Each April 15th, the media inevitably reports that a significant portion of Americans don’t pay any federal incomes taxes. These yearly news stories lead many taxpayers to feel infuriated and outraged.
Most Americans hate paying taxes. This nation was founded on a tax revolt, after all.
Paying taxes is seen as a necessary evil to have a functioning government (albeit a bloated one on many levels), and most people pay their taxes dutifully, though begrudgingly.
Consequently, no taxpayer wants to hear about freeloaders avoiding their patriotic or civic duty to pay their taxes. It’s a reflexive and justifiable anger.
Here’s a perfect example of such a story this week, from MarketWatch:
An estimated 45.3% of American households — roughly 77.5 million — will pay no federal individual income tax, according to data for the 2015 tax year from the Tax Policy Center, a nonpartisan Washington-based research group.
Roughly half pay no federal income tax because they have no taxable income, and the other roughly half get enough tax breaks to erase their tax liability, explains Roberton Williams, a senior fellow at the Tax Policy Center.
It should be noted that the 45.3 percent figure refers to households, not individuals, and there is a big difference. Additionally, the figure includes retirees, who collect Social Security.
Naturally, retirees (and there are tens of millions of them) no longer pay federal income taxes, so this makes the aforementioned figure quite misleading. In fact, retirees are the majority of those not paying federal income taxes.
Additionally, just because some workers don’t pay federal income taxes doesn’t mean they don’t pay any taxes.
Most workers pay state income taxes, and all workers pay payroll taxes (Social Security and Medicare), property taxes (even renters), and sales taxes — which are levied on almost all goods and services, including utilities.
You’ve surely noticed that your water, electric, gas, cable and phone bills, for example, all include hefty taxes. There’s no getting around them.
Unlike federal income taxes, which are progressive — meaning, the more someone makes the higher their tax bracket — payroll taxes are applied at the same rate to all workers, regardless of income. This means they disproportionately impact lower income earners.
And, let’s face it — payroll taxes are indeed taxes on income paid to the federal government.
The combined tax rate for Social Security and Medicare is 15.3 percent, which is split evenly between employer and employee. However, self-employed workers pay the whole 15.3 percent tax.
Yet, the maximum taxable income is $118,500, meaning that any income above that level is not subject to the payroll tax. That favors high earners and the rich (yes, there is a difference).
The fact that 45 percent of households don’t pay federal income taxes speaks to the fact that they earn so little income, which is the really troubling matter.
A recent report by the Social Security Administration has some rather stunning findings:
- 38% of all American workers made less than $20,000
- 51% made less than $30,000
- 63% made less than $40,000
- 72% made less than $50,000
Pause to reflect on that for a moment.
Given that more than half of all workers make less than $30,000 annually, it’s not all that surprising that they don’t pay federal income taxes. They simply don’t earn enough money.
Even a mere 10 percent federal income tax — which would amount to $3,000 — would be punitive to a worker who earns so little.
For perspective, we should consider the federal poverty guidelines for this year.
The poverty threshold for a family of three is $20,160.
The poverty threshold for a family of four is $24,300.
It’s not hard to imagine one parent working, while the other stays home with an infant or toddler(s).
The real outrage is not that so many American workers aren’t paying federal income taxes; it’s that they earn so little.
That means they aren’t helping to create adequate demand and consumption to spur the economy, and move it substantially forward.
Even worse, many of these people are full-time workers who earn so little that they qualify for federal subsidies for things like food, housing and medical. That’s the real scandal and injustice.
There are plenty of large employers (such as Walmart) who pay their workers so little that the rest of us need to subsidize them with our federal income taxes.
That’s the true outrage in this story.