Tag Archives: Taxes Regressive

The Inconvenient Truth…About Taxes

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This may not be the most exciting of my posts but it is one of the most important because it addresses misconceptions about American taxes.

I think it is probably no surprise that I’m not a fan of the healthcare reform plan proposed by the Republicans, but I’m also not a fan of “Obamacare”. I’ll tackle those in a future post, but the debate over one aspect of the Republican plan made me wonder who is telling the truth. Democrats are vehemently arguing that the plan will favor the rich while taking money out of the pockets of the poor and middle class. While at first glance that argument does appear somewhat legitimate I assumed the truth was not quite so simple. That led me to this post.

Who pays taxes? Well…we all do in one way or the other, but again the answer is much more complex. It is easier to begin by reviewing the sources of revenue for the various governments in The United States.

(FYI: I’m about to offer a lot of statistics and other supportive info, so if you get bored you can skip to my conclusion)

NATIONAL GOVERNMENT REVENUE SOURCES

As you can imagine, funding for our national government comes from a variety of sources. In fiscal year 2016 the federal government spent $3.85 trillion while bringing in $3.27 trillion in revenue, meaning it ran a deficit of more than $500 billon. I will not address the consequences of that deficit in this post, but you should be alarmed by the national government’s annual deficit and the current $19.5 trillion debt (too bad my wife and I can’t find a way to pull off spending more than we earn!). Here is where the fed gets its money:

  • 56% from income taxes
  • 34% from “social insurance” revenue (Social Security, unemployment, and Medicare)
  • 10% from taxes on business, fees for using parks, and a variety of other sources.

So the lion’s share of Uncle Sam’s money comes from personal income tax and a large portion also comes from payroll taxes.

STATE AND LOCAL GOVERNMENT REVENUE SOURCES

State governments take in about $1.7 trillion each year, most coming from so called “ad valorem” taxes such as sales tax, property taxes, and taxes on things like alcohol and gasoline.

Local governments bring in approximately $1.35 trillon in revenue .  Interestingly, the largest source of local revenue is money they get from the federal and state governments (called “transfers”) with property taxes following close behind. Sales taxes, fees, parking meter fees, etc. make up the rest.

Now the real question and the one raising controversy these days: Who pays the most taxes?

WHO PAYS THE MOST FEDERAL INCOME TAX

The rich pay an unbalanced portion of federal income tax and the middle class also pays a significant portion. This chart from the reputable Pew Research Center paints a pretty clear picture:

Wealthy pay more in taxes than poor

Those with the higher incomes pay a much larger percentage of income taxes than those with low incomes. Less than 3% of the population paid more than 51% of the income taxes and their average tax rate was 25.7%. People earning less than $50,000 comprise about 62% of the taxpayers, but they contribute less than 6% of the total revenue from income tax and have an average income tax rate of 4.3%.

Bottom line? The wealthy pay by far the largest portion of income tax, and income tax is more than half of all federal revenue. And according to some calculations, more than 45% of all American households pay no income tax at all.

WHO PAYS THE MOST PAYROLL TAXES

Social Security and Medicaid are the two largest payroll taxes. Our incomes are taxed at 12.4% which is shared by worker and employer. This tax currently applies to the first $118,000 of income, so no income above that amount is taxed.

That means that payroll taxes are “regressive”, meaning they have a greater impact on the lower and moderate income workers. Because of the $118,000 cap the top 1% of workers pay a much smaller percentage of their income than do workers with lower incomes. However, at retirement the workers with lower incomes tend to rely more heavily on social insurance than those with higher incomes, so the benefits are progressive, not regressive.

WHO PAYS THE MOST STATE AND LOCAL TAXES

This one is more difficult to address because it varies by state. Some states have income taxes, others don’t. Some states have higher property tax rates than others, some have natural resources such as oil and coal that they can tax (called a severance tax), some have toll roads, etc. In general the wealthy pay more tax on the state and local level because they own more property that is taxed, buy more luxury items thus paying larger sales taxes, pay more state income tax (in states with such a tax) because they have higher salaries, and pay severance taxes because they own the coal mines, oil wells, and stands of timber.

WHO PAYS THE MOST IN TAXES OVERALL?

When all local, state, and federal taxes are combined one may conclude that the higher a person’s income the higher is her/his tax burden.

  • The bottom 20% of income earners pay about 19% of their income in taxes.
  • The top 20% of income earners pay about 32% of their income in taxes.

SO, DAVE, CAN YOU JUST REACH A CONCLUSION ALREADY!?

Well yes. Sort of.  I can actually reach several.

  • The wealthy contribute the lion’s share of income taxes and about half of all Americans do not pay any. So the current argument being made by Democrats that the Republican healthcare plan offers tax breaks for the wealthy is accurate because it would not be possible to offer a tax break for those folks who are not paying income tax at all. Any tax break thus necessarily applies to the wealthy. However, I’m not sure I believe reducing taxes on the top 1% so dramatically is a great idea. In the current Republican plan the top 1% would have their taxes reduced by 44% while the bottom 20% would see only a 2% tax reduction.
  • The wealthy also pay a larger portion of most other taxes at all levels of government.
  • Payroll taxes (Social Security, Medicaid, Unemployment) favor workers with higher incomes because no income over $118,000 is taxed, but the workers with lower incomes benefit most from these programs in the end because the higher income workers are more likely to have personal retirement or pension benefits.
  • The statement from the right (that I’ve heard often in recent days) that the bottom 50% of wage earners pay no taxes is false and only applies to income tax. Everyone, regardless of income, pays sales taxes on purchases, tolls on roads, tax on any owned property (and indirectly on rented property since landlords calculate property taxes into rents), fees for parking meters, excise taxes (gas, alcohol, and tobacco), and usage fees for things like landfills and parks.

Are America’s taxes fair? That is up to you to decide and objectivity on this topic is a challenge.

The problem is that there has been no broad discussion of American taxes since 1913 when the income tax was added to the Constitution. Neither party has been willing to examine our tax codes and the taxes themselves to determine whether they make sense. They don’t. I believe all Americans should pay taxes because we all benefit from the governments supported by those taxes, and all Americans DO pay taxes. We just need a national discussion addressing the tax structure and that isn’t happening any time soon. The Republicans promised such a discussion during the 2016 campaign and I hoped it would take place, but that issue and other issues of substance have been pushed aside because of the constant tweets and other distractions made by the Republican Party’s leader making it virtually impossible for his party to focus on issues of substance.