You may have heard that 47% (or 43%) of people pay no taxes, including the President.
Has our blog post on how to Never Pay Taxes Again really been a bad influence on such a large percentage of the population?
Who are the people who pay no taxes? Let’s explore.
“47% of people pay no income tax”
The calculation that 47% of people pay no income taxes came from a Tax Policy Center report back in 2009, and was made famous in 2012 by then Presidential candidate (now Senator) Mitt Romney’s comment –
“there are 47 percent of the people who will vote for the president no matter what” because they are “dependent upon government … believe that they are victims … believe the government has a responsibility to care for them … these are people who pay no income tax.”
Is this number accurate? Do 47% of people really pay no tax?
Well… only with some creative interpretation.
Federal Income Tax Only
To determine 47% of people pay no income tax, we first need to ignore all types of tax that aren’t Federal Income Tax – State income tax, payroll taxes, property taxes, sales taxes, gasoline taxes, excise taxes, sin taxes, etc…
The majority of the population pays more in payroll taxes than income taxes – the only reason to exclude this from any calculation of total tax burden is because it makes a policy talking point sound better (* More on this later – Thanks to violating Rule #1, we also pay more payroll taxes than income taxes.)
This is shown nicely in the following chart from the Peter G. Peterson Foundation (note that on average, even those with negative federal income tax burden show a positive overall average tax burden.)
Income
The US has a progressive tax system – anybody making less than ~$12,000/year (single) or ~$24,000/year (married) will owe no tax, just due to the standard deduction.
With the Child Tax Credit, the Child and Dependent Care Tax Credit, and the Earned Income Tax Credit, working families can earn significantly more with zero federal tax burden…
One example – with just the Child Tax Credit, a household with 2 adults and 2 children can earn $61,500 in 2020 with zero federal income tax, well above the median US household income. And this is before any deductible retirement savings.
Age
Another big factor buried in the data is age of both taxpayers and non-taxpayers.
Of the population over age 65, ~70% are non-taxpayers. This is primarily for 3 reasons:
- People over age 65 get larger deductions
- Social Security is tax-friendly income (meaning for many people it isn’t taxed at all)
- Incomes for Seniors are mostly low
By contrast, for those age 25-55 only ~10% are non-(federal)taxpayers. (This actually seems low given the tax credits for children.)
Data from Fullerton/Rao, How Long Do the 47 Percent Pay No Tax (behind paywall with free trial)
So… old people don’t pay taxes, young people do (mostly.) Which is exactly what you would expect.
Time
But… is it really reasonable to (disparagingly?) label somebody as a non-taxpayer just because they are retired and living on savings and social security?
Before ending employment and taking a well-deserved rest, didn’t they first pay taxes for 40+ years? (at rates higher than today)
For example, for the past 7 years or so we have been (mostly) non-(federal)taxpayers.
But… (approximating from just our most recent Social Security statements)… prior to retiring early at the age of 38, I personally paid more than $600,000 in federal income tax and maybe $250,000 in payroll taxes. (Plus token amounts to the States of Minnesota, Wisconsin, Illinois, and California.)
Am I automatically a deadbeat loser just because I stopped working? Yes, probably, but even so, excluding a person’s tax history from any assessment of tax burden is not justifiable.
More Time
Of working age people, we learned from Fullerton/Rao that ~10% of people pay zero federal income tax in any given year. (chart above)
But what about the following year?
Roughly 1/3 will pay no tax for just one year, and 60% will pay tax within 3 years. (More detail: summary of report on Forbes.)
Common reasons for not paying tax for 1-3 years… going back to school, starting a business, a bad business/investment year (2008, 2020), losing a job, losing $100 million year after year, etc… (The Tax Policy center also issues a report called, Why Some Tax Units Pay No Income Tax. There is also an entertaining video.)
In other words, paying zero federal income tax year after year is an extreme anomaly. Uncle Sam eventually comes for nearly everyone.
Are Payroll Taxes Really a Tax?
The original Tax Policy Center report stating 47% of people pay no tax looked at Federal Income Tax only, ignoring payroll taxes / FICA / Social Security / Medicare.
This is a fairly common exclusion for people who want to say that the US has a lot of non-payers.
The logic goes, these payroll taxes are just forced retirement savings that will eventually be returned to those who paid in. So not a tax.
This is also a creative interpretation…
Future Social Security benefits are based on your highest 35 earning years. For each additional year of work, the payroll taxes from your lowest paid years are gone… like a tax.)
And what about the people who die before collecting at age 65 or 67 or whatever? All gone –> a 100% tax (ignoring possible dependent benefits.) Or, what if you paid into the system for 40 years and die after collecting for just a few years? If you paid $250,000 in and collected only $25,000, isn’t that other $225,000 a tax?
This seems particularly important when 200,000 of our fellow Americans have been lost so far in 2020.
Or most interesting (to me), for most people who do collect SS benefits, the return-on-investment for Social Security is terrible…
I previously calculated that if I just invested the self-employment taxes I am currently paying, at traditional retirement age I would have 4 times as much money. Or simply stated – it is an additional tax with a marginal rate of 75%.
I’m happy to continue paying these taxes, but recognize that they are just that… a tax.
Summary
The idea that 47% of people pay no taxes is at best creative propaganda.
People pay all sorts of taxes – Federal Income Tax, State income tax, payroll taxes, property taxes, sales taxes, gasoline taxes, excise taxes, sin taxes, etc… Even those who pay little to none in terms of federal income tax pay these other taxes, including Social Security, which is absolutely a tax.
The majority of people who “pay no tax” are Seniors – they pay no tax today after a lifetime of paying, so they are clearly taxpayers.
Some people pay no federal income tax during their core working years, but usually just for a year or 2. There are many common reasons to pay no tax for a short time (going back to school, starting a business, etc…)
In the end, Uncle Sam gets some taxes from all.
Motivation:
Most recently the notion of who is/isn’t a taxpayer was bantered about with regards to Pandemic Unemployment Assistance in the CARES Act (my review) – which paid people $600/week to stay home to avoid viral transmission (like the Senate is doing now.)
One example is a quote from Treasury Secretary Steven Mnuchin: “We’re not going to use taxpayer money to pay people more to stay home.”
I shared this quote on Twitter, equating people to taxpayers and received some pushback – the above hopefully makes it all clear.
Hi, Guys!
Thank you once again for your informative posts. I have been following you guys since 2015 and thanks to all the golden nuggets of advice my husband and I have come out ahead. We retired at age 49 after careers in law enforcement in NJ. I returned to the university and became a licensed psychotherapist and now see clients exclusively online. I just created my own LLC.
QUESTION: WHAT ABOUT PUERTO RICO ACT 20 & 22?? Would it benefit us to live there to save on all the Fed taxes we are still paying on our pensions??
Thank you!!
Congratulations!
I’ve not looked into retirement in PR so I don’t know much at all about taxes there. Sorry :(
Maybe somebody else reading the comments will have an idea.
“We’re not going to use taxpayer money to pay people more to stay home.” but we will give money to big corporations so their senior management can get higher bonuses. That should be the end of the sentence.
Corporate welfare is big in the US.
We’ve always been told to save money for rainy day. In business, it is called to build equity. So in case of a downturn, you would use that equity to let you survive it. Companies now use equity to pay out bonuses and dividends.
As always, love your analysis, and I think the elderly not pay taxes is expected as you show. I love that your site is not very political but I have to ask, it seems as you do support the extra $600 for unemployment ?
I can’t follow this argument. How can paying people more than they would have made a good thing for our economy ? I know several people not worried about covid not even trying to get a job because they make more by not working. Kinda stinks for us workers right ? Hard to not be a little judgemental.
You pay people to stay home so 200,000 people (and counting) don’t die, so the pandemic ends in 3 weeks instead of 9 months (and counting), so life and the economy can get back to normal.
It works – see Taiwan (where I am) and other countries that did hard shutdowns – and is cheaper than doing nothing.
ps: all personal finance is political
100% we could have done it. Shut down for 4-5 weeks and we would be in a much better place.
Did Taiwan “shut down”?? My daughter was working in Taiwan when the pandemic hit and her company didn’t close, they simply put in place safeguards like masks and hand washing.
Having lived in Asia for 6-years, I think the reason HKG, SIN and Taiwan did better than most Western countries has more to do with past events (dealing with SARS) and culture (wearing a mask isn’t a big deal, they were already doing that).
Yes – schools shut down for 3 weeks, no indoor dining, recreational travel stopped, only Taiwan citizens allowed to enter the country, etc…
Yes, masks also. But more importantly an extensive testing and contract tracing system. Every person who had the potential to be exposed was isolated / quarantined, and everybody they came into contact with also.
Past experience is helpful, sure. But as reasonable creatures who can read and understand history, every country on the planet has the benefit of past experience. Knowledge/experience wasn’t the issue, political action was.
Also helpful, the VP of Taiwan is an epidemiologist. The VP of the United States is a science denier and famous for mass failure during another pandemic (HIV.)
I think the best suggestion I saw was a Commentary in the WSJ suggesting a 0% Income Tax for 2020. Instead of collecting $2T and redistributing, it would be better to cut out the middle-man (GOV) and just don’t collect it in 2020. This idea is simple, efficient, low-cost and incentivizes work. Econ 101….you get more of what you incentivize.
https://www.wsj.com/articles/the-best-stimulus-0-income-tax-11602003602?mod=opinion_lead_pos10
On a scale of 1-10, I give this idea a -7.
A few things:
1st, if we had an unlimited zero income tax year, first I would do a Roth conversion of 100% of my Traditional IRAs. Then I would cap gain harvest 100% of my stock portfolio. Every other wealthy person would do the same. We would also see other interesting tax shenanigans… “I sell you my $100 million building for your $100 million building.” Overall ensuring a 25%+ future income reduction for the US government.
2nd, Stephen Moore is a frickin idiot. Dirt is smarter.
Unemployed people already pay zero income tax. Now add a few million CPAs to that (“Auditors and tax preparers would have to find productive work” – For a year? Immediately? lmao, what a maroon.)
With no income, these 30 million people don’t buy food or pay rent. Landlords don’t pay their mortgage. The small businesses Mr Moore thinks will hire so many go under. The 1% who will get 99% of the benefit purchase assets at fire sale prices – Seattle changes its name to Bezos City. Riots increase in numbers and intensity. Depression is the likely outcome.
All good points. Obviously, there would have to be some restrictions limiting the “income tax holiday” to W2 wages earned in 2020 or something of that nature.
The 30+ million people unable to pay for food or rent will surely appreciate that adjustment.
You pay them because they are the ones who spend it back into the economy. Consumer spending drives the economy and not investments.
Right! People on unemployment aren’t sitting just sitting on that extra $600. That money goes to things like rent and groceries and diapers. Which brings business to landlords, grocery stores, farmers, etc. Which keeps the people working in those places employed. And prevents more people from having to go on unemployment and being homeless, etc
“The government is good at one thing. It knows how to break your legs, and then hand you a crutch and say, ‘See if it weren’t for the government, you wouldn’t be able to walk.”
It’s a fun quote. Thanks to government schools 99% of people can read it, instead of just the 5% of people with dynastic wealth.
sick burn!
“[USA] Social Security, which is absolutely a tax”:
… because capital IS NOT owned by, and its performance IS NOT dependent on, the investment choices of the (eventual) beneficiary.
Aus: superannuation (concessionally taxed retirement savings) is not a tax:
… because the capital IS owned by, and performance IS dependent on, the investment choices of the (eventual) beneficiary.
Whether USA Social Security is a tax or not is more like Schrodinger’s cat – all possible states until the state taxed / taxed-not is inspected.
haha, Schrödinger’s tax! Great way to think of it.
Schrödinger’s tax:
https://krugman.blogs.nytimes.com/2012/03/04/schrodingers-tax/
“because you should include the corporate taxes paid by the companies whose stock he owns?”
In Aus these quantum shenanigans are resolved at tax assessment time through dividend imputation:
Corporate tax is credited to the dividend recipient in proportion to the dividend received – like wage taxes are credited to the net wage recipient at tax assessment time.
68 year old baby boomer seeking tax advice. I have postponed taking a pension and SS till age 70. When the RMDs hit at 72 I’ll be facing a much higher tax liability. A Roth conversion can eliminate tax obligations but I don’t see how I can make up the upfront cost of the conversion. Your thoughts?
A. How much tax would you pay on a $100 Roth conversion today? $10? $22?
B. How much tax would you pay on a $100 withdrawal from age 80-90 (peak RMD years?) $24? $32?
If A < B, do Roth conversions. If not, don't.
Just read that Biden’s tax proposal calls for eliminating the step up basis of capital gains for heirs and forces capital gains taxes to be payed the year that assets are transferred to heirs. I certaintly hope I misread that or that is was misinterpreted by the author!! That would be a big deal!!
Sounds like a good idea
I don’t know if forced realization of capital gains is a good idea considering the fact that a fair amount if not most are due to inflation. I hope that this will not be a precursor for taxing saved wealth at some arbitrary point in time decided by the government. The owner of the assets should determine when any gain is realized for their own benefit.
The owner is dead.
A wealth tax is also a good idea.
Thanks for clearing up plenty of tax-related misconceptions lately!
Conflating “Federal Income Tax” with “Tax” drives me bonkers. As you wrote, there’s a ton of different taxes and many folks pay more in them than in US fed taxes.
Great article as usual!
I just stumbled upon this article about changes in 401k if Biden wins the election. Any thoughts on this?
It seems like it won’t be much beneficial for us to invest in 401ks any more.
https://www.google.com/amp/s/www.forbes.com/sites/ebauer/2020/08/25/joe-biden-promises-to-take-away-401k-style-retirement-savings-whats-that-mean/amp/
“It seems like it won’t be much beneficial for us to invest in 401ks any more.”
Fact check: false
The US tax rates make me want to cry. In South Africa we pay the highest marginal tax rate of 45% from $90k of income, with a standard deduction of $850. My average tax rate hovered around 33%-40%, plus my spouse didn’t work and there isn’t a married jointly filing, so no tax benefit.
Then sadly, despite that high tax you still had to make medical contributions and retirement contributions since there isn’t any social welfare, so it isn’t like you get the nice “European” model of high tax but decent social care.
Sigh, no wonder everyone leaves here =( But, at least despite the currency weakening by half it means my expenses also halved. Plus the weather, cheap property and family make it all worth it =)
Paying to the government is important. But what I feel is they should provide complete relief to those suffering some economic crunches.
I’ve always felt that there needs to be more transparency–and shoot, maybe there is and I just don’t know where to find it–in paying taxes. Even if 90% of your taxes go toward, well, whatever they are currently being allocated toward, there should be an option for taxpayers to divvy up the remaining 10% themselves to get them more involved in the process and feel a stronger connection to what they are paying a substantial amount of their paycheck toward. And it’d be nice if these allocations were all listed directly on your paycheck, similar to dental, vision, health insurance, etc. But your idea to not pay any taxes at all sounds much better haha.
What’s the top marginal tax rate in Taiwan? Singapore? Hong Kong? Think the literacy rates there are comparable/better than the US. Don’t think this explains why Hard working folks should have to pay 40%+ to Federal govt on ordinary income, 23.8% on dive/cap gains, 10%+ to some corrupt states, etc, etc..
Top marginal rate in Taiwan is 45% – it’s hit at relatively low income levels.
If El Jefe were El Rey, what would taxes look like?
And with that you get good heavily subsidized govt health care from what you’ve said. I think it’s reasonable to expect top earners to pay 1/3rd in Income taxes. Corporations 25%. Few deductions, no loopholes. My bigger beef is what you get for your taxes. If we had good, efficient government agencies I think that would be more palatable. Singapore is the gold standard from my perspective.
33% is more than what top earners pay in effective federal income taxes now (see 1st chart in post above.)
For Taiwan, health insurance is in addition to.