I have been in an ongoing debate with family and friends about our tax code and the inequalities that exist. To push the idea that the wealthy carry most of the tax burden, people love to say that half of Americans do not pay anything in taxes, and technically they are correct. I have been researching this issue looking at non-partisan groups that evaluate our tax code by using official data provided by the IRS and other federal agencies. Here is what I found.
Tax Policy Center reports that 47% of American households owed no income tax for 2009. The number is up from 38 percent in 2007, and it has become a popular talking point on cable television and talk radio. But that 47% is decieving and the conservative cable/radio shows fail to go into. Here is a breakdown by economics columnist David Leonhardt.
Focusing on the statistical middle class — the middle 20 percent of households, as ranked by income — underlines this point. Households in this group made $35,400 to $52,100 in 2006, the last year for which the Congressional Budget Office has released data. That would describe a household with one full-time worker earning about $17 to $25 an hour.
Taking into account both taxes and tax credits, the average household in this group paid a total income tax rate of just 3 percent. A good number of people, in fact, paid no net income taxes. They are among the alleged free riders.
But the picture starts to change when you look not just at income taxes but at all taxes. This average household would have paid 0.8 percent of its income in corporate taxes (through the stocks it owned), 0.9 percent in gas and other federal excise taxes, and 9.5 percent in payroll taxes. Add these up, and the family’s total federal tax rate was 14.2 percent.
I realize that it’s possible to argue that payroll taxes should be excluded from the discussion because they pay for benefits — Social Security and Medicare — that people receive on the back end. But that argument doesn’t seem very persuasive.
Why? People do not receive benefits equal to the payroll taxes they paid. Those who die at age 70 will receive much less in Social Security and Medicare than they paid in taxes. Those who die at 95 will probably get much more.
The different kinds of federal taxes are really just accounting categories. At the end of the day, the government has to cover the cost of all its operations with revenue from all its taxes. We can’t wish our deficit away by saying that it’s mostly a Medicare and Social Security deficit.
If anything, the government numbers I’m using here exaggerate how much of the tax burden falls on the wealthy. These numbers fail to account for the income that is hidden from tax collectors — a practice, research shows that is more common among affluent families. “Because higher-income people are understating their income,” Joel Slemrod, a tax scholar at the University of Michigan says, “We’ve been overstating their average tax rates.”
State and local taxes, meanwhile, may actually be regressive. That is, middle-class and poor families may face higher tax rates than the wealthy. As Kim Rueben of the Tax Policy Center notes, state and local income taxes and property taxes are less progressive than federal taxes, while sales taxes end up being regressive. The typical family pays a lot of state and local taxes, too — almost half as much as in federal taxes.
There is no question that the wealthy pay a higher overall tax rate than any other group. That is an American tradition. But there is also no question that their tax rates have fallen more than any other group’s over the last three decades. The only reason they are paying more taxes than in the past is that their pretax incomes have risen so rapidly — which hardly seems a great rationale for a further tax cut.