Who Pays No Income Tax? It is the Wrong Question
Would you rather get a tax cut of $1,000 or $1.4 million? I thought so.
Would you change your answer if taking the smaller tax cut allowed you to avoid paying income tax entirely?
That is exactly the focus of the endless squabble over the half of American households who pay no federal income tax. This factoid has become a source of outrage for anti-taxers ever since they got wind of some estimates by my Tax Policy Center colleagues.
But framing the debate as being about who pays tax and who doesn’t misses the point. The question we should be asking is who benefits most from more than $1 trillion in tax preferences that litter the tax code. And the answer is clear: While nearly everyone takes advantage of these breaks, the highest income households do best—by far—even though they are still likely paying some tax after taking those deductions and exclusions.
Thanks to low rates and a pile of tax preferences, it is true that people who earn relatively little are more likely to pay zero federal income tax or even receive net cash benefits through the tax system than those in the top brackets. More than two-thirds one-third of those making less than $50,000 pay no federal income tax (many do pay payroll and other taxes), compared to less than 4 percent of those making $100,000 or more.
But by most other measures, high-income households benefit far more from tax expenditures than those at the bottom. On average, the lowest earners save enough in taxes to buy gas for three months. The highest? They save almost enough to buy three $500,000 Mercedes Benz SLR McLaren Roadsters (one for workdays, one for weekends, and one for truly special occasions such as tax day).
My TPC colleagues worked up some numbers to show how these tax breaks are distributed. They did it by looking at what would happen if Congress repealed all tax expenditures in 2015 (something like one of the plans proposed by the chairs of President Obama’s fiscal commission, Erskine Bowles and Alan Simpson). These tax breaks include everything from earned income and child credits to deductions for mortgage interest and charitable gifts to exclusions for employer-sponsored health insurance and retirement savings. They also include preferential rates for capital gains and dividends.
TPC figures these tax breaks are worth about $1,000 to a typical household earning about $21,000 or less (the bottom 20 percent), boosting their after-tax income by 9 percent. Middle income households earning between $40,000 and $70,000 get an average of about $4,000, increasing their after-tax incomes by about 8 percent.
The story is very different at the top of the economic food chain. Those tax breaks are worth an average of $275,000 to those in the top 1 percent (who make at least $668,000) and $1.5 million to those in the top 0.1 percent (who make more than $3 million). These preferences allow those folks at the very top to boost their after-tax incomes by more than 20 percent—more than twice the benefit of those at the bottom.
To put it another way, the highest-income 20 percent enjoy almost two-thirds of the benefits of tax expenditures. More than one-quarter goes to the top 1 percent alone. The bottom 40 percent? They get about 10 percent (chart). For some, it may be enough to zero out their tax bill, but compared to those at the top, it isn’t much of an increase in income.
Keep in mind that as President Obama and Congress scrub the federal budget, the debate over who benefits from tax expenditures is just one piece of the puzzle. It is, for instance, also worth figuring out who benefits from direct government spending.
But if you are arguing about who cashes in on those tax breaks in the federal income tax code, don’t just look at who pays tax and who doesn’t. The better question is whether you are better off with three months of fill-ups or three top-end Benz’s.
[...] But high-income households benefit from tax expenditures much more. “On average, the lowest earners save enough in taxes to buy gas for three months. The highest? They save almost enough to buy three $500,000 Mercedes Benz SLR McLaren Roadsters… To put it another way, the highest-income 20 percent enjoy almost two-thirds of the benefits of tax expenditures. More than one-quarter goes to the top 1 percent alone,” writes Howerd Gleckman, on the TPC blog. [...]
I think we should all just quit our jobs, and sign up to live off the GOVERNMENT. It will be GRAND! Utopia at last!
What a crock of BS.
For those of you ‘out-there’ that think you can easily run a 2.5 Million dollar small business on a 10% profit margin, and comfortably sit back and collect 250,000 dollars each year, without any concerns whatsoever………..I suggest that you run down to your local banking institution, borrow a half-million or so, and jump on in!
Why is it that the ‘progressives’ amoungst us continue to embrace the attitude of ‘Punishing’ the most ambitious in our society? This is insane.
Small business owners create a lions share of the new jobs in the USA, and they should be rewarded for taking the risks necessary to do so! Not Punished.
“Socialism is a philosophy of failure, the creed of ignorance, and the gospel of envy, its inherent virtue is the equal sharing of misery.”
– Winston Churchill
The comments that lower income families are paying no Federal Income tax are all denying the fact that sales tax, social security tax, and all the numerous excise taxes (gas, utilities, phone, cable) are paid by low income families. If you look at the % of income these taxes add up to, their taxes as a % of gross income are much larger than the $3 billion income hedge fund manger John Paulson.
For example, many states have sales tax of 10% or higher. Social Security taxes have tripled in the past 25 years. Add the tax paid on gasoline, phone bills, utility bills and you see that these low income families are paying over 20% of their income in taxes.
However, the income group that has the worse tax burden are dual income families making between $150,000 to $350,000. They get hit with AMT which eliminates most of their deductions. If you add all their federal, state, local, sales, social security, excise taxes their burden is in excess of 50%.
Solution: Establish a 2% wealth tax on net worths over $10 million including all persons, trusts, foundations, companies, etc. Keep that tax until all the US debt is paid off and there is a balanced budget.
You continue to make the same assertions with no facts. If you’d like to supply some facts, we might have a discussion. Until then, not so much.
You also ignore the fact (as you typically do) that this post is about Federal taxes.
I’m not exactly sure when social security contributions became a “tax”. Those employees who earn too little to pay income tax do contribute to social security. But, let’s not forget that the social security contribution is no ordinary tax. The contributions are credited to one’s earnings history and earn entitlements to the benefits the system offers. They are not credited to general revenues. One needs to consider the effect of the entire program, not just the contributions one makes to it.
Those who make the argument in this context that social security is a tax, suggesting that it is a “tax” just like any other, conveniently ignore the fact that those in this category (contributing to SS but paying no income tax) are pretty much the same group that takes far more out of social security than they put in. I don’t think citing a program in which one takes out far more than one puts i, being effectively a redistribution from higher income groups, is much of an argument here. The folks that pay income tax are, generally speaking, the folks that are subsidizing the non- income taxpayers in the social security system. I’m not saying this shouldn’t be so; I am saying that this line of argument is pretty disengenuous.
Wealth taxes are not constitutional. Only income taxes and direct taxes as the result of census enumeration. While you could technically have states collect a wealth tax to fund the “direct tax” it would penalize low income states and subsidize high income states.
We can’t categorically say, as you do, that the wealth tax is unconstitutional. There are strong constitutional arguments that a federal wealth tax would be unconstitutional, but the issue is certainly not resolved. Professor Calvin Johnson is one who is convinced it is constitutional:
http://www.utexas.edu/law/faculty/calvinjohnson/80tn591.htm
It is true these lower income families are paying sales tax and numerous excise taxes. The question is, what are they using to pay these taxes? If they dont have any income tax liability for the year and are still receiving a tax “refund”, through various credits, then they are using my money to pay for sales tax and excise taxes.
To me, taking advantage of a deduction (Contributing to an IRA, getting credit for State taxes, or mortgage deduction) is much less of a problem than paying no income tax. For starters we are contributing to the US, not taking a credit. In effect we are lowering our tax rate in accordance with the law. The appeal of different tax systems (Flat tax, VAT, or BRT) might be to frame a tax system that is fair and collects revenue from everyone. I think the only way to remove tax preferences is to start from scratch and make what ever results very simple. We all know something has to change and the uncertainty is hurting the recovery.
It’s time for a flat tax! Forget all the tax exclusions, perks and deductions and simply tax everyone at a flat rate of their net income.
No, its not. Non-wealthy individuals who are not business owners should not have to file at all. Instead, tax business owners on all value added, with a tax credit for children as an offset and a higher minimimum wage over and above the child credit to make sure a tax can be paid in most cases.
Society gains nothing from having poor people file income taxes when employers could do it instead (since they file the paperwork and write the checks already).
This article is summed up by: ‘People who pay taxes benefit by tax breaks and the people who pay no taxes don’t, so that means it’s OK that a large percentage of the population pays no income tax.’
This is what happens when you are a blogger with an agenda and no editor. You can use all the red herring arguments you want and most people won’t call you on it.
The writer of this article has an obvious agenda and/or doesn’t understand economics. Allowing such a large % of the population to not pay income tax is essentially treating them like children. Like children, they do not care where the money comes from, they just know they aren’t paying for it, and they want their candy now. Everyone needs to have skin in the game.
The problem with having some-lower earners- pay no income tax is that they have no ownership in our economy or our government. Therefore they are not involved or concerned with how our government collects or spends taxes on our earnings.
Why should they care if the government wastes billions and collects up to 60%? It does not affect their wallet.
Much like a teenager with a car and credit card that is handed to them gratis.
A couple obvious things wrong with that argument, first low income earners pay a higher portion of income in other taxes, sales, payroll and property for example. If I vote to “waste” income tax the federal goverment may reduce aid to education for example which I must make up out of pocket or in other taxes.
The most absurd conclusion though is that basicly what is being said is that the poor have too much political power. That would explain of couse how ACORN was able to crush Fox News.
Maineiac wrote: “low income earners pay a higher portion of income in other taxes, sales, payroll and property for example”
So? That’s a little shell game you play to divert attention from looking at the total tax burden.
“If I vote to “waste” income tax the federal goverment may reduce aid to education for example which I must make up out of pocket or in other taxes.”
First of all, even if that were true, those people would never understand that. Second of all, that’s not true. It’s called a deficit. Government does not stop spending money because money is wasted in other areas.
“those people” are smart enough to understand that they have “no skin in the game” but too dumb to understand that they do? A very weak argument not to mention it rasises the question of who you mean by “those people”
Second of all, these arguments about what “those people” may or may not know are irrverlant because people without money have zero political power.
“Second of all, these arguments about what “those people” may or may not know are irrverlant because people without money have zero political power.”
They can’t vote?
I love how worked up you got over “those people”. I’ll say it again, “those people”! I bet you’re one of “those people”. You know…idiots.
[...] asks who benefits from the federal income tax [...]
The problem is not that 51% pay no income tax or even get a subsidy through the tax code – but that they have to file tax forms to get this benefit. The vast majority of those who have to file to get their benefits hire tax preparers. It would be better to shift tax reporting entirely to employers (who do it anyway, as well as most collection) and make them liable for paying a net business receipts tax (with the net being of materials but not labor) and distributing a simplified family benefit.
This benefit should be large enough to be half the cost of raising a child (with state tax systems distributing the other half) – with this increase paid for by eliminating the home mortgage and property tax deductions.
I suspect that, as TPC data indicates, wealthier taxpayers will still build or buy McMansions and vacation homes without the benefit – yielding a net increase in housing as lower income individuals upgrade. There is a real debate as to whether outsized housing and vacation homes are good for society – both in terms of energy use and in crowding out access to recreation for the rest of society. It is time for the tax code to quit encouraging the trappings of plutocracy.
“The problem is not that 51% pay no income tax or even get a subsidy through the tax code – but that they have to file tax forms to get this benefit”
You think THAT’S the problem? *facepalm*
Yes. It is quite burdensome to people who mostly have to pay tax preparers to get what they should be getting without filing from their employers.
There is nothing libertarian about making poor people pay through the nose for tax preparation services.
You missed the point, again. I was pointing out the hilarity of you pointing to “THE” problem with this, which you say is tax preparation. Tax preparation is a problem. But to say it is THE problem with this situation is beyond ignorant.
….and for the future generations, children just need to start doing a better job of choosing their parents.
As a member of the 1%, I will pay the extra 5%, if we shut down the department of ed, the department of energy, privatize the school system, and withdraw our military from Europe and Asia, and remove the vote for the Senate and Presidency from people who pay no income tax. That’s fair. Heck. I’d pay another 10% if we could do all that good.
You will pay 4% of your INCOME (or 10% more in taxes) in the event of gridlock and the reintroduction of the Clinton tax rates. NO DEAL.
And how much more of your income are you willing to pay Michael? Easy to spend someone else’s money now isn’t it?
I should not have to file at all. Rather, my employer should pay the tax. I would rather pay a 13% VAT (provided I got a 13% raise in net wages and a corresponding drop in gross wages of about 13%.
I am actually willing to have net wages go down too (due to employer tax payment) if it means better health care for retirees.
Even without comprehensive tax reform, I am quite willing to pay my $40 per week more to make sure that the US economy stays afloat. I am more likely to get a better job if that happens.
If they did all that, we’d be running a surplus, and you wouldn’t even need to pay 1%.
Surely you’ve heard the story about the 10 men who get together for beers, and split the bill? It’s a nice illustration about why this entire post is poppycock.
http://financialducksinarow.com/the-tax-story/
It would be a much more compelling piece if you compared the shares of tax expenditures with the shares of income taxes paid. Of course, that would force you to realize that tax expenditures, like the recent rate cuts, actually benefitted the less well off more proportionally than the more well off.
But hey, selective presentation of data works too.
How the hell do you benefit from a tax cut if you pay no federal income tax. What planet do you come from? I made $468,000 last year and paid $138,000 of payroll and income tax. I AM 62 YEARS OLD AND WORK 60+ PER WEEK. If you want 5% more I can live with it but will anybody give any consideration to controlling spending.
That’s about $100,000 less than what you would have paid for the same income under Reagan before tax reform, $200,000 less than under the rates from JFK to Carter and $250,000 less than under Truman and Ike. Of course, the tax rates before Carter were not designed to maximize revenue but to minimize the payment of economic rent to higher earners (at the cost of lower salaries for the people who work for them).
That’s both direct reports and through business ownership.
Michael,
That’s nonsense. The effective tax rate for people in that income group (let’s call it the top 1%) is down less than 4 percentage points since 1980. 4 percentage points on $468,000 is a shade under $19,000.
Now if you’d like to go back to JFK, Piketty and Saez show that from 1970 to 2000, the net of income tax and payroll tax did not decline at all for people in the 99 to 99.5 percentile. And not at all times $468,000 is zero.
So, I’m forced to conclude that you are doing some pretty fancy math to get to your answer or you aren’t using very good data on effective tax rates.
Of course, your contention is ridiculous on its face. Jim says he paid $138,000 on $468,000. You claim he would have paid $250,000 more under Truman or Ike. So that means you think that effective tax rates (income and payroll) under Truman and Ike were $388,000/$468,000 or about 83%.
I’d really love to see you substantiate such a ridiculous conclusion.
Source data for my claims is here.
http://www.cbo.gov/publications/collections/tax/2009/effective_rates.pdf
http://elsa.berkeley.edu/~saez/piketty-saezJEP07taxprog.pdf
I look forward to the sources and methods you use for your claims above.
@ Michael. So? You didn’t answer his question. In fact, you completely avoided it.
OK, I would have poorer people with children get a $500 per month per child benefit and not have to file taxes at all. (the current benefit is $1000 per year per child – roughly $83 per month with a varying benefit for the child exemption based on the marginal tax rate and some additional benefit for chidren whose parents own their homes and itemize mortgage interest and property taxes – for me that’s about $3,000 per year or an additional $250 per month).
Under the scheme I favor, I would be getting an additional $167 a month in income (not including increases to offset paying a VAT).
The same scheme would take the mortgage benefit away from the wealthy and probably raise the tax liability they pay as well – most especially lower rates for dividends and capital gains.
What most don’t understand is that, unless my daughter becomes a famous artist or I suddenly become rich as a consultant to cooperatively held enterprise, her share of the national debt will be pretty miniscule. The children of the wealthy, however, because they will make scads of money on dividends and inheritances, will likely have to pay scads of extra taxes because the debt is building up due to tax cuts and military spending.
When the wealthy realize who they are leaving their debt to, they will go along with an increase in tax rates.
Even if they somehow raise rates for the working, they won’t see the money, since the working class will spend less. Eventually the revenue must come from the high end (unless, of course, income is more fairly distributed).
Eventually, boards of directors in the private and non-profit sectors will realize that CEOs and the managers that support them are not worth what they are paid and lower their compensation drastically.
“OK, I would have poorer people with children get a $500 per month per child benefit and not have to file taxes at all.” —
First of all, providing ANY financial incentive to have kids is pure idiocy. It made sense at some point in our past. It does not make sense anymore. And I do believe everyone should have to file taxes. If we had the flat tax, filing taxes would take about 10 minutes and it’d be so simple even a caveman could do it.
“When the wealthy realize who they are leaving their debt to, they will go along with an increase in tax rates.” —-
No sane person would agree with that. It’s their money, let them decide who to give it to. They’ve already been taxed on it. Leave them alone.
“Even if they somehow raise rates for the working, they won’t see the money, since the working class will spend less. Eventually the revenue must come from the high end (unless, of course, income is more fairly distributed).” —
The point is that everyone needs to have skin in the game. And I wouldn’t hold your breath for some socialist utopia where doctors make the same as janitors – it’s not going to happen here Michael. Americans like economic freedom too much.
“Eventually, boards of directors in the private and non-profit sectors will realize that CEOs and the managers that support them are not worth what they are paid and lower their compensation drastically.” ——-
So you think you can run companies better than the board of directors for those companies. Is your name Barney Frank? Michael – how about this? You live your life and you stop telling other people how to live theirs? I know, I know…that’s a very radical point of view, but you should consider it.