In the US, employees take the biggest hit through payroll withholding, while business owners, corporations and the ultra-wealthy use deductions, credits and loans to legally reduce what they owe. This tour of the US tax pyramid, from employees to business owners, corporations and the ultra-wealthy, shows who pays the most, who uses the rules to their advantage and who pays very little, all legally. It states clearly that it is not financial advice.
Its stance is that the game of money is about what you keep and not what you earn. The figures below are as the video presents them.
Watch the full video here, or skip to the breakdown below.
The 4 groups at a glance
1. Employees
Employees are the most common group of US taxpayers and, according to the video, the ones hit hardest. Wherever you live, Texas, New York or North Dakota, an employee is taxed by the federal government.
The US runs a progressive federal tax system, where the share taxed rises as income rises, like a staircase whose steps get taller. In the video’s example, the first slice of income above $11,000 is taxed at 10 percent, income between $11,000 and $47,000 at 12 percent, and income between $47,000 and $100,000 at 22 percent, then 24 percent and upward. Past $609,350, 37 percent goes to the government.
Citing the IRS, the video says the top 10 percent of earners pay about 76 percent of all federal income taxes, so for employees the rich do pay much more. It then works through a Wall Street banker earning $1 million: roughly $320,000 goes to federal income tax, about $65,000 to New York state income tax and another $32,000 to Medicare and Social Security. That leaves around $580,000, meaning more than 40 percent of the income is gone. Someone in a state without income tax, like Texas or Florida, would keep more.
Employees get the short end of the stick.
2. Business owners
The key to keeping more of what you earn is, in its words, to go from employee to business owner. Owners pay income tax and also self-employment tax. An employer splits the cost of Social Security and Medicare with an employee, but a self-employed person is the company and pays it in full, a little over 15 percent of profits.
Take a small furniture business with $100,000 in annual profit. About $15,000 goes to self-employment tax before income tax, and depending on location the owner takes home somewhere between $60,000 and $70,000. The government still takes about a third.
The difference is that small business owners are taxed on net income, meaning earnings minus business expenses, and a lot counts as a business expense. A work car, part of the rent or mortgage for a home office, or a plane ticket for a business meeting can all be deductible. Smart owners use expenses to blur personal and professional lines, so their taxable income is technically lower while their lifestyle is not. All of it, the video stresses, is legal.
The tax code rewards people who understand it.
3. Corporations
A giant corporation is very different from a small business. Smaller businesses are not taxed themselves, since the owners are taxed on the income. A corporation is treated legally like a person that can make money, own assets, sue and be sued. US corporations pay a flat federal rate of 21 percent of profits.
In practice many pay much less, sometimes nothing, and the video says that is legal. It illustrates with a coffee shop. At $1 million profit the tax is a straightforward 21 percent. Grow into a regional chain earning $10 million and the 21 percent would be $2.1 million, but an accountant points out that $2 million of coffee machines bought last year have depreciated by a million dollars, which can be deducted. Tax is then paid on $9 million instead of $10 million.
Go nationwide with $100 million in profit and the tax would be $21 million. If the company spends $50 million on coffee anyway and buys exclusively from environmentally friendly farms, it qualifies for a tax credit of 10 percent of that spend, or $5 million, so it pays $16 million. Mega-corporations take this further. According to the video, Amazon reported over $10 billion in profit in 2018 and, after stacking deductions and credits, received $129 million back from the government instead of paying tax.
That takes the best lawyers and accountants, which most people do not have, which is why the system can feel pay-to-win. You may find it unfair, but in this telling it is all legal.
4. The ultra-wealthy
When people say the rich do not pay their fair share, the video says they are really thinking of the owners behind companies, since a company’s wealth ends up with its people. It separates tax avoidance, which uses legal means to reduce a bill, from tax evasion, which means lying about what you owe and is illegal. Only avoidance is covered here.
Shareholders can be taxed twice: the company pays on its profits, then shareholders pay somewhere between 0 and 20 percent on dividends. Selling shares for a capital gain depends on how long they were held. Sell within a year and the profit is taxed like regular income, up to 37 percent for top earners. Hold longer and the rate tops out at 20 percent no matter how much you made. That is why the video says savvy investors think long term.
The best approach, it says, is never cashing out. It uses Elon Musk as the example: most of his wealth is unrealized gains, so instead of selling Tesla stock and triggering capital gains tax, he can borrow from a bank against his shares. Loans are not taxable income, so he gets cash without selling a share. He can repay with dividends, roll the loan over with another one, or at worst sell a small amount of stock, and interest rates on such loans are described as practically zero for someone like him.
The loophole is controversial but legal, it says. Its closing line on the topic is that the ultra-wealthy did not make the rules, they are just very good at the game, or at least their lawyers are.
What the pyramid shows
Each group faces the same system with different tools. Employees have little room to move. Business owners get deductions, corporations get depreciation and credits, and the ultra-wealthy use stock, long holding periods and loans.
The takeaway is that knowledge is power, and that understanding the rules is the first step to keeping more of what you earn. Anyone planning their own taxes should get proper professional advice, since the video itself says it is not financial advice.
FAQ
Who pays the most taxes in the US?
According to the IRS figure cited in the video, the top 10 percent of earners pay around 76 percent of all federal income taxes. Employees are described as hit hardest in the sense that their tax is withheld from their paychecks.
Why do business owners pay less tax than employees?
Owners are taxed on net income, which is earnings minus business expenses. Items like a work car, a home office or business travel can be deductible, so taxable income is lower. They also pay self-employment tax of a little over 15 percent of profits.
What is the corporate tax rate in the US?
The video says US corporations pay a flat federal rate of 21 percent of profits, but deductions and credits mean many pay significantly less, sometimes nothing.
What is the difference between tax avoidance and tax evasion?
Tax avoidance uses legal means to reduce your bill. Tax evasion means lying to the government about what you owe, and it is illegal.
How do the ultra-wealthy borrow instead of selling stock?
The video says they take out loans against shares instead of selling them, and since loans are not taxable income they avoid triggering capital gains tax. It describes this as controversial but legal.
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