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Wednesday, May 4, 2011

51% of Households Pay No Income Tax; Share of Taxes Paid by Rich Growing Faster Than Income

Senate Logo The Senate Finance Committee yesterday held a hearing on Is the Distribution of Tax Burdens and Tax Benefits Equitable?. Here are links to the member statements and witness testimony:

In connection with the hearing, Ranking Member Hatch released this letter from the Joint Committee on Taxation reporting 51% of U.S. households did not pay any federal income tax in 2009.

Wall Street Journal, High-Earning Households Pay Growing Share of Taxes:

As President Barack Obama pushes to raise income taxes on high earners, opponents are seizing on data that indicates these U.S. households already pay a large and growing share of taxes, even compared with high-tax European countries. And a new congressional study concludes that the percentage of U.S. households owing no federal income tax climbed to 51% for 2009. ...

WSJ 

Democrats note that the incomes of higher earners have been growing far more rapidly, so it's only natural that they would pay a higher share of tax. As for those Americans who pay no federal income tax, most of them still pay Social Security and Medicare payroll taxes that can take a significant share of their income, Democrats said. ...

Upper-income taxpayers have paid a growing share of the federal tax burden over the last 25 years. A 2008 study by the Organization for Economic Cooperation and Development, for example, found that the highest-earning 10% of the U.S. population paid the largest share among 24 countries examined, even after adjusting for their relatively higher incomes. "Taxation is most progressively distributed in the United States," the OECD study concluded.

Meanwhile, the percentage of U.S. households paying no federal income tax has been climbing, and reached 51% for 2009, according to a new analysis by the Joint Committee on Taxation. ...

[A]nother reason for the U.S. system's apparent progressivity is its lack of a value-added tax, according to some experts. VATs—a form of consumption tax common in Europe and Asia—typically place more of the burden on lower-income earners, because they spend more of their income.

Tax systems in emerging economies tend to be less progressive than either the U.S. or other developed countries, according to experts. They extract less in taxes as a percentage of GDP, and the role played by individual income taxes is "remarkably small," said Eric Zolt, a tax law professor at UCLA. Singapore's top individual income-tax rate, for example, is 20%. The highest U.S. marginal rate is 35%: Mr. Obama has proposed raising it to 39.6%.

To be sure, some experts say the share of tax borne by the wealthy is not the best measure of a system's progressivity. They say it's more important to look at the tax rates being paid by higher earners. In the U.S., the average tax rate for higher earners has fluctuated, but generally has declined for the top 10% from 29.6% in 1979, to 26.7% in 2007, according to the CBO, even as incomes for that group were rising. Average rates for the very wealthy are often lower than that because of low tax rates on investment income.

Some experts see an opportunity. "There's a potentially very large fiscal reserve" that the government could tap by raising taxes on higher earners, says Emmanuel Saez, an economist at the University of California, Berkeley.

Other press and blogosphere coverage:

http://taxprof.typepad.com/taxprof_blog/2011/05/senate-51-of-households.html

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Comments

The US is getting closer to its "tipping point" of givers and takers.

The FairTax will equalize the tax payers and benefactors.

Posted by: Will Manning | May 4, 2011 9:07:45 AM

The impact of this on a poll-driven media and government cannot be overemphasized.

Posted by: taxjock | May 4, 2011 9:31:19 AM

Wasn't that sort of the point of tax reform?

Posted by: mike livingston | May 4, 2011 9:56:23 AM

Didn't we get into a big gunfight a while back over being taxed without representation?
If a majority of votors pay no taxes, and if they tend to vote for people and programs that keep them off the tax rolls, where is the equity for those of us unfortunate or stupid enough to pay taxes that support the kleptocracy?

If you don't shoulder the responsibilities of basic citizenship, as represented by the payment of property and income taxes, why should you be allowed the privilege of the franchise? I'll answer for you; you should not.

In the eastern seaboard states, you are really seeing this in terms of property taxes relating to school budgets. People who are not property owners vote to levy taxes on their neighbors who are. How sustainable do you suppose that scam is?

Posted by: B Dubya | May 4, 2011 10:18:26 AM

I hate these headlines and studies for the simple reasons that most don't include FICA payroll taxes.

Contrary to their formal name -- "contributions" -- these are very real income taxes, and hit the poor hardest. For most people, they are the only income taxes they pay.

I'm not saying this to be siding with the Dems -- my online work speaks to my Conservative beliefs -- but what I am saying is that we need to be honest with these things.

Posted by: geek49203 | May 4, 2011 11:02:30 AM

Seriously? The old "half the country are freeloaders" spin again?

Couple questions.

What percentage of total federal revenue is income tax?
What does the overall tax burden look like when you include all taxes (state, sales, local, payroll)?
And finally, is the overall tax burden on the top 1% historically high or low right now?

Thanks, in advance.

Posted by: Blue Texan | May 4, 2011 11:03:00 AM

I find the overemphasis on INCOME TAX reporting quite annoying and partisan. What actually matters in total marginal tax rate per unit population.

In any case, it seems to me this is an effort to redirect concerns over the runaway growth of government and its intrusion into everyday life. Instead, we should be making every effort to take as much tax money of ALL TYPES away from government as possible and return government to it's core functions.

Posted by: BioBob | May 4, 2011 11:12:45 AM

If 51% of people do not pay income taxes it is because of one of two things:

1. There are too many deductions.
2. 51% of the people do not earn enough to have to pay income taxes.

We can get rid of the first thing. The second requires an examination of how wealth is distributed in the country.

If there is a problem it is not the progressive system, it is with the perverse division of profits and earnings between capital and labor.

Posted by: Allan | May 4, 2011 11:23:39 AM

TANSTAAFL: There ain't no such thing as a free lunch.

Flat tax, please, so everyone can toss in their share.

Posted by: fiftyville | May 4, 2011 11:33:01 AM

"To be sure, some experts say the share of tax borne by the wealthy is not the best measure of a system's progressivity. They say it's more important to look at the tax rates being paid by higher earners. In the U.S., the average tax rate for higher earners has fluctuated, but generally has declined for the top 10% from 29.6% in 1979, to 26.7% in 2007, according to the CBO, even as incomes for that group were rising. Average rates for the very wealthy are often lower than that because of low tax rates on investment income."

Here's a graph I made a few weeks ago addressing that issue:

http://incompletemarkets.tumblr.com/post/4895216260/total-average-federal-tax-rate-1979-2007

Posted by: B | May 4, 2011 11:41:29 AM

I wonder about the factor of State income taxes. Are there any studies about say North Carolina's wealthy and their share of the State's income taxes similar to the study about Federal income taxes?

Posted by: WJ | May 4, 2011 11:54:47 AM

FICA tax contributions are predominantly returned to the taxpayer in the form of SS payments (in theory, anyway), so that is not an apples to apples comparison.

Posted by: GringoSalado | May 4, 2011 12:07:17 PM

"most of them still pay Social Security and Medicare payroll taxes" and geek40203

What these stories and the Democrats NEVER mention is that most of those in the now 51% who don't pay federal income tax also get significant amounts of money 'back' each year as refunds that more than cover what they pay in social security and medicare taxes. For example my in laws paid zero in federal income tax and SS and $100 in medicare tax last year. Yet they received $400 back as a 'refund'. A single mom friend of mine who has 2 kids and works at a retail store got 'back' thousands.

What I would like to know is if there are any figures out there of how much these people get 'back' and how it compares to what they pay as far as SS and medicare and state income taxes. I think I read somewhere that this figure is in the billions. I submit that they should pay an effective tax of minimum $10/month because everyone should pay some federal tax.

Posted by: Steve | May 4, 2011 12:08:03 PM

2009 is an interesting choice to look at. I know plenty of millionaires that had NOLs that year and therefore they paid no tax. But, these people certainly are in the top 10% (or higher) in terms of wealth.

Posted by: anon | May 4, 2011 12:08:10 PM

I agree that the focus on income taxes skews the debate, however, FICA is perhaps even more progressive than the income tax. If you analyze the "point system", you'll find that a taxpayer gets 7 points per dollar below ~8,000, 3 points per dollar below ~$35,000 and a mere 1.5 points per dollar after that. When the benefit formula pays out directly based on the points that you've accumulated, it becomes clear that any payments above the ~$35,000 threshold is just a giant transfer payment to those below the ~$35,000 threshold. The calculus for the medical benefits portion is even more progressive.

Admittedly, income correlates with life expectancy, but nowhere near enough to make FICA anything but a progressive program. Plenty of taxes are regressive, such as the fuel tax or the tax on prepared food, but let's call a spade a spade regarding FICA.

Posted by: ry | May 4, 2011 12:30:44 PM

I read the letter and I am not entirely sure it means that 51% pay no income tax. Here is why, the statement in the letter that xx million filers have a "refundable credit" could simply mean that they had withholding in excess of their tax liability, likewise, the statement that xx million filers have a "positive tax liability" could refer to those who owe more than was withheld.

I firmly believe that a "progressive" tax system is immoral and would like to take the statement that 51% pay no tax at face value, but the letter on which this is based is a product of government and thus should be subject to great skepticism, ESPECIALLY when it supports one views.

Posted by: jpintx | May 4, 2011 12:30:55 PM

"If a majority of votors pay no taxes, and if they tend to vote for people and programs that keep them off the tax rolls, where is the equity for those of us unfortunate or stupid enough to pay taxes that support the kleptocracy?"

Yeah, how unfortunate for you that you don't live a life of miserable poverty. I'm sure your parents deeply regret getting you your current white collar job(that you weren't doing when you posted about this at 10am on a weekday). If only they had let you fend for yourself you might have been living the easy life of a Best Buy cashier, pulling down literally hundreds of (income tax free!) dollars a month.

Posted by: Lucky Ducky | May 4, 2011 12:40:23 PM

Does "owing no taxes" mean the same thing as paying no taxes? Doubtful...

Posted by: Thingumbob | May 4, 2011 12:42:03 PM

IMHO, this argument on "income" taxes borders on pure intellectual dishonesty by both sides.

The reality is that the growth of government at almost every level has generated an insatiable appetite for revenue which means the lower-income (that 51%) are being ground to dust by taxes.

The Federal and State gov't pushes their "income" taxes downstream via mandates so that the downstream uses sales, property and usage (car registration, etc) to collect the money.

FICA (mentioned earlier) + Medicare: 7+%
Sales taxes: 10+% in Illinois, 8+% in NY and other states.
Fuel taxes (where the Fed and State gov'ts make far more than the oil companies profit).
Taxes on health insurance and medical care.
Property taxes (which increase prices and sales taxes).

The wealthy are less affected directly by the above, so the Feds hit them up but it's certainly not like that lower 51% are escaping.

Posted by: Codebanger | May 4, 2011 1:06:19 PM

It would be helpful to know how many of the 51% of households end up paying no payroll taxes either due to tax credits and how many of those households receive some kind of federal entitlement, stipend and/or subsidy.

Posted by: SukieTawdry | May 4, 2011 1:21:24 PM

B Dubya's comment paraphrased:

"Even though I'm conservative and want to agree with those advocating less tax for the wealthy, your arguments in favor of it are patently deceitful and based on misinformation."

It's nice to see an honest conservative, it helps balance out the ones who put out deceptions masquerading as cold hard facts.

Posted by: UVP | May 4, 2011 1:52:09 PM

What thingumbob said. The distinction between owing no taxes after taxes have been taken out of every paycheck and/or making estimated tax payments, and paying no taxes is a HUGE one.

Posted by: Pyperkub | May 4, 2011 2:12:15 PM

Posted by: Thingumbob | May 4, 2011 12:42:03 PM

The reality is that the growth of government at almost every level has generated an insatiable appetite for revenue which means the lower-income (that 51%) are being ground to dust by taxes.

___________

Except that you've been shown over and over by Paul Krugman and others that there's been no such growth in government, the recent spending increases have all been due to the economic downturn, which was caused of course by deregulation and other conservative economic policies blowing the economy up like a giant clown car full of balloons and driving it off a cliff.

Of course you'll just respond that Krugman is a lefty, or some other ad hominem response, he'll keep proving these points anyway, and you won't listen. On and on it goes.

Posted by: UVP | May 4, 2011 4:47:53 PM

Lucky Ducky = whiny douche with a shitty job. Waah!

Posted by: model_1066 | May 4, 2011 10:05:53 PM

So what's the surprise? This is a plainly foreseeable development of the Progressive Income Tax. The government raises the tax rate on wealthy business owners who pass these taxes along to their consumers via increased cost of goods and services. The problem is that eventually this pushes the businesses out of business or out of the country. Nor can we switch over to some sort of consumption tax when it needs to be set between 40 & 50 percent to equal current tax rates. Any switch in taxes should begin by reviewing what the government does and do we really need them to do this.

Posted by: Jerry | May 5, 2011 10:31:56 AM

Tax systems in emerging economies tend to be less progressive than either the U.S. or other developed countries, according to experts

That's because in order to spend 40% of GDP you have to go where the money is: the middle class.

Posted by: AMTbuff | May 5, 2011 1:42:08 PM

To B Dubya: If you want to talk about other kinds of taxes that most people pay, including FICA, that's fine. But FICA isn't an income tax, so just accept the headline as accurate.

Posted by: Steve from Wisconsin | May 5, 2011 6:59:12 PM

How in the world did Emmanuel Saez become an economist at UCLA, Berkely? Anyone in Econ 101 learns that the more you tax the rich, the less money the government takes in. Is he the only one left in America that doesn't know this? More harebrained ideas like his and we shall all declare bankruptcy, including him.

Posted by: Ziporay | May 6, 2011 12:35:06 AM

"How in the world did Emmanuel Saez become an economist at UCLA, Berkely? Anyone in Econ 101 learns that the more you tax the rich, the less money the government takes in."

Please link to one reputable economic journal or publication that supports this. You are completely wrong.

Posted by: The Derider | May 6, 2011 5:53:19 PM

51% paying no federal income tax simply reflects how unequal the distribution of wealth is in the U.S.

Posted by: David Bennethum | May 10, 2011 8:44:54 AM