The most common lament I hear from the Fox-watching conservatives who surround me everywhere I go is that half of the people in the country pay no taxes and that it is unfair of the fifty percent of those who do pay to be forced to support these ‘freeloaders.’ I suppose that is a fair enough concern . . . if it was true. I decided to do some homework to find the truth of the matter.
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 pay an average of 8.8 percent of their incomes in payroll taxes, compared to 1.6 percent of income for those in the top 1 percent of the income distribution. 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. Stunningly, the bottom fifth of taxpayers also pay 12.3 percent of their incomes in state and local taxes, well above the 7.9 percent average rate that the top 1 percent of households pay. (Congressional Budget Office, “Average Federal Taxes by Income Group,” June 2010, http://www.cbo.gov/publication/42870). The oft-quoted fifty percent figure covers only the federal income tax and ignores the substantial amounts of other federal taxes — especially the payroll tax — that households pay. As a result, this figure grossly and unfairly overstates the share of households that do not pay federal taxes. For example. 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. Tax Policy Center, “Tax Units with Zero or Negative Tax Liability, Current Law, 2004-2011 (T11-0173),” June 14, 2011. When all federal, state, and local taxes are taken into account, the bottom fifth of households pays about 16 percent of their incomes in taxes, on average. The second-poorest fifth pays about 21 percent.
Fact: A GAO study found that in every year from 1998 to 2005, 55 percent of large corporations paid no corporate income tax. 2.7 percent of large corporations reported no net tax liability in all eight of those years. This pattern also applied to small business owners and others who deduct business losses from their taxable incomes and thereby eliminated their income tax liability in some years. http://www.gao.gov/new.items/d08957.pdf.
Conclusion: The notion that “half of Americans don’t pay taxes” not only overstates the share of households that do not pay federal income taxes in a typical year, it also ignores the other taxes people pay, including federal payroll taxes and state and local taxes. The lowest 20% of Americans pay a greater percentage of their incomes in taxes than the top twenty percent. Half of large corporations pay no corporate income tax. Policymakers, pundits, and others conveniently overlook these points. One has to wonder why? Just saying . . .