“Who Pays Taxes?” is Back on the Scene

September 19th, 2012 at 2:36 am

Well, apparently “who pays taxes” is back in the news today, so who’s up for a bit of rehashing some older work by my CBPP colleagues?

The main thing, just in from the facts department, is that it’s just flat out wrong to conflate “federal income taxes” with “taxes.”  You may not pay the former because your income is quite low, and thus after the standard deduction you don’t have any federal income tax liability (that’s the case for 7% of the 46% that don’t pay federal income tax).  Or because you’re elderly with modest income and no earnings (10% of the 46%).

But if you draw a paycheck, you might not pay federal income tax but you’ll pay federal payroll taxes (28% of the 46%).  Or if you put gas in your tank (federal excise tax) or buy something in a state with a sales tax, etc.

So pretty much everybody pays a tax in there somewhere.

For that matter, you could have very high income of a type that’s given special treatment by the tax code, like capital gains, and pay less in taxes than your typical wage earner.  You can even be rich and join the group that pays no federal income taxes, again due to deductions, credits, the writing off of various losses or expenses.  According to the IRS, in 2009, about 21,000 tax returns with income above $200,000 had no federal income tax liability.

The first link above provides much useful evidence of taxes paid across the income scale, including payroll, excise, and state/local taxes.

But I also find this data, from Citizens for Tax Justice, to be elucidating in this discussion.  It compares the share of pretax income going to each income class to that of taxes paid, including all levels of taxation—national, state, and local—and capturing income, corporate, payroll, excise, estate, sales, et al in terms of different types.

Source: Citizens for Tax Justice.

For the most part, tax shares are about equal to income shares.  Those in the top 1% (average income, $1.4 million) pay 22% of all types of taxes and hold 21% of all income.  Those at the bottom end pay 2% of all taxes and hold 3% of all income.  The system, in terms of effective rates (your tax liability as a share of your income) is mildly progressive, with a 17% rate at the bottom, 25% in the middle, and 29% at the very top.

Look, people in my biz are constantly writing and reflecting on these issues of fairness in the tax code, and they’re important.  But to be perfectly frank, the debate is wildly overblown.  The relatively marginal changes being contemplated—e.g., allowing the high-end Bush tax cuts to sunset—won’t have much effect on any fundamental economic variables, except the budget deficit, which it will help to lower a bit.

Almost everyone pays some taxes.  Meanwhile, the federal code has become less progressive and is raising too little revenue.  At least from where I sit, those are the relevant facts of the case.

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3 comments in reply to "“Who Pays Taxes?” is Back on the Scene"

  1. Jake says:

    Sunsetting the Bush tax cuts for the high-end while keeping them for all others also is important as a step towards trying to use tax policy to address the 30-year trend in falling household income for the middle 20%. The Census Bureau as reported I believe on this blog shows a decline in income share of the middle 20% from 17.3 to 14.3 from 1967 to 2011. Tax policy won’t make up for the loss of income share, but it would be a step taken in recognition of what is changing in this country.

  2. Joe says:

    This is about federal income taxes. Working people paying payroll taxes do so with the expectation (correct) that those payments are specifically for a future benefit that they are “entitled to ” by virtue of their payments.

    With regards to the income tax, the share of income that the top 10% earned rose throughout the Clinton era from 39% to 46%. They rose again during the Bush era from 43% to 45.8% (note a slower growth than during the halcyon Clinton era). The top 10% share of income tax paid rose throughout the Clinton years from 59.24% to 67.3% and in the Bush era from 64.89 to 69.94. So in spite of the “rich favoring” Bush tax cuts, the “rich” actually paid a greater share under Bush.

    The bottom 50%’s income share fell during Clinton from 14.92% to 12.99% and also fell under Bush from 13.8 to 12.75%. The bottom 50% saw their tax share fall from 4.8% to 3.9% under Clinton and from 3.9% to 2.7% under Bush. Again, in the hated Bush cuts the bottom 50% actually saw their share of taxes paid decrease.

    Tax rates? Under Clinton rates on the top 10% rose from 20.2% to 22.34%. But, the tax rate for the bottom 50% also rose under Clinton from 4.3% to 4.6%. Under Bush the top 10% average rate fell from 21.4% to 18.7%. But, under Bush the tax rate for the bottom 50% also fell from 4.1% to 2.59%, a huge decrease.

    Net it all out and we have an extremely progressive federal income tax code and one that has become even more progressive. At some point we will have too few people paying for the operation of the federal government.

    Sorry for all the data points

  3. SeattleAlex says:

    This chart rocks my socks JB… Thanks for providing the data and context I need to refute all the ridiculous arguments I hear on a daily basis. Cheers!