Half the People in the Country Are Freeloaders Who Pay No Taxes, Right?
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A friend of a friend sent me an e-mail recently attempting to make political points with the claim: "half the people in the country don't pay any federal income taxes."
There seems to be a strand of jealousy trumped up among the more well-to-do that contends the country is populated by n'er do well freeloaders supported by the wealthy classes.
This kind of thinking appears to justify further tax cuts at the higher ranges of income.
But it is understandable because the American creed is fairness.
Analysis by the non-profit Tax Policy Center and the Center on Budget and Policy Priorities shows, however, that the nation's tax system is just about as fair as it can be.
Taking payroll taxes into account, in 2009, some 83 percent of filers paid either some federal payroll or some federal income tax.
Tax Policy Center data show that only about 17 percent of households did not pay any federal income tax or payroll tax in 2009, despite the high unemployment and temporary tax cuts that marked that year. In 2007, a more typical year, the figure was 14 percent.
Urban Institute analyst Elaine Maag has written of non-income taxpayers, "most are elderly, poor, or unemployed (including people who are too disabled to work). Whom, I wonder, should the tax man put on the block?"
Erroneous politically-motivated statements often make Internet rounds, especially just before elections. Where did this one come from?
TPC notes that at a Senate Finance Committee hearing in May 2011, Senator Charles Grassley, Iowa Republican, may have started the trend when he said:
"According to the Joint Committee on Taxation, 49 percent of households are paying 100 percent of taxes coming in to the federal government" (meaning that the other 51 percent pay no federal tax whatsoever).
At the same hearing, Cato Institute Senior Fellow Alan Reynolds asserted, "Poor people don't pay taxes in this country."
In 2010, Fox Business host Stuart Varney said on Fox and Friends, "Yes, 47 percent of households pay not a single dime in taxes."
None of these assertions are correct.
As the Tax Policy Center's Howard Gleckman noted regarding a TPC estimate that almost half of Americans owed no federal income tax in 2009, "rarely has a bit of data been so misunderstood, or so misused."
Gleckman wrote: "Let me explain -- repeat actually -- what [the figure] means: About half of taxpayers paid no federal income tax last year. It does not mean they paid no tax at all. Many shelled out Social Security and Medicare payroll taxes.
"Some paid property taxes and, it is fair to say, just about all of them paid sales taxes of one kind or another. So to say they pay no taxes is flat wrong.
The reality is that the income tax is one of a number of types of taxes that individuals pay, both over the course of their lifetimes and in a given year, and it makes little sense to treat it as though it were the only tax that matters. Some 82 percent of working households pay more in payroll taxes than in federal income taxes.
In fact, low and moderate-income people pay a much larger share of their incomes in federal payroll taxes than high-income people do: taxpayers in the bottom 20 percent of the income scale paid an average of 8.8 percent of their incomes in payroll taxes in 2007, compared to 1.6 percent of income for those in the top 1 percent of the income distribution.
There are two reasons why this is the case: high-income taxpayers generate much larger shares of their incomes than other households do from sources such as capital gains and dividends that aren't subject to the Social Security payroll tax; and earnings above $110,100 in 2012 aren't subject to the Social Security tax. That means that, as Aviva Aron-Dine wrote in a recent Milken Review article, "dishwashers pay a larger share of income in payroll taxes than, say, neurosurgeons."
In 2007, the most recent non-recession year, 86 percent of filers paid either some federal payroll or some federal income tax. In addition, Congressional Budget Office data show that lower-income households pay a significantly larger share of their incomes in federal excise taxes (levied on goods such as gasoline) than middle- and upper-income households do.
When all federal taxes are considered, it is clear that the overwhelming majority of Americans pay such taxes. CBO data show that the poorest fifth of households paid an average of 4 percent of their incomes in federal taxes despite their low incomes in 2007, while the next fifth paid an average of 10 percent of income in federal taxes.
Low-income families also pay substantial state and local taxes. Most state and local taxes are regressive, meaning that low-income families pay a larger share of their incomes in these taxes than wealthier households do.
The bottom fifth of taxpayers paid 12.3 percent of their incomes in state and local taxes in 2011, according to the Institute on Taxation and Economic Policy (ITEP). That was well above the 7.9 percent average rate that the top 1 percent of households paid.
Considering all taxes -- federal, state, and local -- the bottom 20 percent of households pays an average of 16 to 17 percent of their incomes in taxes. The next 20 percent of households pays about 21 percent of income in taxes, on average.
In fact, when all taxes are considered, the share of taxes that each fifth of households pays is similar to its share of the nation's total income.
ITEP data show that in 2011, the bottom fifth of households received 3.4 percent of the total income in the nation and paid 2.1 percent of the total taxes.
The middle fifth of households received 11.4 percent of income and paid 10.3 percent of taxes.
The top 1 percent of households received 21.0 percent of income and paid 21.6 percent of taxes. The tax system as a whole is only mildly progressive. ###
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