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The 50 percent aren't who you think

BY DANIEL TAIBLESON | MAY 02, 2012 6:30 AM

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Every time I hear someone say that "nearly 50 percent" of Americans pay no federal income tax, I cannot help but wonder why it is they have introduced that statistic into the discussion.

Was it introduced for the purpose of shedding light on some fundamental problem? Or was it instead invoked as a worthless platitude intended imply that the poor pay too little in taxes and the wealthy too much?

More importantly, I wonder if the person who has so readily invoked this mantra ever bothered to explore who makes up the "nearly 50 percent" and why it is they do not pay federal income taxes?

I think that last question is the most important because when you actually explore the "nearly 50 percent" statistic, it flips the rhetorical usefulness of that statistic on its head.

Last summer, the nonpartisan Tax Policy Center provided a breakdown of who the "nearly 50 percent" are, and the findings of its work were valuable. Not only because it did us the collective favor of revealing who the Americans are, but in so doing, it struck a crucial blow to the rhetorical weight of the statistic as a means to imply that poor are getting away scott free while the wealthy are getting the shaft.

While it is true that the poor make up a disproportionately large percentage of all individuals not subject to the federal income tax, not all people earning less than $30,000 escape the federal income tax. In fact, according the Tax Policy Center, 40 percent of people earning between $20,000 and $30,000 a year and an additional 20 percent of people earning between $10,000 and $20,000 a year, pay federal income taxes.

As a result, people making under $30,000 only represent 80 percent of all people who escape the federal income-tax. This also means that around 20 percent of all people who pay no federal income-tax earn more than $30,000. Of that 20 percent, 19 percent earn less than $100,000 annually.

That is all to say, 99 percent of all people not paying any federal income-tax earn less than $100,000. Of that 99 percent, 80 percent are people earning less than $30,000. That still leaves 1 percent.

Put another way, 491,000 people who make more than $100,000 a year pay no federal-income tax. Of those 491,000 people, 7,000 of them earned more than $1 million.

How is it 40 percent of people who earn $20,000 and $30,000 a year are subject to the federal income tax while 7,000 millionaires pay no federal income tax at all?

One likely answer is that these individuals made their million-dollar incomes shuffling money around and then invested their earnings in tax-exempt bonds. Another possible answer is that their income comes from sources overseas, for which they receive foreign tax credits.

For a more in-depth look, I recommend Eric Schoenberg's step by step explanation of how he used and abused the federal tax code to pay an effective tax rate of 1 percent on his $200,000 income in 2009.

There is no doubt that poor make up the overwhelming majority of the people who pay no federal income taxes. But as the Center on Budget and Policy Priorities points out, 22 percent are elderly people over the age of 65, another 17 percent are either full-time students, the long-term unemployed, or the disabled, and almost all of the remaining 61 percent pay federal payroll taxes.

Taxing all but a few of these people would require policymakers to tax disabilities and veterans benefits.

Furthermore, because none of these people escape highly regressive state taxes — in all but one state, state taxes eat up a larger percentage of the incomes of the bottom 20 percent of earners than the top 1 percent of earners — many would have to either borrow money or withdraw from their savings to pay federal income taxes.

So the next time you hear someone invoke the "nearly 50 percent" statistic, don't think: The poor aren't paying their fair share. Instead think: I can't believe that 40 percent of people earning between $20,000 and $30,000 a year are paying federal income taxes while thousands of millionaires are not.


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