Let's define some things.
INCOME TAX: Two amounts you see on your pay stub are Federal and State Income Tax Withheld. These numbers don't tell you what you've actually been taxed for. You simply acknowledge and accept that these amounts are being withheld from your paycheck for federal and state tax purposes. Until you file your federal and state tax returns, you can't even determine how much income tax you've actually paid. Income tax is progressive, meaning, if you don’t make much money, you don’t pay much tax. Or, if you make lots of money, you may pay lots of tax. The current top tax rate of 39.6% begins at taxable income of over $400k for an individual.
PAYROLL TAX: Social Security- This is a 12.4% tax on the first approximately $113k of earnings. You pay ½ of this and your employer pays the other ½. If you are self-employed, you have to pay the full 12.4% yourself. This is a regressive tax which hits those on the lower end of the spectrum disproportionately. For example: Self employed individual making $100k/year will pay roughly 12,400 in SS tax. Self-employed individual making $1 million/year will pay roughly $13640.
PAYROLL TAX: Medicare- 2.9% tax on all earnings. You pay ½ of this and your employer pays the other ½. If you are self-employed, you have to pay the full 2.9% yourself. Also a regressive tax, but less so.
DIVIDENDS: This is the money distributed from corporations that you own stock in. Most people don’t own much stock. Some extremely wealthy people own a lot of stock. This is currently taxed at 15%, a very low rate.
CAPITAL GAINS TAX: If you sell an appreciated stock or asset that you’ve held for more than a year you can qualify for a lower tax rate on that gain. Most people don’t have a lot of appreciated assets, but some extremely wealthy people have a lot. This is currently taxed at 15%, a very low rate.
SALES TAX: This is a consumption tax. You pay an extra 9% of an item's price. Sales Tax is also a regressive tax, as even though the wealthy will more likely buy very expensive items such as yachts and planes, these extravagant purchases are purely for pleasure or enjoyment. However, clothing, toilet paper, etc, are necessities for everyone, making this percentage much more of a burden on the less wealthy.
PROPERTY TAX: One of the few wealth taxes we have. For the privilege of owning a valuable asset of real estate or certain kinds of equipment, you are required to pay a percentage of the value to the county. This is fairly progressive, as the tax is usually directly related to the value of the asset. Prop 13 in CA has screwed this up a bit by keeping some property taxes artificially low allowing for some ridiculous inequalities in tax bills between identical pieces of property, depending on when they were purchased. This needs to be ammended to exclude any property owned by corporations and investment properties: only your primary residence should be allowed to keep it’s low property tax.
ESTATE TAX: Another wealth tax. This one has undergone a lot of flux lately. Currently the exemption is 5 million with a 35% tax rate. Essentially, anyone with assets under 5 million pays no estate tax (10 million for a married couple). I’m okay with the exemption amount, but I believe the brackets should go up higher, for example: above 10 million, taxed at 45%, above 20 million, taxed at 55%, above 30 million taxed at 65%, above 40 million taxed at 75%, above 50 million taxed at 85%; How much does one person need? The average American only earns $1.6 million in his/her lifetime! Is it really necessary that we protect our moneyed aristocracy so much?
Let's do some real world examples:
Joe Worker: Joe Worker makes $30,000. He gets to take the standard deduction and exemption, lowering his taxable income to $20,000. After Joe's income is taxed at 10% and 15% rates, his income taxes becomes $2,554 and his payroll tax (social security and medicare) becomes $3,060. Joe's total taxes for the year are $5,614, an effective tax rate of 19%.
Professional Bob: Professional Bob makes $110,000. He gets to take the standard deduction and exemption, lowering his taxable income to $100,000. The first 9k of his income would be taxed at the 10% bracket, then the next 27k would be taxed at the 15% rate, then another 52k at 25%, and then the remainder at the 28% brackets, resulting in a income tax bill approximately $21,293. His payroll tax on $110,000 is $16,830. So, Professional Bob's total tax paid for the year would be $38,123, an effective tax rate of 35%.
Richie Fatcat: If Richie Fatcat made $2,000,000 in stock dividends and capital gain investment sales, he could take the standard deduction. He will most likely itemize his taxes and deduct the interest he pays on his million dollar home, property taxes, etc. To keep it simple, lets say he rents his mansion. Stock dividends and capital gain sales are taxed at 15%. Investment income is not subject to payroll tax, so he doesn't pay any of that. This would result in a tax bill of $300,000, an effective tax rate of 15%.