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The Only Certainties in Life are Death and Taxes

TPC_chart(Graphic: Tax Policy Center, 2011)

By Sarah Godfrey

The now-famous video that shows presidential candidate Mitt Romney talking about “the 47 percent” of Americans who “pay no income tax” has the entire country discussing who does or does not pay taxes. Romney’s remarks have thrust into the spotlight a study that is actually a smart, common-sense analysis of taxation—it shows that everyone, especially the poor, pays.

The "47 percent" figure is taken from a Tax Policy Institute study that found 46.4 percent of Americans did not pay federal income tax in 2011, but even the Institute itself has said its findings have been largely misconstrued.  “Commentators have often misinterpreted that percentage as indicating that nearly half of Americans pay no taxes. In fact, however, many of those who don’t pay income tax do pay other taxes—federal payroll and excise taxes as well as state and local income, sales, and property taxes,” the group wrote in a 2011 explanation of its findings.

Derek Thompson, writing in the Atlantic on Sept. 18, put it plainly: “When you hear ‘the 47 percent,' you should think old retired folks and poor working families.” The Washington Post’s Wonk Blog analyzed the same Tax Policy Institute study, and found that of the roughly 47 percent of those who don’t pay income tax, 60 percent are still paying into Social Security and Medicare. Another 22 percent of non-payers are retirees. “Only about 7.9 percent of households are not paying any federal taxes at all,” wrote Brad Plumer. “That’s usually because they’re either unemployed or on disability or students or are very poor.”

And the poor actually often shoulder a greater share of the tax burden relative to their income. A 2012 Citizens for Tax Justice study found that the poorest fifth of Americans, a group with an average cash income of $13,000 per year, saw 17.4 percent of their incomes go to taxes last year.

This is because while income tax is progressive, sales and excise taxes are regressive. A progressive tax increases proportionally as the income of an individual taxpayer rises. However, fixed-rate regressive taxes represent a greater portion of one’s income as that income falls.  If you live in Washington state, for example, you pay 6.5 percent sales tax on a tube of toothpaste whether you earn $11 million per year or $11,000 per year. The poor sacrifice a much greater percentage of their earnings to regressive taxes.

And the poor are often less able to escape taxes. To give a basic example, groceries and unprepared foods are typically exempt from sales tax, but in food deserts—poor neighborhoods where it’s hard to find a supermarket, but easy to find fast food restaurants—the residents are unfairly burdened by sales tax when it comes to purchasing food and other necessities.

The non-partisan Institute on Taxation and Economic Policy’s 2009 study “Who Pays?” offers a good primer on how regressive taxation affects the poor. The study assessed the fairness of each state’s tax system, measuring state and local taxes paid by different income groups in 2007. The main finding of the research was that “nearly every state and local tax system takes a much greater share of income from middle- and low-income families than from the wealthy.”

The ten states with the most regressive tax systems asked their poorest residents — those in the bottom 20 percent of the income scale — to pay up to six times as much of their income in taxes as they ask the wealthy to pay.

Tax credits, such as the Earned Income Tax Credit and the Child Tax Credit have helped low-income working families during the recession and assist in offsetting the regressive tax burden shouldered by the poor.  These tax credits, which were established with bipartisan support, will expire at the end of the year. Congress is currently debating if these credits will be extended.

Federal income tax is just a sliver of the taxes that are paid in this country, so not paying federal income taxes is not akin to not paying taxes. The old adage that the only certainties in life are death and taxes holds true – for everyone. Unfortunately, the reality of how the tax burden is shared is not always understood. 

Sarah Godfrey is Bread for the World's associate editor, online.

 

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