Every time someone proposes raising taxes on the top earners in the country, Fox News hurriedly trots out the “half the people in this county pay no taxes” statement. What they mean, of course, is that half the country, after deductions and credits, pays no federal income tax. Those folks do, however, pay payroll tax, state income tax, sales tax, tax on personal property (like car registration), etc., but that’s beside the point for purposes of this post.
So half of Americans don’t pay federal income tax? What’s the beef here? It’s simply the consequence of the progressive tax code.
Consider: The poverty line for a family of four in 2011 in the U.S. is $22350. That $22350 is subject to a federal income tax rate (we’ll assume married filing jointly) of 10% for the first $17000, and 15% for income between $17000 and $22350.
Now, you all know we have a graduated marginal federal income tax, yes? That means that everyone — me, you, Bill Gates, the working poor, the richest to the poorest — pay the same rate on the first $17K we earn (to wit, 10%), then the same 15% on marginal income that falls into the next tax bracket (from $17K to $69K), then 25% on marginal income that falls into the next bracket, and so on. Note that again: We all pay the same rate on income that falls into particular brackets. Seems fair, no? True, some people earn enough such that their marginal income straddles several brackets, but within the brackets we’re all taxed the same. It’s simply the case that people who don’t earn very much may have deductions and credits (the kind that are available to all taxpayers, with some exceptions, like the Earned Income Tax Credit) that ultimately zero out their income for tax purposes.
I’ll give an example , because often when I talk taxes, many people don’t understand the graduated marginal rates. If someone says to you: “I’m in the 25% tax bracket.” That doesn’t mean their entire income is subject to the 25% rate. It means the first $17K of their income is subject to a 10% rate, the income from $17K to $69K is subject to a 15% rate, and income over $69K, and only that income, is subject to the 25% rate. To drive the point home: if someone ever says to you, “I don’t want to take that raise because it puts me in the next tax bracket and I’ll therefore have less take home pay,” then you will instantly know that the person does not understand a graduated marginal tax rate. It is essentially never the case that earning the next dollar makes you worse off for tax purposes. Go ahead and take the raise!
So, let’s imagine a world where the Fox News talking heads get what they appear to want and the tax rate for all those low income tax deadbeats is increased. Heck, maybe we stick a $3,000 surcharge on income in the 10% bracket. There. Presto. Lots of those deadbeats are now paying tax. Ha, ha, deadbeats!
But alas, you’re paying more, too, and I have no doubt that you know why. The nature of graduated marginal tax rates means that any tax increase on any particular bracket is a tax increase on all taxpayers who have income that falls into that bracket (even if they also have income that falls into a higher bracket). So, uh, thanks, Fox News. You’ve increased taxes for every American. I hope you’re happy now.
All right, I’m joking (a little). The takeaway to remember here is that poor and working class Americans who earn, say $30K per year, are subject to the same tax rates wealthier people pay on that first $30K, and they can (in theory, at least) take the same deductions as wealthier people. The tax code is entirely fair in that regard. It’s just that many folks earn so little that their income gets zeroed out for tax purposes. Why that bothers people I can’t quite figure out.
Would it make Steve Doocy get a warm fuzzy if the poor paid $100 in federal income tax? $500? As noted above, any increase of the tax rate for income in the lowest bracket is a tax increase on all. Though I suppose you could, in theory, target just the poor and working class (e.g., if your adjusted gross income is $40K or below and you’re deductions would otherwise zero out your tax liability, then you must pay $500). But ask yourself what purpose a regressive tax of that kind would actually serve. What problem is it trying to solve? Do the poor have it too good?
I think a lot of people who get angry over this issue don’t understand the graduated marginal tax rates, so they feel like they’re getting shafted by shiftless poor people. But they aren’t. We all pay the same rates on income that falls into particular brackets. Hopefully the above helps with that to some degree.
Now, there are a some groups that use this issue as a proxy for talking about the real issues that bother them. Sometimes they’re against tax credits they don’t like which benefit only the poor (e.g., the Earned Income Tax Credit), sometimes they’re against a progressive tax code altogether and would prefer a flat tax, sometimes they think the rates in particular brackets are too high, etc. But to the extent those are the issues of concern, I’d rather they engage with those issues directly, rather than dance around it by raising what looks to me to be a non-issue.