Are Your Taxes Actually High?

Every high earner has had the same conversation, probably this past spring. You open the tax return, see the number, and say some version of “I’m getting killed in taxes.” The bill is large. The tax bracket feels punitive. After enough years of watching a big share of your growing income disappear before it ever reaches your bank account, it’s a short step to believing that people at your income level have never been taxed harder than they are right now.

Why are taxes so high? Well, they’re not; they just feel that way, and that feeling might be affecting your decisions.

Consider, for example, the pre-tax 401(k) that many people contribute to by default. When you put money into a pre-tax 401(k), you don’t avoid the tax on it. You defer it. The dollars go in untaxed now and get taxed when you take them out later, so that pre-tax balance is really a tax bill you haven’t paid yet. Deferring that bill only makes sense if the rate you’d pay today is higher than the one you’ll pay down the road.

The urge to defer runs hottest in the exact moment you just felt, when the tax return looks punishing. If today’s income tax rate is actually low (not high), that instinct is leading you the wrong way. So, the tax rate isn’t trivial. It’s the number the whole decision turns on.

The Number You Feel vs the Number You Pay

A household that earned $400,000 in 2025, took the standard deduction and claimed nothing else, paid an effective federal income tax rate of roughly 18.5%.

Claiming nothing else means no pre-tax 401(k) contributions shrinking the income before the brackets reached it, and no tax credits trimming the bill at the end. The standard deduction, the flat amount any household subtracts before its tax is figured, was all this household took off. Any further contribution, deduction, or credit would push the rate down, not up, which puts 18.5% near the top of what a household at this income would owe, not the bottom.

The effective tax rate isn’t your bracket. Your bracket is the rate on your last dollar of income, and for this household those last dollars landed in the 24% bracket. The effective rate is the whole tax bill divided by the whole income, the actual share that leaves your hands. Here that share is 18.5%, comfortably under the 24% bracket, because the dollars beneath the top bracket are taxed at lower rates and the first slice isn’t taxed at all.

Hold onto that number, because by the standard of the modern record, 18.5% is lower than what a household at that income paid at nearly any point in the last forty years. The feeling says high. The record says low.

Everything that follows is the comparison that settles which one is true.

The Step with a Date on It

The comparison is straightforward.

Take the same household we started with, a $400,000 earner taking the standard deduction, and run its effective tax rate back through the years. One adjustment makes the comparison fair. The income stays fixed in today’s dollars, so a high earner in 1995 is measured at the income that bought back then what $400,000 buys now. That keeps the household’s real standard of living constant and lets the rate move for one reason only – because the tax law changed.

Effective Federal Income Tax Rate

$400,000 household in 2024 dollars, standard deduction only.

In every year before 2018, a household with $400,000 in real income (in 2024 dollars) paid an effective tax rate between roughly 23% and 27%. Not one year below 23%. Then look at 2017 and 2018, two consecutive years, the same household, the same real income. The rate falls from 23.7% to 18.6%.

Nothing about the household changed. What changed was the law. The Tax Cuts and Jobs Act of 2017 (a tax overhaul) took effect in 2018, and the effective tax rate stepped down almost five full points and stayed there. The drop isn’t a slow drift you could pin on the economy or on one household’s quirks. It’s a step, with a date on it, caused by a single piece of legislation. And 2024 sits right where 2018 left it, in the high 18s.

There is no precedent in the modern era for high earners paying as little federal income tax as today’s high-earning Americans pay.

You might expect the comparison to run back further, since top federal tax rates used to be far higher, 70% in the 1970s and above 90% before that. But almost nobody actually paid those rates. The old tax code was full of deductions and shelters, and a high earner with a good accountant paid a small fraction of the rate on the label. The Tax Reform Act of 1986 cleared out most of the shelters and cut the headline rates in the same move, and only then did the published rate and the rate people paid line up closely enough for year-to-year comparison to mean anything. That’s why the table starts in 1988. Reaching back to the 90% era would compare today against a number that was never really paid.

This is income tax alone, the largest piece of a high earner’s federal bill and the part we can measure cleanly across four decades. And every figure so far is computed from the brackets, the tax the code says this household owes, not what landed on real returns.

What’s left is whether real taxpayers, with all their complications, paid anything close.

What the Real Tax Returns Show

We can check. The IRS reports what taxpayers in each income group actually paid, from real returns, not computed brackets. Line those up against the bracket math, and they track.

The table below shows the average federal tax rate the top 5% and the top 1% actually paid across the post-reform decades. The top 1% is the closer match to our household, since for much of this stretch it took around $400,000 to enter it.

Average Federal Income Tax Rate Actually Paid, by Income Group

These won’t match the household figure to the decimal, since the whole group writes off more and earns more from lower-taxed investments than one earner on the standard deduction. But the levels were never the point. The rates moved in the same direction as the bracket math, so the first table isn’t a quirk of how the brackets are drawn. It reflects what people actually paid.

And the broadest test agrees. Income tax is only part of the federal bill. The Congressional Budget Office tracks all of it together, and for the band our household sits in, the 81st to 99th percentiles, that total tax burden fell from 25.1% in 1979 to 22.1% in 2019.

That’s the case, and it runs one direction. Today’s federal tax rate is low against the bracket record, low against what real taxpayers paid, and low against the broadest measure of federal burden. Which leaves the question the record can’t answer. If the rate is this low now, what happens to it from here?

A Number You Know, a Number You Can’t

For a long time, the catch with today’s low tax rates was that they were temporary. The 2017 overhaul was written to expire at the end of 2025, so they came with a deadline attached. Then, in the summer of 2025, a law called the One Big Beautiful Bill Act removed the deadline and made the current rates permanent. The brackets you see now are the brackets the law intends to keep.

Permanent is a reassuring word. It sounds like the matter is closed. In the case of the pre-tax 401(k), it’s like the rate you’re deferring at is the rate waiting for you when you withdraw. But it isn’t closed, because permanent in tax law doesn’t mean what it means anywhere else. It means until Congress decides otherwise.

We’ve watched this exact word do this exact thing before. The Bush tax cuts were also permanent until 2013, when Congress let the top bracket return to 39.6%. Permanent described the law right up until the day it didn’t. So, the honest way to read the word isn’t as a promise about the future. The permanence delivered in 2025 is a snapshot of the rate environment we’re in now, not a prediction of where rates will sit when the money you defer today comes back out.

And today’s rates sit on real pressure. That pressure does not tell you rates are going up. Nobody can tell you that. What it tells you is that the forces pushing Congress to reopen the tax code are large and not going away.

• The federal debt just hit $40 trillion.
• The government spends close to $1.9 trillion more each year than it collects, and that yearly gap, the deficit, piles onto the debt.
• Interest alone on what’s already been borrowed now runs about a trillion dollars a year, more than the government spends on national defense.

Pressure like that makes a permanent rate worth a second look. It doesn’t predict the next change. It makes the next change something you can’t assume away.

The asymmetry that matters has nothing to do with guessing what Congress will do. What’s permanent is today’s law. Today’s rate you can measure. You can look it up, run your income through it, and know it to the decimal, which is exactly what we did a few paragraphs ago. The rate you’ll face when the deferred money comes out, twenty or thirty years from now, you cannot measure, because it doesn’t exist yet. The deferral decision sets a number you know against a number you can’t. That’s the whole shape of it. Not a low rate weighed against a probably higher one, but a measured quantity weighed against an unmeasurable one.

None of this predicts the future. The uncertainty is the point. The deferral bet quietly treats the future rate as if it were known and friendly, when it’s the single number in the whole decision that nobody actually has.

Where You Go from Here

Today’s federal tax rates are as low as they’ve been at any point in the modern record. That part isn’t a guess. We can measure it, and we did.

What we can’t know is what the tax code will look like in the future – by the time that pre-tax 401(k) money comes back out. That’s up to a Congress that hasn’t met yet, and nobody can call it in advance. It’s not a reason for alarm, and it’s not a prediction. The code in place today is written down, and we can run any income through it and see exactly what it does. The code that will govern your withdrawals decades from now hasn’t been written.

So, a deferral is a real trade, not a free break. You take the deduction now, at a rate you can look up and that sits near the bottom of the modern record, in exchange for paying the tax later under a code nobody has written yet. For a high earner, taking the deferral can still be the right trade. But with a known price on one side and an unknown law on the other, it’s a choice worth making deliberately and with some caution, not by reflex.

Where that leads depends on where you stand. If you’re still putting money into a pre-tax 401(k), the question is whether the habit of deferring still fits, and that’s the larger conversation here. If you’re already drawing that money down, the question is whether to convert it to a Roth at a rate you can see rather than wait on one you can’t.

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