San Marcos Mercury: Tax misconceptions that distort our perceptions
media mentionby LAMAR W. HANKINS
“Now a petty, narcissistic, pridefully ignorant politics has come to dominate and paralyze our government, while millions of people keep falling through the gaping hole that has turned us into the United States of Inequality.” – Bill Moyers
Almost every week, I hear from a friend, acquaintance, or political pundit that half of our population (more or less) don’t pay their fair share of taxes, or don’t pay taxes at all. Usually, these people are focused only on federal income taxes and fail to consider other federal taxes, along with state and local taxes. Nearly always, they are talking about the bottom half of the income earners in the US.
When I have heard conversations that fit Bill Moyers’ description of our politics, I have not always had the facts I needed to explain why I believed that focusing only on the income tax distorts our understanding of who pays taxes, and that much of the “common wisdom” about such matters is incorrect. After doing some research, here is what I found.
To begin, it is fair to acknowledge that what has happened since the beginning of the Great Recession does not adequately reflect the long-standing application of tax laws in this country. Tax figures since 2008 do not provide an accurate picture of this country’s tax policy history, so I will use pre-Great Recession figures to illustrate the tax misconceptions inherent in the idea that half the population do not pay a fair share of taxes.
In 2007, 40% of households did not pay federal income taxes (for 2011, that figure is 46%). But virtually all those who were working did pay federal taxes – namely payroll taxes. And payroll taxes are 15 cents for every dollar earned. (While they are supposedly split between the employee and the employer, most economists believe, as Fordham University law professor Linda Sugin pointed out recently, that workers would have a higher income without the payroll tax.) In 2007, only 14% of households paid no federal income or payroll taxes, but almost all did pay federal excise taxes on gasoline and other products and services, like whiskey, wine, tobacco, tickets, vaccines, cell phones.
A 2012 study from the Center on Budget and Policy Priorities explains, “Most of the people who pay neither federal income tax nor payroll taxes are low-income people who are elderly, unable to work due to a serious disability, or students, most of whom subsequently become taxpayers. (In years like the last few, this group also includes a significant number of people who have been unemployed the entire year and cannot find work.)”
The Congressional Budget Office reports that the poorest 20% of households paid an average of 4% of their incomes ($18,400) in federal taxes in 2007. This amount of income is barely above the 2007 federal poverty guidelines for a family of three. Considering how modest the incomes are of this group, 4% is a significant amount. The next 20% of households (with incomes between $20,500 and $34,300) in 2007 paid nearly 11% of their incomes in federal taxes.
But the tax burden for this bottom 40% of households in the US is not limited to various federal taxes. The Institute On Taxation and Economic Policy (ITEP) found that the 40% of poorest households pay on average about 18.5% of their income in federal, state, and local taxes. (State and local taxes are significant and are paid by everyone, including renters, who pay property taxes indirectly through their monthly rent.) It is clear from these figures that Mitt Romney’s 47% of “takers” are also payers, as well.
And the Center on Budget and Policy Priorities made a startling discovery:
“[W]hen all taxes are considered, the share of taxes that each fifth of households pays is similar to its share of the nation’s total income. ITEP data show that in 2011, the bottom fifth of households received 3.4 percent of the total income in the nation and paid 2.1 percent of the total taxes. The middle fifth of households received 11.4 percent of income and paid 10.3 percent of taxes. The top 1 percent of households received 21.0 percent of income and paid 21.6 percent of taxes. The tax system as a whole is only mildly progressive.”
If we set aside all the other federal taxes and look only at those who do not pay federal income taxes, the Tax Policy Institute found facts that any fair-minded person should want to consider in evaluating why some families did not owe federal income taxes in 2011:
“50 percent are in this category because their incomes are so low that they are less than the sum of the standard deduction and personal and dependent exemptions for which the household qualifies. . . . Some 62 percent of the households who will owe no federal income tax in 2011 have incomes under $20,000.
“Another 22 percent do not owe federal income tax because they are elderly people who benefit from tax provisions to aid senior citizens, such as the exemption of Social Security benefits from income tax for beneficiaries who have incomes below $25,000 for single filers and $32,000 for joint filers and the higher standard deduction for the elderly.
“Another 15 percent . . . don’t owe the tax because they are low-income working families with children who qualify for the child tax credit, the child and dependent care tax credit, and/or the earned income tax credit, and the credit(s) eliminate their income tax liability.”
But which big money-makers in the US pay no federal income taxes? A study by the General Accounting Office found that between 1998 and 2005, 55% of large corporations (those with at least $50 million in gross receipts) paid no federal corporate income taxes. And many wealthy individuals shelter their income outside the US to avoid taxes. Here’s how Bill Moyers explained that situation:
“Corporate profits are at record highs. But have those companies invested that in new Jobs? No. Did they at least give their workers a bump in pay? Hardly. Surely they shelled out a little more in taxes to help refurbish the social structure – highways, bridges, schools, libraries, parks – where they do business! Guess again. Corporations are sitting on $1.7 trillion of cash. Look at this report just published by PIRG — the Public Interest Research Group — on how average citizens and small businesses have to make up the $90 billion giant companies save by shifting profits to offshore tax havens. Among the 83 publicly traded corporations named: Pfizer, which for the past five years reported no taxable income in the US, even as it made 40 percent of its sales here.
“Microsoft, which avoided $4.5 billion in taxes over three years by shifting its income to Puerto Rico. Citigroup, which maintains 20 subsidiaries in tax havens and has over 42 and a half billion dollars sitting off-shore. Taxes collected here at home? Zero.
“It’s not only corporations stashing their swag abroad. The Center for Public Integrity in Washington and its International Consortium of Investigative Journalists recently got their hands on two and a half million files from offshore bank accounts and shell companies set up around the world by the wealthy. Among those documents are the names of 4,000 Americans who hid their money in secret tax havens.”
So the next time someone tells you that this is a nation of freeloaders, or at least half the nation fits that description, let them know that even the poor pay taxes, but it’s the wealthy and the giant corporations that have the tax rules fixed for them so they can keep their income from being fairly taxed. They are the real freeloaders.