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.)
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.
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.)
So… old people don’t pay taxes, young people do (mostly.) Which is exactly what you would expect.
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.
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.
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.
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.