Who Really Pays Taxes?

By :: June 26th, 2008

Less than an hour after Howard Gleckman posted a blog entry on the presidential candidates’ tax plans, a question came in about TPC’s finding that Senator Obama’s plan would increase taxes of a low-income elderly couple by $150. How, the commenter asked, could that happen if Obama said he’d eliminate taxes for elderly households with income under $50,000?

The answer has two parts, one easy and one more complicated.

First, Obama wants to eliminate individual income taxes for most elderly families. (Two-thirds of the elderly have income below $50,000 and less than a quarter of those pay any income tax now.) But he increases corporate income taxes, which indirectly affects the elderly (and others who own assets).

And that gets to part two of the answer, what economists call “tax incidence”—who actually pays a tax. We assume that the incidence of the corporate tax falls on people who own assets by lowering their pre-tax rates of return. This assumption is controversial.

Clearly, somebody must pay the tax. It could fall on shareholders, employees, customers, or a combination of the three. It could even affect asset income or wages more broadly, cutting returns for investors who own non-stock assets or reducing compensation for workers at firms outside the corporate sector.

Economists agree on the incidence of some taxes—the individual income tax falls fully on people who earn the taxed income, for example—but reach different conclusions on others, including the corporate income tax. For a long time, the conventional wisdom held that the corporate tax burden landed on all owners of capital, not just corporate stockholders. Some—but not all—models show that, under certain circumstances, much of the tax can fall on workers. TPC follows the Congressional Budget Office’s practice of assigning corporate tax incidence to all owners of capital in proportion to their income from capital.

So that’s how a poor elderly couple gets a tax hike from Obama. On average, low-income older people own some capital—stock in their retirement funds, homes, or maybe mutual funds—and that capital bears some of the corporate tax. Obama’s plan would increase corporate taxes and poor older couples would bear some of the cost—not all of them and not much of the cost but enough to make their average federal tax bill rise.

This story has two related lessons. First, you can’t assess the impact of candidates’ proposals without poking around in the fine print. Second, seemingly odd outcomes generally spring from less than obvious details and interactions.

8Comments

  1. Anonymous  ::  12:15 am on September 19th, 2008:

    What a pile of nonsense. Low income older people would have tax hikes because of a tax cut. Why not do the real math – take an average elderly, low income couple – reduce their taxes and then wait to see how the unknown increase increase in corporate tax (which denies adjustment for inflation or competition) affects them…. Looks like they save money to me.

  2. Anonymous  ::  1:53 pm on September 20th, 2008:

    The math looks solid to me. My mother in law makes 0 dollars per year and her income is from some mutual funds and social security. She pays no income tax. If corporate taxes go up her income will go down due to a lower return on the mutual funds.

  3. Anonymous  ::  8:32 pm on October 15th, 2008:

    This is the same old nonesense that polititians continue to spew out and an uneducated public buys – that the “evil” corporations are the source of all of our problems and that they, and the “rich” individuals of our society should pay more in tax. Well, as this article points out, those taxes are additional costs to a corporation, and they will be passed down, to … YOU and ME. AND those “rich” people in our society?? Those tend to be the SMART and HARDWORKING types, MOST of whom have earned their own money. Which is exactly what capitalism provides – incentive to work hard to improve your own lot! Moving to a socialist society, as we now are, is only going to hurt us in the long run. Government should NOT be in the business of redistributing wealth and, in fact, should not be in business at ALL. You only have to look at how the federal government has managed their OWN budget and deficit (which is OUR deficit) to know THAT. btw – I did some quick math – with a current deficit of $10 trillion and about 150 million working Americans, if we EACH paid an equal share of taxes we'd EACH owe $66,667.00. Now, even scarier, is that about half of working people do NOT pay taxes. So us working saps are now responsible for about $120,000 of the government's debt. Think you could save $10,000 a year for the next 10 years to help pay that off?? Funny how you don't hear any politicians, ANY politicians, except maybe for Ron Paul, talking about THAT.

  4. Anonymous  ::  12:01 am on October 29th, 2008:

    I'm no savvy economist, but I'm usually a good researcher. Could someone please break down the current income tax payments showing who (the rich, the middle, the poor) is paying the bulk of taxes? As I understand it, the top 25% earners currently pay more than 80% of all income tax. Is that true? A pie chart would be great. Thanks.

  5. Anonymous  ::  3:45 am on November 1st, 2008:

    I wish those SMART,HARDWORKING types would help educate us… you know the “uneducated public.” I would have to disagree with your statement that MOST have earned their own money, while there are many that have, there are just as many that have not. As a nurse, I feel I work hard, both physically and mentally, but in order to advance I would have to continue my education, somethng that is not easy to do when you work in a field in which there is a shortage. Who will cover for me while I am taking classes and working to improve my lot, and how will I support my family while I am in school and losing hours at work? While I do see your point and agree with much of what you say, I just have to point out that it is really not that cut and dry. I do agree with your statement that the “evil” corporations are not the source of all of our problems, but I do feel that the rich should pay more in tax, not a huge amount, but even a little would help, because there really are some hard working people that are very much needed in our society, but are not in a position in which they can ever really become rich, however they probably provide the services that the rich depend on. This of course goes both ways, I admire some of the hard working people that are better off then I am and provide services that I depend on, I would not say that they work any harder then the next guy, they are just in a field in which there is better earning potential. I wish there were an easy answer.

  6. Anonymous  ::  8:17 pm on November 12th, 2008:

    Yes, it's true that the top 25% earners pay more than 80% of the income tax burden. Check out these links (data comes from the IRS and the Congressional Budget Office):
    1) http://www.ntu.org/main/page.php?PageID=6
    2) http://www.atr.org/content/pdf/2008/August/081408ot-federalincometaxandwhattheypay.pdf
    What's really surprising to me is that the bottom 40% of earners get a net tax CREDIT. (See page 3 of the pdf in link 2, above) That's nearly half of the earners in the country not only paying no taxes, but actually getting money given to them.
    So, we have less than 60% of the earners paying all the taxes, plus some take-home pay for the other 40%. Of that 60% that pay the taxes, the top 25% earners pay 80-85% of the total tax burden, and the remaining 35% of earners pay the rest of the tax burden (15-20%).

  7. Anonymous  ::  10:57 pm on November 12th, 2008:

    See the Tax Policy Center's “tax topic” page on the current-law distribution of taxes. There are three pie charts, and links to many spreadsheets so you can make even more if you like.
    Here are the facts: We estimate that the top 20 percent of tax units (households) will pay 69% of federal tax in 2008. That sounds like a lot, but they earn 55% of the income. People at every income level pay some federal tax, at least on average, when you include payroll and other taxes as well as income taxes. Most Americans owe more payroll (Social Security and Medicare) taxes than income tax. Including state and local taxes, low-income people actually pay a fair amount, because those tax systems are much less progressive than the federal tax system.
    Whether people at various income levels pay too much or too little tax is up to the voters and their elected representatives to decide. I have no problem with refundable tax credits–net payments–to low-income working people. They help hard working people to feed and clothe their families, something that would otherwise be very hard to achieve in many low-skilled jobs. Credits like the refundable earned income tax credit encourage single moms to enter and stay in the work force by helping to make work more lucrative than welfare. These all seem like good things to me.
    I know some people object to the idea of a progressive tax system because they don't see why hard working people who become successful should have to subsidize slackers, but a lot of low-income people are working really hard–often in two or more jobs. They might lack the skills needed to advance for reasons completely beyond their control. The progressive income tax helps them to get by and live in dignity.

  8. Anonymous  ::  6:20 pm on April 17th, 2009:

    What are you blabbing about low income older people do not pay any tax, none, zero. Now do the real math 0-5%=0.