(Written with assistance from my husband the CPA)
I‘m sure you’ve all heard that our income taxes are “unfair” because the top 1% pays 40% of the taxes in this country and that half of us pay nothing at all. People espousing this view are quick to jump to doomsday scenarios and paranoid rambling. The Heritage Foundation thinks our very democracy is at risk because those darn poor people get to vote. The Daily Mail engaged in a bit of hand-wringing over potential “resentment” from people who do pay taxes, even as pointing out that the group who isn’t taxed includes kids, retirees, and other people who don’t work. Darn freeloading babies, old people, and stay-at-home moms! But are the numbers even accurate? Let’s take a look.
Well, about half of all Americans don’t pay income tax. That doesn’t mean they aren’t paying any taxes. When you factor in all the other ways in which each of us is taxed every day, it’s virtually impossible for an individual to pay absolutely nothing. Contrary to what the talking points would have you believe, income taxes are not the only source of government revenue, and in 2011 actually only made up 47% of total moneys collected. The next largest chunk of revenue comes from Social Security and Social Insurance taxes at 36%, with a measly 8% coming from corporate income taxes, 3% from excise taxes on products like gasoline, alcohol, and cigarettes, and 6% from miscellaneous sources such as estate and gift taxes.
Pretty much everyone who has a job pays Social Security and Medicare taxes under FICA, the Federal Insurance Contributions Act, though some student workers are exempt and individuals who are self-employed pay a variation that I’ll get to in a second. The Social Security tax rate is usually 6.2% but was temporarily dropped to 4.2% for 2011 and 2012, and in 2011 is only levied on the first $106,800 of gross income for a limit of $4,485.60. Since any wages above the $106,800 cap isn’t taxed at all, people pay a progressively lower overall rate the more money they make; for example, someone earning a million dollars would only pay about 0.45%. For this reason, it’s considered a regressive tax. Medicare taxes are an additional 1.45% with no upper cap. Employers also pay these taxes in addition to what was taken out of the salary for a total of another 7.65% (they didn’t get the temporary SS tax discount but the cap still applies so the percentage is lower for higher-wage employees). The tax on people who are self-employed is more complicated, with them paying the combined employee and employer taxes but with some finagling and income tax deductions to make it work out fairly.
When you look at excise taxes and state and local taxes, the bottom 50% pays even more. Excise taxes are generally invisible since they’re factored into the price of products before sales tax is added and vendors factor them into the retail price. For examples, think about the .9¢ on gasoline and diesel prices, or the vastly different prices on tobacco products depending on where you buy them, which is due to different levels of federal, state, and local excise taxes. These taxes are the same no matter what your income level, and in some cases poor people may pay much more since they may not be able to afford newer cars that go farther with each gallon of gas, leading to higher consumption. Sales taxes also disproportionately affect lower-income individuals since they tend to spend a much higher percentage of their income. Most people also pay property taxes, either directly on homes/land they own or indirectly as a portion of rent paid to landlords. Almost every state and some cities charge their own income taxes or commuter taxes for people who work there but live elsewhere.
So how much does the 1% pay in comparison to everyone else? According to figures compiles by Americans for Responsible Taxes, the top 1% of wage-earners made an average of $1,328,000 in 2010, giving them 20.4% of total income earned by all Americans that year. Taking into account all forms of taxation, this left them paying a 30.8% tax rate which accounted for 22.1% of total tax revenue. The bottom 99% only earned $56,200 on average, spending 28.2% of it on taxes, only a 2.6% lower rate. Even the bottom 20% who only earn on average $12,400 pay 16% in taxes. In real numbers, that average 1 percenter will still have $918,976 left over after tax, while the average person in the bottom 20% will only have $10,416. Tell me again how the top 1% has it hard?