January 3, 2014

If you thought Mitt Romney’s comment during the 2013 presidential campaign that 47 percent of Americans don’t pay taxes was controversial, you’re going to want to check out this gem from the latest report on tax burdens published by the Congressional Budget Office Report (CBO).

According to the report, the rich don’t just pay more taxes, they pay them all. On page 13 of The Distribution of Household Income and Federal Taxes report of 2010, it clearly states that the richest 40 percent of American earners paid 106 percent of individual income taxes.

Negative Tax Rate?

These figures, which are based on 2010 IRS census data, show that the bottom 40 percent didn’t pay anything toward income taxes. In fact, they paid a negative 9 percent. How do you pay less than 0 percent? The formula used by the CBO gives a negative percentage to taxpayers who get back in benefits more than what they pay in income taxes.

To illustrate, according to the same report, in 2010, the poorest 20 percent earned an average of $8,100 but also received $25,000 in federal benefits. Actually, a quarter of the taxpayers in this group had a -15% tax rate. That means that for every $100 they paid, they received $115 back in benefits.

Fair Analysis?

Do these statistics give a fair picture of America’s tax code? According to the Center on Budget and Policy Priorities the significance and policy implications of figures like these, are unfair and widely misunderstood.

For instance, although much is made from the fact that the poorest taxpayers do not earn enough to pay federal income tax, this doesn’t mean they don’t pay toward other federal taxes. Based on data from the same CBO report, the bottom 40% paid 15.4 percent of all Social Insurance taxes, 4.8% of corporate income taxes and 28.8% of all federal excise taxes, such as fuel, communications and environmental taxes. Once you take into account these other taxes, the bottom 40 percent of taxpayers paid 4.2 percent of all federal taxes in 2010; which doesn’t seem so outrageous, particularly when you consider they only earned a 9.7 percent share of the market income.

Reports that highlight the fact that that low-income households don’t pay federal income taxes generally fail to mention the taxes they do have to pay, such as state and local taxes. According to data from the Institute on Taxation and Economic Policy, in 2011, the poorest fifth of American households paid 12.3 percent of their income toward state and local taxes. If you include federal, state and local taxes, the percentage of their income dedicated to paying for taxes is 16 percent. A stunning figure when you consider how modest their wages are to start with.

The Bottom Line

Yes, the richest 20 percent do pay nearly 93 percent of all federal income taxes. And yes, the poorest 40 percent pay less in income taxes than they get back in federal benefits; but only if you choose to ignore what they pay in payroll, excise and corporate taxes. A rather arbitrary way of presenting the data when you consider that payroll taxes are used to fund federal benefits, such as Social Security and Medicare.

The bottom line is that the rich do pay the lion’s share of taxes. However, when you consider the top 20 percent earns over half the total market income and the wealthiest 1% saw their income grow by 16% — compared to the 1% increase most taxpayers experienced –it’s hard to feel too sorry for the poor rich folk.

Photo: Chicago Now