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Do the poor really pay no taxes?

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As Jon Stewart details in the clip above, some in the media have fastened on a Tax Policy Center report saying that 47 percent of Americans pay no federal income tax. Is it true? In a very limited sense, yes, about 47 percent of households are owed more in federal help than they pay in federal income tax. But it's not because they don't owe federal income tax. It's because they're owed other money that runs through the tax code.

The Earned Income Tax Credit, for instance, is an income-support program created by Richard Nixon and expanded by both Ronald Reagan and Bill Clinton. The underlying idea came from legendary conservative economist Milton Friedman. So this is bipartisan stuff. And it was designed to run through the tax code rather than just send recipients a separate check. So if your income is low, you may (1) owe very little in income taxes, and (2) get a check through the EITC. The result isn't that you don't owe anything in federal income taxes, but that your income tax liability is wiped out by your EITC check. The critics of the tax code don't seem to know this, but their problem is with programs like the EITC -- of which there are many, some of which help the middle class -- not income tax brackets.

That accounts for a lot of the people who don't owe federal income taxes. But it doesn't account for the bigger dodge here: Why are we talking about federal income taxes at all?

I'm going to be charitable on this and assume that people are biased toward their own experiences rather than playing loose with the data. For upper-income folks -- journalists, television executives, congressmen, think tank employees -- the big hit is on income taxes, so they get pretty annoyed when they hear that lots of Americans don't pay any income tax. But their experience is not typical. Most people's tax burden has a very different composition. As David Leonhardt points out in a typically excellent column today, "about three-quarters of all American households pay more in payroll taxes, which go toward Medicare and Social Security, than in income taxes." And that doesn't even mention state and local income taxes.

So let's mention them. The following graph comes from a report (pdf) by Citizens for Tax Justice. It compares the share of the total tax burden -- that means income taxes, payroll taxes, state and local taxes, capital gains taxes, and so forth -- with the share of the total income for different groups. It's the single most important graph to understand our tax system.

Is -Tax Day- Too Burdensome for the Rich- - Powered by Google Docs_1271267556720.jpeg

Doesn't look so disproportionate now, huh?

By Ezra Klein  |  April 14, 2010; 2:26 PM ET
Categories:  Taxes  
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Comments

But it's not because they don't owe federal income tax. It's because they're owed other money that runs through the tax code.

They are "owed other money"?

Why do we disparage people who chose not to be kings of the "consumer society", we should be setting them up as examples to be emulated!

Posted by: MikeMcLamara | April 14, 2010 2:39 PM | Report abuse

Your graph gives the impression that people pay taxes in a way that's fairly proportional to their income.
But there's another question, of whether they pay taxes in proportion to their wealth. And there, I rather suspect we'd find that the poor are paying more proportional to their wealth than are the wealthy. Certainly, the portion of all Americans' wealth controlled by the very wealthiest has been growing ever higher for many years.

Posted by: WarrenTerra | April 14, 2010 2:40 PM | Report abuse

Does the chart include estimates of state sales taxes as well, or just state income taxes, etc.?

Posted by: madjoy | April 14, 2010 2:45 PM | Report abuse

madjoy

The pdf makes no mention of sales taxes, but rather fed, state and local income taxes only.

Posted by: Lomillialor | April 14, 2010 2:57 PM | Report abuse

WarrenTerra is exactly right.

Warren Buffett famously offered a meeting of hedge fund managers to pay any of them 1 million dollars if they could show they pay a higher percentage of their income in taxes than their secretaries do. None of them took him up on it.

Posted by: nisleib | April 14, 2010 3:05 PM | Report abuse

Not to mention that our social security payments are being stolen from us to pay for other largesse. We should have started
putting them in the lockbox ten years ago.

"The first monthly payment was issued on January 31, 1940 to Ida May Fuller of Ludlow, Vermont. In 1937, 1938 and 1939 she paid a total of $24.75 into the Social Security System. Her first check was for $22.54. After her second check, Fuller already had received more than she contributed over the three-year period. She lived to be 100 and collected a total of $22,888.92"

So what's next? Extending the minimum age by one year every other year until it reaches age 75? (bad for unemployment) Reducing benefits? (probably necessary)

Why has the payroll tax risen over the history of social security from 3% to 12.4% (including employer contribution)?

If it's really social insurance, (not a pension) should we be paying the rich?

Posted by: staticvars | April 14, 2010 3:07 PM | Report abuse

@WarrenTerra: you are correct. This graph shows % of income earned by folks in a certain income level vs % of the tax burden they pay. A different graph would show % of income paid in taxes at the different income levels. A nice companion graph to this one. It would show that higher income people pay a much smaller % of their income in taxes.

Posted by: srw3 | April 14, 2010 3:10 PM | Report abuse

staticvars,

the problem is that while some industries allow employees to function well enough to work past age 62, 65 etc (white collar) many blue collar industries don't allow that to happen. The problem is that there's no fair way to address this issue that i can see. Either way it has to be moved back to maintain sustainability and you're right, we need to stop robbing from Peter to pay Paul.

And yes the wealthy should not get SS income. Sorry but Bill Gates doesn't need $1000 every month when he turns 65.

Posted by: visionbrkr | April 14, 2010 3:21 PM | Report abuse

Interesting concession by Leonhardt:
"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 social security system places a heavy tax burden on the poor and then does not create any ownership of capital that can be passed onto heirs as a vehicle to slowly build intergenerational wealth in poorer communities. It has been a horrible system for the poor with middle class aspirations for their children and grandchildren.

Posted by: cdosquared5 | April 14, 2010 3:36 PM | Report abuse

Quick note: Sales taxes are either state and local taxes.

Posted by: Ezra Klein | April 14, 2010 3:37 PM | Report abuse

Visionbrkr,

Do you think any Senate Democrats would support means-testing Social Security or Medicare? I imagine they are afraid of it becoming like welfare. If fewer people collect, less popular support for the program.

Posted by: cdosquared5 | April 14, 2010 3:44 PM | Report abuse

Ezra, you know I love you but sometimes you just have to take a step back and say there are time when you just don't go there and this is one of those times.

Kind of a reprise of my post elsewhere today... We are talking Federal Income Tax (because tomorrow is Tax Day!) and you have to admit there are some segments of the wage earning public that get hit pretty damn hard on Federal Income Taxes.

I will be the first to admit that the 47% of people who pay no Federal Income Tax might not look like who we think they look like (poor people) but could be members of the Walton family.

I'm sorry, FICA doesn't count today because people who pay FICA are buying an insurance benefit (health, disability, and a retirement annuity) roughly in proportion to the amount they pay in.

And yes, there are lots of horrible regressive taxes out there that should be counted when we talk about total tax burdens but that's not the topic today! The topic is Federal Income Tax and it is one day a wage earner like myself gets to feel a bit sorry for myself. I'll get over it and will be back to my (somewhat) social-democratic self the day after tomorrow but for now, sorry, not buying it!!!

As always, Regards!

Posted by: luko | April 14, 2010 3:50 PM | Report abuse

Also, is there a link that is a little more substantive in regards to the methodology behind the chart? Those footnotes are a bit ambiguous. How would the corporate income tax , corporate income have been allocated?

Posted by: cdosquared5 | April 14, 2010 3:53 PM | Report abuse

One of the things the commentators also tend to neglect is that not only do the lower income classes pay payroll taxes (as well as a whole host of fees and sales taxes at the lower levels of government), they pay payroll taxes on their ENTIRE income.

That's not the case with most upper-crust taxpayers. The limit on how much income can be taxed for payroll taxes ensures that for most of them, payroll taxes never even come close to constituting a large fraction of their tax burden.

Posted by: guardsmanbass | April 14, 2010 3:58 PM | Report abuse

cdosquared5,

Medicare Part B already charges their premiums based on income. That's enough IMO.

If that's a cross to bear for sustainability then we'd have to do it. Fewer people are going to collect (or more people are going to collect lesser amounts) because of the issues that staticvars speaks of anyway. Just a matter of how you want to go about it.

I'm honestly surprised they haven't done it already in their attacks against the "rich" Maybe they're worried populist anger is high enough as it is.

Posted by: visionbrkr | April 14, 2010 4:00 PM | Report abuse

This doesn't include any sales taxes - wow, interesting. I'm a self-identified progressive, and even I thought the income/payroll tax structure was considerably more progressive than that.

Posted by: madjoy | April 14, 2010 4:09 PM | Report abuse

It's worth pointing out how Social Security benefits are calculated. The SSA's description of the formula is at http://www.ssa.gov/pubs/10070.html, but to gloss over the details is that you take your average monthly income (adjusted for inflation, not counting income above the cap on the payroll tax, and only counting the thirty-five years you made the most money) and you recieve a percentage of that number, with the particular percentage dropping the more money you made, the maximum being 90% but dropping down quite a bit at the higher incomes.

To contrast the percentage of your income that you pay into Social Security is a fixed 6.2% of the income below the cap. (Plus your employer paying another 6.2%.) So yes, the relationship between how much you pay in social security taxes and how much you get in benefits is kind of indirect. Both are based on income, but they're very different formulas.

Posted by: usergoogol | April 14, 2010 5:26 PM | Report abuse

visionbrkr,

I think we need to be careful with means testing. A straight clawback of social security benefits would destroy the incentive for most people to save, unless means test didn't affect anyone except the uberwealthy, at which point its only symbolic.

Suppose Social Security promises a young couple $30,000/yr in inflation adjusted dollars starting in 2050, but that value is reduced by $1 for every $30 in wealth after, say, $100,000. If you retire a millionaire, you're wealthy and don't need government support. However, if you're deciding how much to save in early twenties, you might think that clawback is aggressive. If you expect to live 25 years in retirement - probably reasonable for those hitting 67 in 2050 - then at a 5% discount rate the present value of the social security payments from retirement to death is $422,818. That's almost half of the difference between not saving at all and saving $1 million over a lifetime. I wouldn't save a dime more for retirement if social security was means tested in that way - and remember a lot of people don't build up $1 million nest eggs for retirement.

A means test would need to be structured to avoid that massive disincentive. Perhaps switching to a forced savings mechanism would work, and social security creates an income floor. If you're 67+, you're given 125% of the poverty line for your household, less your savings and pension income. This too would be a disincentive to save except you are forced to save in lieu of some of your FICA tax. This would keep every 67+ individual out of poverty while limiting the transfers to those who need them most. Could be an expensive transition though.

Posted by: justin84 | April 14, 2010 6:30 PM | Report abuse

Perhaps I'm slow, perhaps I'm missing something, but shouldn't you define the axes of your graph in more specific terms? Again, to ME, your format seems deceptive--precisely what you are professing to critique. I went to your site to get more info, not PC propaganda.

Posted by: desertlabs | April 14, 2010 8:29 PM | Report abuse

desertlabs,

I think the axes are labeled fairly. Take the first group - the bottom 20% of households. They make about 3.5% of all income, and pay about 1.5% of all taxes levied on income (I'm just eyeballing it, I don't know the actual numbers). The next 20% make about 7% of the total national income, and pay about 5% of the total taxes. This compares with the top 1% of the population which by itself brings in 22% of all income, and pays 23% of all taxes.

This suggests (given my estimates for height of these bars) that the average household in the top 1% makes 125.7x what the typical household in the bottom 20% makes, and pays 306.7x the amount of taxes. So if taxes take 35% of income on average for the top 1%, then taxes take about 14% of income for the bottom 20% - which gets back to Ezra's point that we have a modestly progressive tax system but taxes are in fact paid by the poorest households.

Now, much of the taxes the poor pay go towards crediting them participation in Social Security which provides the highest income replacement percentage to those with low incomes, but that said it remains a compulsory tax.

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Posted by: itkonlyyou5 | April 14, 2010 10:43 PM | Report abuse

"This doesn't include any sales taxes - wow, interesting. "


Hello..!?! As Ezra already explained (for those to whom it is not already obvious) sales tax is collected by state and local authorities, and therefore is already reflected under that heading.

On a more general note, the notion that taxes do not take a disproportionate bite from the total income of lower income people is absurd. Any middle class (or lower) individual or couple who has ever completed their own federal income tax return and who has seen all of the deductions that are available only to the well-heeled already knows the truth about taxes in modern America.

Renters subsidize the interest paid by home owners. The households that are not paying taxes are mostly the sultra-rich enjoying write-offs for the interest on their multiple vacation homes, race horses, etc.

Posted by: Patrick_M | April 14, 2010 10:51 PM | Report abuse


Somehow I keep remembering a lot of those top 1% folks not paying much or any taxes -do all the trusts, dodges, foreign accounts, corporations, etc. they can afford to set up and manipulate get factored in?
And how about those living in states with low or no sales taxes on some items and no state income tax? Somehow I think they work hard at getting that blue column a lot higher than that white column.

Posted by: dcunning1 | April 14, 2010 11:17 PM | Report abuse

Doing this sort of plot using wealth rather than income is actually much trickier. We have lot of income data because people are required to report their income every year, but you aren't required to report your wealth unless you die, pass the wealth on, and are subject to the estate tax. Plus there are lots of tricky ways to hide wealth: internationally, numbered accounts, physical assets.

But it is a fair assumption that the poor pay a larger percentage of wealth in taxes. When the savings rate is negative, when earned income is less than cost of living, this is pretty much necessarily true.


Posted by: zosima | April 15, 2010 12:39 AM | Report abuse

cdosquared5, the methodology for corporate income taxes that is typically employed in these analyses is that ALL the corporate tax is allocated to the shareholders.

Now since the top 1 percent own significantly more stock (should that be significantly, significantly?) they are assumed to shoulder the tax burden. Excluding the corporate income tax brings their tax incidence down quite a bit and would make the graph slope down again at the top 1 percent.

Posted by: grooft | April 15, 2010 3:06 AM | Report abuse

Semantics are so important. If only you had said "47% receive more in federal help" instead of "47% are owed more." Maybe the distinction matters only to me.

Posted by: lawyerwithachainsaw | April 15, 2010 11:08 AM | Report abuse

Ezra:

Great op-ed today. Don't forget that a lot of people on the poorer end of the socio-economic spectrum tend to live in E.J. urban areas. Meaning, they're repeatedly exposed to more air and water pollution; also, acid rain, than those who migrated to the pristine suburbs. SO, in essence they pay a heavier "tax" on their health as well.

Posted by: dep05 | April 15, 2010 11:18 AM | Report abuse

As do most people with a particular bias, Ezra's chart and story are slanted to support that bias. Until we admit that SS is a pseudo-welfare program, it is not fair to include it in the data. Those taxes purport to be for buying a future benefit, one that is slanted in favor of lower income people, as has been noted earlier. Further, SS benefits are taxed for higher income people. And, again noted above, Medicare part B premiums are increased for higher income folks.

It can certainly be argued that these societal benefits are appropriate in our nation but including those compulsory "taxes", which have largely been removed for 2009 and 2010 on lower income people is slanting the data and story.

Posted by: RentonComments | April 15, 2010 11:41 AM | Report abuse

Mr. Klein and Mr. Leonhardt are missing the point. The claim is income taxes, not total taxes. You cannot include payroll taxes such as FICA, Medicare, unemployment insurance, workers comp insurance, etc. These are all benefit driven taxes; the lower you are on the income scale the more likely that you will receive more than you contribute.
According to this article (http://congress.blogs.foxnews.com/2010/04/15/) 97% of federal income taxes are paid by the upper 50% of income earners and 86% of federal income taxes are paid by the top 20% of earners.

Increasing taxes on the poor or middle class will not generate much revenue for the government, however, overtaxing the wealthy will stifle investment. The wealthy will simply invest their money in the economies where they are likely to receive the highest return. Similarly, tax breaks to the poor or middle class will not generate a significant increase in economic activity.

Since everyone benefits from government programs, all, except the very lowest wage earners, should pay some federal income tax as their portion of the cost of government. When government spending is increased, everyone's taxes liability should be in jeopardy of increasing, otherwise there will become a general feeling amoung those that do not pay taxes that government programs (which included schools, road, police) are free.

Posted by: rxk150 | April 15, 2010 1:23 PM | Report abuse

Ten years ago, tax groups were saying that the average citizen payed fifty percent of his/her income to the government, if one included everything the government demands from "user fees" through income, social security and other taxes and permits for license plates, licenses, etc.

Posted by: deadmanwalking | April 15, 2010 1:31 PM | Report abuse

Ezra fails to mention that the total amount disbursed under the EITC is about $36 billion each year. So basically about 1% of the federal budget. While the concept may inflame some conservatives, in reality it's just not that much money. And note that not one republican lawmaker has put forward a plan to eliminate the EITC. That should tell you something. They only rant about the concept when on the campaign trail.

Posted by: johnk1000 | April 16, 2010 10:22 AM | Report abuse

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