Myths About Tax Rate: Who Pays and Who Does Not

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.

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5 responses to “Myths About Tax Rate: Who Pays and Who Does Not

  1. Thanks for diving into those tax numbers a bit deeper. Good info!

    In my defense from our previous conversation: I did mention that nearly half of Americans payed no Federal income tax, but I also mentioned that this did not include payroll taxes as you mentioned here.

    • Another fellow blogger and I have been going round and round about including/excluding payroll taxes. The fact is, it is important to include these numbers because the top 2% normally do not get the bulk of their income from a salary like the middle/lower classes do, which gives them the ability to skirt around our tax code and use those lovely loop holes we have or through off-shore activities, which puts a large percentage out of the reach of our government.

      Just an FYI, I read your article on reductions in taxes for imported shoes (those are my representatives…so proud LOL). I am still trying to research this and gather more info. The whole issue of teriffs was brought to the forefront when Trump (I hate to even mention his name) was making an issue about raising tariffs on Chinese imports, etc, etc. I must admit this issue is still rather new to me, so if you have any suggested reading material would welcome the suggestions.

  2. I do not support tariffs. They are often put in place to protect domestic businesses. As with almost every other policy, there are more effects than just what is intended.

    A tariff raises the price of foreign goods to make domestic products more attractive. Therefore, the price of these goods is higher overall. There is also the possibility of American good coming under fire with other countries placing tariffs on them. This results in the limiting of the market for American products.

    So the effects are goods being more expensive to consumers and the market for American good shrinking.

    Trump is not in the race anyway, but I definitely do not support tariffs. I honestly am not sure what the party positions are on the subject.

    • tariffs

      By definition; trade benefits BOTH parties. –I exclude cases of fraud where one party misrepresented their product. This is illegal and is not an example of a properly functioning market–. This is how wealth is created by expanding trade.

      I do not support tariffs.

      Good man! Me either.

      They are often put in place to protect domestic businesses.

      Or trade unions. Often times tariffs benefit just a protected few; see tariff on Chinese tires.

      I honestly am not sure what the party positions are on the subject.

      I suspect that Republicans often fail on this subject. Patriotism makes it easy to call for tariffs. While it’s true that removing barriers to trade adds competition to domestic companies, the consumers end up losing either due to inferior goods or, as you mentioned, a higher price.

  3. But that 47% is decieving and the conservative cable/radio shows fail to go into.

    It can be deceiving, but only in a context. For example, if the conversation is centered around total burned and people’s incomes, then yes, that number is not fair. However, if the context is Federal Income taxes and the rate desired by Obama vs Paul Ryan, then yes, that number IS fair.

    The Federal government levies taxes on Americans. The Federal government has no such power when it come to local and state taxes. Obama can’t impose a state sales tax, or a county property tax. If a city wants to pass a tax on hotels, they can. Heck, they can pass taxes on gasoline, bridges and smokes.

    Most of the time the conversation starts with the Federal Income tax, the brackets and the burdens. This is because this is what brings people from sea to shining sea, Seattle to Raleigh, together. The state taxes in Washington are interesting from a trivia perspective. The state taxes in Carolina are interesting because I have to pay for ’em.

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