Forum Post: The forty-seven percent

http://www.nytimes.com/2010/04/14/business/economy/14leonhardt.html "...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 investment taxes, among others. And, of course, people pay state and local taxes, too.

Even if the discussion is restricted to federal taxes (for which the statistics are better), a vast majority of households end up paying federal taxes. Congressional Budget Office data suggests that, at most, about 10 percent of all households pay no net federal taxes. The number 10 is obviously a lot smaller than 47.

The reason is that poor families generally pay more in payroll taxes than they receive through benefits like the Earned Income Tax Credit. It’s not just poor families for whom the payroll tax is a big deal, either. About three-quarters of all American households pay more in payroll taxes, which go toward Medicare and Social Security, than in income taxes.

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.

I realize that it’s possible to argue that payroll taxes should be excluded from the discussion because they pay for benefits — Social Security and Medicare — that people receive on the back end. But that argument doesn’t seem very persuasive.

Why? People do not receive benefits equal to the payroll taxes they paid. Those who die at age 70 will receive much less in Social Security and Medicare than they paid in taxes. Those who die at 95 will probably get much more.

The different kinds of federal taxes are really just accounting categories. At the end of the day, the government has to cover the cost of all its operations with revenue from all its taxes. We can’t wish our deficit away by saying that it’s mostly a Medicare and Social Security deficit.

If anything, the government numbers I’m using here exaggerate how much of the tax burden falls on the wealthy. These numbers fail to account for the income that is hidden from tax collectors — a practice, research shows, that is more common among affluent families. “Because higher-income people are understating their income,” Joel Slemrod, a tax scholar at the University of Michigan, says, “We’ve been overstating their average tax rates.”..." http://www.netatty.com/articles/tax.html In recent years, a number of very rich people have renounced their United States citizenship and moved abroad.63 The reason for this is simple: it saves them enormous amounts of money in U.S. inc ome taxes.64 This is an extreme reaction to government taxation of income, and tax professionals hesitate to recommend it.65 The Treasury Department estimates that only persons with more than $5 million in assets would find this advantageous.66 Some recent millionaires that have renounced their citizenship and moved overseas include Mark Harris Getty and Christopher Ronald Getty, grandsons of John Paul Getty,67 Kenneth Dart, president of Dart containers Corp.,68 Michael Dingman, chairman of Abex,69 J. Mark Mobius, 70 Richard Minns,71 John Dorrance III, heir to the Campbell Soup fortune,72 John Templeton, 73 and Joseph Bogdanovich, vice chairman of H.R. Heinz Co.74 These high profile expatriations have prompted Congress to introduce bills to eliminate this particular loophole 75 and thus the extensive grumbling by editorial writers.76 The Joint Committee on Taxation, in a study of the "problem" of expatriation, howev er, decided that eliminating the loophole would exacerbate what is, ultimately, a minor problem.77 ..."