(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?
18 replies on “Who Really Pays Taxes? Let’s Do the Math!”
ok, interesting. What about the super-wealthy, people like Warren Buffet, who has publicly said he’d prefer to pay more in taxes ?
Here the lower income tax rate is 20% and the higher is 41%, and that’s before PRSI (like FICA) and VAT at 23% (goods tax).
In Fact, Obama’s Tax plan is misleading in many ways. People like Buffet, Romney, Gates, they don’t earn a Salary or wage, their income is derived on investments. This income is what we call Capital Gains. In the 80’s, Capital gains was taxed at 30%, but thanks to the lobbying efforts of the Koch Brothers, Heritage Foundation and the Walton Family (Owners of Walmart), this Tax was reduced under Clinton to 15%. Romney has been campaigning to make this zero. Since the majority of Buffets, Romney and Gates income are capital gains they pay a significantly lower rate, Buffet I believe is 17% and Romney was disclosed at 13%. Â The Buffet rule for which Obama has been campaigning is similar to the Alternative minimum tax, (essentially another tax code) which will take the persons tax liability, determine the rate and then set a minimum bar for which they have to pay. This rule, however, as I have hear it does not include capital gains, so in the case of Buffet, Romney, Gates etc… they will not pay additional taxes under the Buffet rule. In other word, the law is just for show…
I know this isn’t relevant, but this reminded me of how some states don’t have +tax on products in supermarkets and other stores and in other states you only notice at the counter that the tax isn’t incorporated and it bugged the crap out of me.
Can a Stateian explain why there isn’t one tax to tax them all?
Sales taxes vary by state and county or city, both with the amount charged and by what it’s charged on (there’s generally no tax on groceries, but some areas tax clothing and other items and others don’t and “sin taxes” are all over the place). For chain stores it’s infinitely simpler to have one centralized price scheme where each local store just sets the percentage that’s charged at the end than for every single store to manually calculate and reprogram every item. This is especially true when rates change, which they do fairly frequently. I worked in a used bookstore for nearly nine years and I think the tax rate for NYC changed three times. It would have been impossible to change the price on every listing since there were probably hundreds of thousands of editions in the inventory. It was enough of a pain when there were periodic tax holidays on clothing because I did have to go through every bloody size of every bloody t-shirt and fix the tax code manually, then change it all back two weeks later. (Our inventory system was rather old and clunky.) Even in smaller stores it’s usually added after so that the prices look lower to compete with the chains. The only places that really include tax in the price are convenience stores and bodegas because people are usually in a hurry and don’t want to dig around for an extra 8¢ for their $1 can of soda. I still hold a grudge against the one bagel shop I used to go to occasionally because they charged tax and we all assumed they were keeping it because the non-prepared food items weren’t supposed to be taxable.
But why do they vary? Is this a thing from previous time in which every state had more control? Does this mean that buying product A can be marginally more expensive in state A over B because one of them adds less sales tax?
(you can also just point me to a place where this is explained, if you don’t feel like it any more).
Some states don’t charge any sales tax, but most do. On top of that, every county charges their own rates and some cities have different rates. Here’s a chart for New York, where I live. The state collects 4%, and then the county rates shown include that plus an extra 3-4.875%. New Jersey is only 7% and some areas only charge 3.5%, so we get lots of ads that encourage people to go to NJ to shop. On small purchases it’s only a difference of a few cents, but it adds up over time and for large purchases people will sometimes travel to nearby counties to get a better price. It’s annoying.
They vary because states and counties are the ones who set the sales tax based on their budgets/politics. And it is definitely true that buying goods in one state or county can be cheaper than another. For example, I live in the suburbs of Chicago, in the same county as the city itself. So when the city jacked up its sales tax so that we had the third-highest tax in the country, a lot of people who lived on the borders of the county would shop in the neighboring counties to save a few percent.
(Coolest part of this situation: my part of the county actually started proceedings to secede from the rest. Sadly they were persuaded to stay, but it was really interesting to see the beginnings of how that would have worked.)
My city and county have various sales taxes added on to the state base sales tax. We have the highest in the state (of 100 counties). I know–I should move, but I’m an idiot and I bought a condo here 11 years ago. Anyway, we have tax on groceries (though lower than other sales tax), tax on clothes, tax on, well, pretty much everything. Prepared food sales tax is even higher. At one point over the last few years, our sales tax was at all-time high of 8.25% and “prepared food” was another 0.75% or 1% (see also: why I don’t eat out). The regular sales tax has gone down a percent since last year. The city and/or county will just randomly add on a 0.25% or 0.5% tax for roads or transit or something that we citizens get no vote for.
This is really good. Â I need to memorize the stats to use as points in argument.
But to be honest, it’s quite safe to assume that people who earn more actually pay less in taxes, because they may be better educated in knowing how to use the system to work for them when it comes to write-offs for things like charity and they are better able to afford access to good lawyers and accountants who can assist them in getting the most bang out of their tax refunds.  And a lot of us who don’t make a ton of money want that, too, though.
Yeah, I’m not sure if the chart I got a lot of this from took into account all the deductions and capital gains taxes and all that nonsense. If you can afford a tax preparer they almost always find weird loopholes that people doing them at home wouldn’t know about. The software can pick up on some of them, but most poor people are probably just filling out a 1040EZ by hand.
I can’t believe that those who earn less than $15,000 a year are still expected to pay 16% of their income to taxes. What do they live on after that?
The sad part is a single person with no children earning $15,000 per year doesn’t even qualify for Food Stamps. This is a chart of household income needed to qualify for Food Stamps. The Republicans talk about these people being Freeloaders, but in most cases these are people living on less then $30/Day, which includes rent, food, and any other fixed costs you can think of. Mario Batali is doing the Food Stamp Challenge, he calculated that these people have only $31/week for food, which calculates to $1.48 per person per meal. And groups like the Heritage Foundation, and other Republicans want to throw these people off of Food Stamps and let them starve. Food Stamps was not part of the New Deal like Republicans like to say it was. Food Stamps was an Elanor Roosevelt or First Lady initiative. Children during the great depression were starving in the street. You know how you see pictures of children in Africa with distended bellies? This is because their livers are swollen and dying from malnutrition. This is what was happening in America, Children were walking in the street with distended bellies, starving and dying from liver failure. Elanor Roosevelt made it her mission to insure in America that children would not starve to death. This is the image of America the Republicans would like to restore. Thanks for the comment… :)
(130 percent of poverty)
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Yes I checked Hungry, Thin Mints, YUM!
What you don’t realize is that there is a long tradition of clicking Hungry on posts where it makes no sense. So ha!
I was totally, *totally* going to use that exact bumper sticker for a Takedown this week, but then I got all up in arms about entitlement. Â PHEW!
Ha! Too funny. I was actually gonna use this one too but it didn’t quite fit. But please, feel free to rage at it with me!
Thanks for doing the number crunching on this. An interesting, yet infuriating, read.
You’re welcome!