The Forty-Seven Percent Solution

If it's a small bag, keep it.

David Leonhardt does a nice job today in the NYTimes writing about the recent dust-up over the mid-2009 study that claims that 47% of Americans owe no federal income taxes.

All the attention being showered on “47 percent” is ultimately a distraction from that reality.

The 47 percent number is not wrong. The stimulus programs of the last two years — the first one signed by President George W. Bush, the second and larger one by President Obama — have increased the number of households that receive enough of a tax credit to wipe out their federal income tax liability.

But the modifiers here — federal and income — are important. Income taxes aren’t the only kind of federal taxes that people pay. There are also payroll taxes and capital gains taxes, among others. And, of course, people pay state and local taxes, too.

Focusing on the statistical middle class — the middle 20 percent of households, as ranked by income — underlines this point. Households in this group made $35,400 to $52,100 in 2006, the last year for which the Congressional Budget Office has released data. That would describe a household with one full-time worker earning about $17 to $25 an hour. Such hourly pay is typical for firefighters, preschool teachers, computer support specialists, farmers, members of the clergy, mail carriers, secretaries and truck drivers, according to the Bureau of Labor Statistics.

Taking into account both taxes and tax credits, the average household in this group paid a total income tax rate of just 3 percent. A good number of people, in fact, paid no net income taxes. They are among the alleged free riders.

But the picture starts to change when you look not just at income taxes but at all taxes. This average household would have paid 0.8 percent of its income in corporate taxes (through the stocks it owned), 0.9 percent in gas and other federal excise taxes, and 9.5 percent in payroll taxes. Add these up, and the family’s total federal tax rate was 14.2 percent.

To those people who still find it offensive, I suggest they do two things:  1) Contemplate raising their family on $50,000 in gross income, and 2) Contemplate raising their family on $50,000 in gross income then paying $10,000 of it away in taxes.  Doesn’t leave much.  The system is (supposed to be) designed where those with the ability to pay, pay.

Exxon Mobil paid no US federal income taxes last year and few seem disturbed by that. I am not, but then again, this 47% number doesn’t bother me, either.

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