Close To Half Of The U.S. Households Currently Do Not Owe Federal Income Tax. Truth or Fiction?
“Close to half of U.S. households currently do not owe federal income tax.” How accurate is this statement? This statement is cited as evidence, typically by Republicans, that lower income families do not pay their fair share of income taxes. This viewpoint is flawed because it specifies income tax. There are other forms of taxation. Let us list them one by one and see who pays and at what rate.
Income Tax
The recession of 2008 and beyond has vastly increased the number of households where individuals lost their jobs. Many workers that held jobs had their hours cut. Some workers were demoted to less paying jobs.This factor alone resulted in a tax payer dip. The fall out from this recession is so many families have lost income and thus pay a much lower tax rate or no taxes.
Congress passed legislation to help those who lost their jobs. The 2009 Recovery Act removed millions from the federal income tax rolls when individuals received unemployment benefits.
What other category of individuals do not appear on the tax rolls?
- Elderly
- Serious disability
- Students
Here is a list of inconvenient truths that should dispel the notion that nearly half of the US population does not pay taxes:
Low income households do pay federal taxes. “The poorest fifth of households paid an average of 4.0 percent of their incomes in federal taxes in 2007, the latest year for which these data are available.”
One up from the bottom fifth payed 10.6 percent.
Low income households pay about 12.3 percent of their incomes in state and local taxes.
Payroll Taxes
If you want to see how statistics lie or are obfuscated with political smoke, then read the following list of who and how much different segments of our population pay Federal Taxes.
Let us break up our population into six parts, most wealthy at the top going down to the poorest families and see how much each section pays and see if you can detect any problem with this portrayal.
- Top (Most wealthy) pay 1.6% in payroll taxes
- Pay 5.7% in payroll taxes
- Pay 9.5 % in payroll taxes
- Pay 9.4 % in payroll taxes
- Pay 9.5 % in payroll taxes
- Bottom (poorest families) Pay 8.8 %
Looking at the above list of who pays the most taxes it appears that the wealthy do not pay their fair share! But the truth is not apparent at first glance because the rich have lower numbers. There are way fewer rich people than poor. Since 1980 the poverty rate in the U.S. has increased from about 11% to 12%. In 2010 the rate had increased to 15.1% So why is this important? For two reasons. First is this chart (above) does show that the poorest families do pay a significant share. The second point is this. Just reflect a moment and realize that by helping the less advantaged families at the bottom become middle class or better, the tax rolls will expand! There is a lot more low and middle class than rich. If you expand those groups, you get a huge tax benefit.
Federal Excise Tax
The next chart is most startling and should run somewhat counter to the claim that the low income families do not pay their fair share of taxes. It shows another form of tax collected by government through producers or retailers. It is included in the price of the product so while we still pay the tax, we sort of don’t know or think about it. It is called excise tax.
Misc Taxes
In calculating wealth factor for a family the concept of marketable assets needs to be employed. Marketable assets are those items that can easily be converted to cash. Real estate, stocks and bonds are prime examples. The middle class held most of their wealth in owning their home while the very rich have stocks and bonds. The 2008 recession saw a huge decline in middle class home ownership as part of their marketable assets. People loss their homes in vast numbers. Real estate, stocks and bonds are traded generating investment costs and out of that process significant tax generation for many layers of government is achieved. Fewer middle class Americans are now paying as much in property and other home related taxes as before. They are not trading up in housing. Property values have not increased in most areas of the county. County property tax rates have even fallen. Speculators and investors are now becoming a larger component of paying taxes associated with investments than the middle class.
Further Reading:
Wealth, Income and Power by G. William Domhoff, http://www2.ucsc.edu/whorulesamerica/power/wealth.html/