The Myth of the Poor Paying No Federal Taxes

One of the dominant memes on the right at the moment is the claim that more than half of all Americans pay no federal taxes. The Center for Budget and Policy Priorities puts that myth to rest decisively. First, it notes that the figures come from a year when the recession had dramatically lowered incomes:

The 51 percent figure is an anomaly that reflects the unique circumstances of 2009, when the recession greatly swelled the number of Americans with low incomes and when temporary tax cuts created by the 2009 Recovery Act — including the “Making Work Pay” tax credit and an exclusion from tax of the first $2,400 in unemployment benefits — were in effect. Together, these developments removed millions of Americans from the federal income tax rolls. Both of these temporary tax measures have since expired.

In a more typical year, 35 percent to 40 percent of households owe no federal income tax. In 2007, the figure was 37.9 percent.

Second, the claim only includes federal income taxes, ignoring federal payroll taxes:

The 51 percent figure covers only the federal income tax and ignores the substantial amounts of other federal taxes — especially the payroll tax — that many of these households pay . As a result, it greatly overstates the share of households that do not pay any federal taxes. Data from the Urban Institute-Brookings Tax Policy Center show only about 14 percent of households paid neither federal income tax nor payroll tax in 2009, despite the high unemployment and temporary tax cuts that marked that year.

And it also doesn’t include other federal taxes, like excise taxes on gasoline. CBPP also looks at who makes up the group that pays no federal income taxes and they are either students, people on social security, the unemployed or the working poor who still pay payroll taxes.

More importantly, it ignores the fact that taxes at the state and local level are strongly regressive. Those with lower incomes pay a far higher percentage of their income in state and local taxes than the wealthy do. In fact, there are in reverse proportion at every level — the lowest 20 percent of earners pay the highest percentage (12.3%) and each subsequent quintile pays lower percentages, with the top 1 percent paying only 7.9%.

A study by the group United for a Fair Economy, in fact, found that if this system were inverted — if the top earners paid 12.3% and the bottom earners paid 7.9% — it would add around $40 billion to state revenues, which would all but erase the systemic budget problems that have plagued most states in recent years. And it would also be more fair.

The CBPP also points out that an almost identical reality exists when it comes to corporate income taxes, yet you don’t hear conservatives screaming about how unfair that is.

As this report notes, in addition to paying other taxes each year (many of which involve significant tax burdens), most people who do not pay federal income tax in a given year do pay that tax over time. For example, more than half of the tax filers who received the EITC between 1989 and 2006 received the credit for no more than a year or two at a time and generally paid substantial amounts of federal income tax in other years.* In fact, the taxpayers who claimed the EITC during this 18-year period paid $473 billion in net federal income tax over that period (in 2006 dollars) even after taking the EITC payments they received into account.

The tax-paying record of both large corporations and small businesses follows an analogous pattern — in some years no taxes are paid, while in other years substantial taxes are paid. During the years when they have net operating losses, companies that are subject to the corporate income tax generally have no tax liability.

A GAO study found that in every year from 1998 to 2005, approximately 55 percent of large corporations paid no corporate income tax. ** But just 2.7 percent of large corporations reported no net tax liability in all eight of those eight years. This reflects a similar pattern as applies to families and individuals — those who do not pay income tax in a given year often do pay income tax over time.

This pattern also applies to small business owners and others who deduct business losses from their taxable incomes and thereby eliminate their income tax liability in some years.

The right seems to think that the only people who pay too much in taxes are the wealthy and the only people who don’t pay enough are the poor. That’s clearly backwards.

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  • fastlane

    Bookmarking this study for reference. Thanks Ed.

    It confirms some of the haphazard searching I’ve been doing, and some basic calculations I’ve used as hypotheticals come pretty close to these actual numbers.

  • The right seems to think that the only people who pay too much in taxes are the wealthy and the only people who don’t pay enough are the poor.

    Which makes it rather hard to believe that they have a principled objection to taxation. It really is just class warfare.

  • When big companies like Exxon Mobil, Chevron, Boeing, and Yahoo! pay NO taxes at all, it’s kind of obscene to think about squeezing 20% from the bottom tier of wage-earners.

  • bahrfeldt

    Most of us pay 6.2% of our gross wages (temporarily at a reduced rate) for Social Security. Our employer does as well but can take an income tax deduction for its share. A-Rod is paying less than 0.04% of his salary in payroll taxes (assuming the reported salary is correct and is paid as an employee’s salary), them Yankees at a similar rate. If he could treat that as long term capital gains, like some hedge fund managers, or dividends or interest or rents or even other capital gains, that percentage would drop to zero. The pols treat payroll taxes as taxes for “balancing” the budget but not when it comes to who pays them. Can they spell hypocrite?

  • marymallone

    The regressive tax system makes no sense whatsoever. I keep trying to think of ways to articulate how fucked up that is, and why, but I can’t. Is it some sort of “trickle-down” thing? That just does not make sense.

  • azkyroth

    Is it some sort of “trickle-down” thing?

    It’s more of a “nuke the poor” sort of thing.

  • Michael Heath

    Another regressive tax on the poor is that business taxes are incorporated into the price paid for goods and services. From a practical perspective, businesses as a collective group don’t pay taxes, they pass them on to consumers.

    The poorer one is, the less discretionary income they have to pay the taxes embedded in the goods and services paid for and consumed, taxes which are not regressive but instead flat and therefore regressive from the marginal amount of income available to pay such taxes. The richer one is, the more marginal income they have to invest after paying taxes embedded in the goods and services consumed.

  • doktorzoom

    It’s more of a “nuke the poor” sort of thing.

    It’s also a “the poor have no lobbyists” thing

  • jonhendry

    I’d like to see the numbers for the Clinton years, when unemployment was low and labor participation rate was higher.

  • jesse

    It seems to me there are a couple of ways to solve a ton of problems with both Social Security and local tax revenues.

    1. No more payroll tax limit. Tough titties if you make $3 million a year and have to pay $180K a year in payroll tax. You get a check, you pay. Social Security would be essentially solvent forever.

    2. Income is income. You make money, you pay. It should not matter where the money is from. I have no problem with various deductions — there are all sorts of ways to massage that, depending on what you want to encourage people to do. But Little Jenna Bush could live entirely off an inheritance and gather interest, and make far more than I do without working a day in her life, and pay less in taxes. If I worked and made $100 K per year in salary I would pay more than a rich kid living off daddy’s dime. That is beyond un-freaking fair as not all of us were born with rich daddies.