Taxes. As the saying goes, “the only things you can count on in life are death, and taxes.” They’re just one of life’s necessary evils and we all have to pay them….or do we? A common argument, and one that’s getting a lot of attention right now is the argument that 47% of Americans don’t pay any taxes and are just living life completely dependent on government support.
It’s convenient that this is making headlines right now, because it touches on one of my biggest pet peeves when it comes to talking taxes: people only focus on income taxes. I’m going to try to stay away from all the political stuff and focus on the core of the argument: Do 47% of Americans really pay no tax? If so, who are they?
“The 47%”: True or False?
Do 47% of American’s pay no federal taxes? Sort of. It is true that about 47% of Americans pay nothing in income taxes.
Which makes a convenient and effective political argument. The problem is, it ignores the complete picture. While these households paid no income tax, 28.3% of those paying no income tax DID pay the payroll tax for Social Security and Medicare.
So if you’re scoring at home, that makes 81.9% of Americans who are actually paying federal taxes. Still, 47% of the population not paying income taxes seems like a huge number of people. Who are they?
Meet the 47%
As mentioned above, 28.3% of those who pay no income tax do still pay the Social Security and Medicare payroll tax. The households in this group pay no income tax simply because they qualify for enough deductions to wipe out their income tax liability (standard deduction, deductions for dependents, etc…) 1 So who is left in that 18.1% who pay neither income tax or payroll tax?
10.3% of those paying neither tax are the elderly and retired. The Social Security income they receive is not taxed as income. The elderly also receive an extra standard deduction. This along with other various credits often reduces their tax liability to zero.
This leaves us with just 6.9% of households who pay neither the income, nor the payroll taxes. These households make less than $20,000 per year, and are probably the ones most people immediately think of when they hear statements like “47% of Americans don’t pay any taxes.” Certainly 6.9% is a much smaller portion of the population and one that wont instill the rage that the 47% number does. 2
Lets not forget Local & State Taxes
The vast majority of Americans still pay local and state taxes. It’s important to include this in the discussion because local and state taxes tend to be more regressive than federal taxes. 3
When you look at the complete tax picture you see that most income groups in the United States tend to contribute a share of taxes proportionate to their share of the total income earned. On average, yes, the rich do tend to pay more, but ALL income groups do contribute. 4
This isn’t to say that the American tax system is perfect, or even fair. Every year from 1998 to 2005 an astounding 55% of large corporations paid no corporate income tax. 5 The same can be said for many small businesses, who are able to deduct losses from their incomes and can possibly eliminate their tax burden as well. Although I doubt you’ll find many people leading the charge to get small business owners to pay more in taxes. I’m also sure you won’t find either presidential candidate out there bragging about how much they paid in taxes. As both candidates have an effective tax rate lower than most Americans. 6 Taxes will always be a hot button issue in the United States. The majority of people will always think they pay too much, regardless of what their share may actually be.
If you take anything away from this article I hope it’s:
1. That income taxes are just the starting point for any tax discussion, they are far from the complete picture. and,
2. That half the country is not simply riding the coattails of the other half. When you look at the complete tax picture, they too are paying a healthy portion of their incomes to the government. For further reading check out 7 8 9
- Many of the deductions this group takes were part of the famed Bush tax cuts, which both candidates favor extending. ↩
- What might instill some rage is the 7000 millionaires who paid no income tax. ↩
- Meaning those with a lower-income pay a higher percentage of their income than higher income individuals do. ↩
- Check out: http://ctj.org/ctjreports/2012/04/who_pays_taxes_in_america.php for more . ↩
- See: http://www.gao.gov/new.items/d08957.pdf ↩
- Obama paid 20.5% and Romney paid 13.6% in 2011. The 28.3% of Americans paying only the payroll tax likely have a higher effective tax rate than Romney’s 13.6%. ↩
- A. http://www.cbpp.org/cms/index.cfm?fa=view&id=3505 ↩
- B. http://www.washingtonpost.com/blogs/ezra-klein/post/why-do-half-of-all-americans-pay-no-federal-income-taxes/2011/07/11/gIQA8olBuI_blog.html ↩
- C. http://www.theatlantic.com/politics/archive/2012/09/where-are-the-47-of-americans-who-pay-no-income-taxes/262499/ ↩