Friday, April 16, 2010

When People Pay No Federal Income Taxes

-- Posted by Neil H. Buchanan

Yesterday was "tax day," the official filing deadline for federal income taxes in the United States. (Actually, anyone can receive an automatic six-month extension to file, if they submit a simple form and pay a reasonable estimate of their tax liability. But no matter.) The media's Pavlovian coverage of anti-tax protests focused on this year's big talking point from right-wing politicians and pundits: the estimate (which has been available since last June yet managed to emerge just in time for April 15 punditry) that roughly 47% of all taxpayers will have zero net federal income tax liability for 2009. Here, I will run through some of the obvious ways that that number is being used to dishonest effect. Most of these points, happily, have already been made in prominent news outlets; but the dishonest claims continue unabated. I will then address a more fundamental question: Would it really be bad if large numbers of people paid no taxes at all?

Unlike some issues (such as breathless claims about the evils of federal budget deficits), this new claim that nearly half of all people pay no taxes has been pretty thoroughly destroyed by mainstream sources. David Leonhardt, the economics columnist for the New York Times, ran an article on Tuesday in which he described the reality behind the claim that "half of all people pay no taxes at all, not a penny" (as I heard one business pundit claim on TV). It is true that 47% of all potential taxpayers will end up with zero liability for their 2009 federal income taxes, Leonhardt points out, but that is hardly the same thing as saying that people pay "no taxes." At the federal level, people with no net income tax liability still pay excise taxes (including federal gasoline taxes), payroll taxes, and corporate taxes (through the tax on dividends).

Focusing on a family in the statistical middle -- with $35,400-52,100 in annual income, such as firefighters, preschool teachers, truck drivers, etc. -- he finds that the average family's federal income tax liability would be about 3% of their income, but their total liability for all federal taxes would be about 14.2%. That is a lot more than zero. Moreover, Leonhardt does a very good job defeating the argument that federal payroll taxes are not really taxes because they come with benefits. Although he does not quite put it this way, his argument boils down to this: All taxes come with benefits (national defense, infrastructure, etc.), so it is completely arbitrary to call FICA and Medicare taxes non-taxes because they are nominally tied to specific benefits. Finally, he points out that the super-rich are extremely good at hiding income, making their reported tax rates higher than they actually are.

A report from Citizens for Tax Justice, a liberal think-tank, also debunks the claims that 47% of Americans pay no taxes, adding to the analysis in Leonhardt's article (and, to be clear, in many other places, since his arguments are hardly novel) by including mostly-regressive state and local tax liabilities, especially sales and property taxes. CTJ concludes that the overall U.S. tax system is nearly proportional and that "all Americans pay taxes."

In addition, as some other analysts have pointed out, when a person has zero federal income tax liability, that is often because of the inclusion in the tax code of the policy-oriented credits that Congresses led by both parties have enacted with such glee over the years. Almost the entire increase from 2008 to 2009 in zero-tax-liability returns, for example, was because of popular (and temporary) credits like the first-time homebuyer program, which provided $5000 to people who otherwise would have had a positive federal tax bill. That is a very different reality from the idea that the federal income tax code simply exempts half of the population from taxes.

The depressing aspect of this debate, of course, is that reality has nothing to do with it. Even more than the "death panel" nonsense and the absurd claim that the health care bill represented a "government takeover of 1/6 of the economy," these claims about taxes are not only dishonest but have been prominently and repeatedly shown to be so. That has not stopped the dishonesty from continuing to spew forth, which alone is reason to despair for our political culture.

I think that there is a more important issue at stake here, however. The analysis above amounts to the following claim: "Most taxpayers do so pay taxes! Don't say they don't." But what if it were really true that half of the country paid no taxes? Why do we unquestioningly accept the presumption that this would be a bad thing? As I suggested in a FindLaw column on a related matter in 2007, it is entirely to be expected -- indeed, it is morally required -- that a society with serious income inequality will not tax people who are just getting by. The "zero bracket" is a term of art describing the amount of income not subject to tax, because of such things as the standard deduction and personal exemptions (as well as all of those credits). When there is a zero bracket, people with low enough income will pay zero taxes. We set the zero bracket, in fact, on the basis of a legislative consensus about what constitutes "just getting by."

It is worth noting that even some fundamental changes to the tax system favored by conservatives include large zero tax brackets. Dick Armey, the former Republican Majority Leader in the House, proposed a so-called flat tax program with much larger zero brackets than currently exist in the tax code, which would have meant that many middle class people would pay no federal income taxes. That, in fact, was one of his major selling points -- that the system would really be progressive, by reducing some people's tax liabilities to zero and exempting much more income from slightly more well-off middle-class people.

In the last thirty years, middle class incomes have barely kept up with inflation, even as health care costs have skyrocketed (and benefits have been cut), as pensions have been slashed or eliminated, and as families' life savings and housing equity have been destroyed by financial catastrophes beyond their control. Meanwhile, the incomes of the wealthiest Americans have risen to levels that far outstrip any increases in the taxes that they pay. It hardly seems surprising that the bulk of Americans would see their tax liabilities shrink or disappear in such an environment, while others would be expected to pay more.

3 comments:

michael a. livingston said...

This may also explain much of the seemingly irrational objection to taxes on the part of economically modest individuals: when wage, excise, and local property taxes are taken into account they many not be so illogical, at all.

Paul Scott said...

Your figures should, I hope, make something very clear - the regressive nature of our tax system.

Overall in our system, Two things are taxed substantially:

1. Income (including all the payroll associated taxes).

2. Transactions (sales, gifts, etc.)

The one thing that is taxed very lightly, if at all in some cases, is wealth. In some cases, in fact, wealth results in tax credits.

For lower to lower-middle income persons, even if the "Income Tax" is zero bracket, 100% of their income will be subjected to the various payroll taxes. Also, for lower income persons, essentially 100% of their take-home income is taxed again in transaction taxes - as these people are required to spend essentially 100% of their income.

The idea that our tax system is progressive simply because the Federal Income Tax has a progressive scale is simply a lie. Unlike the ones you are talking about, this lie is complicated enough that most "reporters and analysts" either don't understand it or don't report it.

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