tax credits and deductions. Lower income households can have negative effective tax rates due to credits like the EITC.
Step-by-step explanation:
The federal income tax in the United States is a progressive tax system, which means that individuals with higher incomes tend to pay a higher percentage of their income in taxes compared to those with lower incomes. For example, in 2018, the top 1% of households had an average pre-tax income of $1,679,000 and paid an average federal tax rate of 25.4%. However, the effective income tax rate—total taxes paid as a fraction of total income—was lower at 20.4%, due to various tax credits and deductions.
Conversely, households in the bottom two quintiles may experience negative effective income tax rates due to provisions like the Earned Income Tax Credit (EITC). Furthermore, following the Tax Cuts and Jobs Act of 2017, the highest income tax bracket saw a reduction from a rate of 39.6% to 37%. It's significant to note that despite news stories of high-income individuals paying little in taxes, the typical pattern, as reported by the Congressional Budget Office, is that wealthier people pay a higher share of their income in federal income taxes.