• The old “half of Americans pay no taxes” line.

    It’s a little out of health policy, but too good to pass up. One of my friends likes to throw this line in my face all the time. Let’s first of all, accept that it just isn’t true. Every American pays some taxes, be it sales tax, business tax, payroll tax, state income tax, etc. This line only applies to federal income taxes. When you add in other taxes, we have a progressive system, but everyone pays.

    But “half of Americans pay no federal income taxes”? That’s pretty much true. So who are these people? Donald Marron breaks down a report from the Tax Policy Center:

    Low incomes (or, if you prefer, the standard deduction and personal exemptions) account for fully half of the people who pay no federal income tax.

    The second reason is that for many senior citizens, Social Security benefits are exempt from federal income taxes. That accounts for about 22% of the people who pay no federal income tax.

    The third reason is that America uses the tax code to provide benefits to low-income families, particularly those with children. Taken together, the earned income tax credit, the child credit, and the childcare credit account for about 15% of the people who pay no federal income tax.

    Taken together, those three factors — incomes that fall below the standard deduction and personal exemptions; the exemption for most Social Security benefits; and tax benefits aimed at low-income families and children — account for almost 90% of the Americans who pay no federal income tax.

    So half of them are too poor to owe taxes (and you have to be pretty poor for that to happen), another fifth or so are elderly people living on social security. Child care credits for reasonablly poor people add in another 15%.

    That leaves about 10% of people who manage to use other deductions and/or loopholes to get under the tax line. Some of them make a decent amount of money; I personally know some.

    But about 90% of people who don’t have to pay federal income tax don’t because they are poor, perhaps with children, or elderly and on fixed incomes. And, they still pay other taxes.

    Which of these “lucky duckies” should we go after first?

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    • Aaron, since this column is quasi political, there is one more thing you need to mention. Virtually the entire structure of the current system has been shaped and molded by Republican tax legislation. It was Republicans who removed half the population from the tax rolls and made the burden of taxation more progressive than it has been in anyone’s memory.

      The irony is that these same Republicans have allowed their opponents to characterize them in the public’s mind as advocates for the rich.

      As the old saying goes, there is a stupid party and there is an evil party ….

      • John,

        I’m neither assigning credit nor blame. The friend who I mention is, in fact, a strict libertarian, and would bristle at being put into any political party.

        Aaron

    • This also a pet peeve of mine. This stuff is pretty easy to look up, so people are either willfully ignorant or lazy.

      Steve

    • One of my pet peeves is when people say that someone who holds municipal bonds pays no taxes when he is really opting to pay taxes to state and local governments at a slightly lower rate rather than paying the income tax.

    • Thank you for this analysis.
      Another tax related “disinformation” is that “the rich” pay a lower percentage of their income in taxes than the middle class.
      http://3.bp.blogspot.com/-j1RGkKlJw60/TjDJCHMxyWI/AAAAAAAAPgw/ouP8BV4GzBc/s1600/income.jpg
      (Data source IRS)

        • Thanks Steve.
          I was curious why the figures didn’t match up so I did a bit of digging.
          So even though the top 1% (or 968,159 taxpayers) paid an average of 23% federal income tax, the top 400 income earners (0.0004% of tax payers) only paid 17%. (There were 96,815,936 tax payers for 2006.)

          If the uber-rich are paying a lower percentage, is it because most of their income is from long term capital gains, i.e. invested capital? Will we really be better off shifting that that from private sector investment to government spending? (Not that I think honestly earned money is ours to shift anyway.)

          Is it from tax loopholes? I’d be glad to see all tax deductions go away–and a simple flat tax.
          It would at least save a lot of wasted effort filing tax returns and trying to game the system. Less lobbying for preferential tax treatment. Lots of advantages.

          What do you think?

          • please

          • @Beth-Sorry for late response, a busy call w/e. It is a combination of factors. First, most of that income comes from capital gains. Some people, hedge fund managers are the famous example, exploit that to make millions of what looks like income to the rest of us, but they count it as capital gains. Secondly, dividends are also taxed at 15%. Thirdly, the wealthy often have exemptions written just for them. Last of all, the wealthy are much better at income shifting. Their mansions, travel, expensive clothes and jewelry become business expenses.

            There is tons written about capital gains rates. I think it has become more of an ideological litmus test than anything else.

            Steve

            • Thanks Steve.
              Those all seem like good reasons for doing away with tax exemptions, on principle, and treating all income the same. that would decrease teh ability to game the system.

              Agreeing on what is a “fair share” is a whole other question,

    • Does your friend get upset that 1% of the population, largely from the lower income groups, fight 100% of our wars?

      I think that is a more than fair compensation for the top 1% of earners paying their fair share to keep them on their perches.

    • I really like the thread here! Great food for thought!

      I just want to inject something. I really think the extremes are bad. I realize low income and elderly need every dime they have, but 0% is too low. How about 1-3% of income minimum for everyone? I feel like I can afford 1 penny on the dollar no matter what. If that is coming from 47% of the population, that becomes a lot of pennies. I don’t think that any individual in this population could take on the additional financial burden if presented with a crisis. The truth is they need the assistance. However, free assistance just seems really wrong.

      Just an idea.

    • Obama makes it sound like the half of us who do pay tax want the government to go after the half who don’t pay tax. That’s not true. No one is saying, “go after those who don’t pay tax.” I think we all understand why they don’t. So, your sarcasm of calling them “Lucky Duckies” doesn’t fly. We’re saying what we do pay is enough. Make do with what you get. Obama would have us believe that the half who pay no tax is upset with the half of us who do pay tax because we are not paying our fair share. On the contrary, I think they’re thankful some people can carry the load of others. You also make it sound like Social Security is not taxable when, in fact, 85% of it is added to adjusted gross income. And you liberals have got to stop clouding the issue by throwing in all other taxes. The $14 trillion hole Obama has put us in is to run the Federal government. So we’re only talking about Federal income tax on earned income, not state tax, gas excise, sales tax, etc. And stop referring to, FICA and Medicare as tax, They’re retirement savings and medical insurance.

    • I take exception to Obama being blamed for the $14 trillion hole. Much of that was inherited from W.

      • @George
        Of course you are correct that the Pres can hardly be blamed for all of it. About $5 T was accumulated from ~1790 to 2000. Another $5 T from 2001 to 2008. And about anotter $5 T during economic emergency. Of course, it is really only meaningful to talk about deficits in percent of GDP terms. Our big problem is not big deficits during economic emergencies, but the predictable ones we will have over the next 40 years sans some big changes (taxes up and spending down as compared to steady state).