Who pays a higher tax rate?

Rose Hudson
college student, waitress
Income $7,935
Effective average tax rate 18%
(combined federal income & payroll tax)

Sean & Stacey Graham

retired CIA agent/tutor and high school teacher/waitress
Income $61,922
Effective average tax rate 1%
(combined federal income & payroll tax)

These two case studies from the VITA workbook provide a good illustration of how the complications in our income tax system affect its progressivity.

Rose Hudson qualified for very little in the way of income tax breaks, due to the fact that she is a dependent of her parents. She paid 3% of her income in federal income tax. She also paid payroll taxes (FICA contributions for Social Security and Medicare) on her wages. Using the standard Congressional Budget Office incidence methodology (which assumes that the effective burden of employer and employee share of payroll tax falls on the worker), her total federal income and payroll tax burden was 18% of her income.

Sean and Stacey Graham qualified for a great many income tax breaks. They support a household of five; paid bills for college tuition, daycare, health care, mortgage interest, a new high efficiency hot water heater, real estate taxes, retirement contributions, student loan interest, and more. Thanks to refundable credits for Making Work Pay, Additional Child Tax Credit, and the American Opportunity college tuition tax credit, their federal income tax rate was actually negative: their federal income tax liability was entirely eliminated by non-refundable credits, and they received 4% of their income in refundable credits. They also paid payroll taxes on their wage and self-employment income, but much of their income was investment, pension, unemployment benefits, or other income not subject to payroll tax. The bottom line: they paid 1% of their income in federal income and payroll tax.

There is a strong case to be made for the idea that Rose Hudson, who is supported by her parents, can afford to pay a higher income tax rate than other taxpayers like the Grahams, who have many more financial responsibilities, but many people would be surprised by the actual magnitude of the tax rate differential.

For more details on Rose Hudson's tax situation, see this post. For more details on Sean and Stacey Graham's tax situation, see this post.

IMPORTANT NOTE: These are fictional taxpayer scenarios created by the IRS to help VITA and AARP volunteers practice. They are designed to be representative of the kinds of taxpayers who qualify for assistance at VITA and/or AARP sites.