StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



What People Don't Know About Federal Income Taxes

15 Apr 2010
Posted by Bruce Bartlett

As readers of this blog know, one of my pet peeves is all of the tea party demonstrators who are outraged by the high level of taxation in America, but who in fact know virtually nothing about taxation and grossly overestimate its burden. Further evidence of this fact come from a CBS News/New York Times poll released earlier today.

This poll sampled all Americans for their views on taxation and oversampled those who claim to be tea party supporters. Question 54 (page 25) is reproduced below. As one can see, five percent of all respondents and 11 percent of tea party supporters think that most Americans pay less than 10 percent of their income in federal income taxes each year. In fact, according to the Joint Committee on Taxation of the U.S. Congress, more than 86 percent of tax filers this year have an effective rate less than 10 percent (page 45).
 
About a fourth of all respondents and tea party supporters think most Americans pay 10 percent to 20 percent in federal income taxes. In fact, only 13 percent of Americans pay that much. Finally, 38 percent of all respondents and 44 percent of tea party supporters think most Americans pay more than 20 percent of their income in federal income taxes. The actual figure is less than one percent.
"On average, about what percentage of their household incomes would you guess most Americans pay in federal income taxes each year – less than 10 percent, between 10 and 20 percent, between 20 and 30 percent, between 30 and 40 percent, between 40 and 50 percent, or more than 50 percent, or don’t you know enough to say?"
 
Average Tax Rate
All Americans
Tea Party Supporters
Actual Distribution
Less than 10%
5%
11%
86.5%
10 – 20%
26%
25%
12.9%
20 – 30%
25%
26%
 
0.6%
30 – 40%
10%
14%
40 – 50%
2%
3%
More than 50%
1%
1%
Don’t know
31%
20%
 
 
Even though the question was quite clear is referring to average tax rates (taxes as a share of income), some people will undoubtedly respond that people were thinking about marginal tax rates. According to the JCT (page 36), this year 37 percent of taxpayers face a marginal federal income tax rate of zero, 16 percent will pay 10 percent on each additional dollar earned, 30 percent are in the 15 percent bracket, 14 percent are in the 25 percent bracket, and 4 percent of taxpayers face marginal rates above 25 percent. About one half of one percent of taxpayers paid any taxes at the 35 percent top statutory rate.
 
I’m not going to waste my time with those who will insist that people were thinking about payroll taxes, estate and gift taxes, property taxes and all the other taxes that exist at the federal, state and local level. Today is the day we pay federal income taxes and that’s what people were out protesting. And there is no getting around the fact that the vast majority of people think that the federal income tax burden is very considerably higher than it actually is.

Employment taxes

For many many working people, employment taxes and income taxes are pretty much the same thing. The technical distinction isn't of much use when all of your income comes from wages... like it does for most working people. From the document you note , those two taxes make an average tax rate of 19%... pretty close to what people think it is.

Its true that employment taxes get paid throughout the year, so maybe April 15 isn't the right time to protest them, but they appear on your W2s and so you only get a really good sense for how big they are when income tax time comes around.


payroll tax

I really think you ought to waste some time with those who will insist that people were thinking about payroll taxes. For the average wage earner, I doubt there's much of mental distinction between the income tax and the the payroll tax. And the way the budget deficit is typically reported, there isn't much of a practical difference either. For self-employed individuals, there's even less of a distinction, and in fact "today is the day we pay" the payroll tax as well as the income tax.

I'm not sure including the payroll tax would alter the qualitative conclusion, but if a poll is to ask specifically about the federal income tax while ignoring all other taxes, it seems to me it's asking for technical information that typical Americans shouldn't necessarily be expected to have.


lower taxes?

The other vast misapprehension of the Tea Party people is that US taxes can be lowered. In fact given the obligations of the federal government taxes will have to be raised, probably rather steeply in the near future. David Stockman of all people had a good interview on the issue and said as much. If Stockman thinks taxes need to go up, you can be very sure they do.


While it is certainly the

While it is certainly the pleasure of conservatives to quote statistics on income taxes alone (neglecting payroll taxes, etc) to suggest that the present tax system is overly progressive and that most people on the bottom don't pay any taxes, when they do this we (liberals) think they are being deceptive.

It seems hypocritical, then, to now think that the polled individuals were not thinking of all forms of taxes assessed on personal income. Either people recognize the difference between income tax and all taxes assessed on personal income, or they don't. I think it is better to assume they don't, and if you want to provide honest, unbiased data on tax rates, to do so looking at all taxes assessed on income.


Wouldn't a VAT have a lower tax gap?

From time to time I read about the 'tax gap'. It seems a lot of US income tax is avoided by cheats.

I suspect that a VAT would be much more difficult for cheats -- especially for individuals. Am I right?


Not intentional, I'm sure...

But what the other two commenters said. Spreading this info about fed income taxes only -- ignoring payroll (and state, and local) -- gives aid and comfort to the enemy.


Federal Income Taxes

The question clearly asks people about federal income taxes--those they were filing returns for TODAY. If someone wants to complain that people were really thinking about payroll taxes as well in order to rationalize the gross ignorance that most people have about the true burden of federal income taxes, I can only conclude that any poll on this question is worthless because people are simply too stupid to understand the difference between the payroll tax and the income tax. Personally, I think they perfectly well know the difference and are are simply confused about what most people pay in federal income taxes because Rush Limbaugh, Glenn Beck, Grover Norquist et al. are continually telling them they are grossly overtaxed, that taxes are rising and it's all because the Democrats are in power.


I get a paycheck every month.

I get a paycheck every month. The paycheck has money taken out of it that goes to the federal and state government. Only intellectuals with an abundance of hubris like yourself would look down on someone for not knowing whether the federal government is taking the money from them as a payroll tax or an explicit tax on income. Money comes out of the paycheck, goes to the federal government, that is a federal income tax no matter how you want to pooh-pooh the semantics. Just because it goes toward a federal social program specifically instead of into the general coffers is hardly a reason to not call it a tax on income.

I agree that lumping State, local, and/or property taxes in there with "federal" taxes is a sign that someone is probably not very intelligent, but how can you seriously argue that payroll taxes aren't a form of federal income tax and that someone is stupid or mislead for thinking otherwise?


1040

How much effort does it take to look at the bottom line on the 1040 form and compare one's taxes paid to the income reported on the same form? Too much for the tea party crowd, apparently, which prefers being angry to being informed. 


self-employment tax

It's a bit more subtle than just looking at the bottom line. The bottom line of the 1040 (at least the 2008 version I'm looking at now from last year) only tells how much you owe at tax time, which by design is supposed to be close to zero. You have to choose which line to look at, and the choice is not obvious.

Would you look at line 56? I suppose that would be the correct line to look at, but I bet one is more likely to look at line 61, the one that says "This is your total tax" (while line 56 has no particular label). If you're self-employed, however, line 61 includes not only the employee's payroll tax but the employer's payroll tax as well.

It's a valid point that people who are going to advocate for changes in tax policy should know what they are talking about. But as for the general public, I'm not sure they need to make it a priority to know the names of the various taxes they pay.


Let's get this straight. I'm

Let's get this straight. I'm self employed. I read the very government document you provide, and it says right at the front:

"The current federal tax system consists of four main elements ... (3) ... and corresponding taxes on ... income..."

But I'm "stupid" to regard the "self-employment" taxes I pay under item 3, on April 15 no less, based on my income, into the federal tax system, as "federal income taxes"? There's no rational basis for my belief; I'm just "too stupid", end of story?

I'd like to hear you argue why self-employment taxes so obviously aren't federal income taxes give the very language in the report from the Joint Committee of Taxation. Or if you concede that this is a reasonable interpretation, I'd like to hear you somehow explain how payroll tax which is functionally identical except when it is collected, should so obviously be an entirely different beast and anyone who doesn't see this is just "too stupid".

The question didn't ask about "Federal Income Taxes(tm)". (It also didn't say "include only those paid on April 15".) It asked about federal income taxes (ordinary word of English whose meaning is not up to the arbitrary whim of some bureacrat). If the US government tomorrow rewrote all legislation to replace the words "tax" with "levy", perhaps my "Federal Income Taxes(tm)" go to 0 but my federal income taxes would in fact remain totally unchanged.


Are self employment and FICA federal income taxes

The point Bartlett is making is that AP trumpeted:
"47% do not pay federal income tax"
David Leonhart of NYT also expanded on this as Bartlett is doing.

Now you are telling me that FICA and self- employment taxes ARE federal income tax, or as near as doesn't matter.

But the percentage of people who pay NEITHER Federal income tax nor FICA is very small, and the AP headline goes away.

And the know-nothings who are worried that somebody else is freeloading (that somebody who is completely coincidentally imagined as brown skinned)
off the system because they don't pay federal income tax, have no hobby horse to ride.


So what? There are people

So what? There are people annoyed that (supposedly) a lot of society doesn't pay tax, and others that (supposedly) we are not so lightly-taxed as some think. Maybe some people think both though it's hard to thread that needle consistently. I certainly don't think the former!
I tend towards the latter.

But whatever he is responding to, Bartlett's article has a clear message: we don't pay as much federal income tax as most people think we do. And indeed he uses the survey to justify a simple message: people grossly underestimate how many people avoid all "federal income tax". He follows up with fairly dismissive pre-emptive rebuttal to simple counter-arguments. Overall message: people don't have a clear view of the federal tax burden and overestimate it.

I think this is intellectually dishonest. It's obvious to me that FICA etc is federal income tax, and that many poll respondents will (IMO rightfully so) mentally include it as such, though I accept this is an arguable point - but for sure people who include it within the compass of "federal income taxes" and NOT necessarily stupid and NOT inarguably wrong! (And, by the way, the employer-paid part FICA is federal income tax too :-) Contrary to what Bartless says, the poll results do not necessarily show that people are confused or wrong at all. Maybe they are, maybe they aren't.

P.S.(1) If your withholding and estimated taxes are wrong, there's a day by which you have to file a specific form analyzing any mismatch and fix it. The day is April 15, and the form is 1040. If your FICA taxes are wrong, there is likewise a day and a form: the day is April 15, and form is 1040. The FICA component of our federal taxes is so simple that in 98% of the cases all prepayments are exactly right (unless you have two jobs, work for yourself, or have a crooked employer) but Bartlett's repeated defense "We are talking about April 15, so of course we aren't talking about payroll taxes" is just factually erroneous.

P.S.(2) Am I the only person struck by how similar the teabaggers beliefs about "federal income taxes" matches the overall citizenry. I suspect that the main difference (and it's not really that great after allowing for noise) is in beliefs about the <10% bracket but the difference even there looks fairly unremarkable given the overall statistics.

P.S.(3) I'm not a teabagger. Bring on more taxes (and yes, I would bear the absolute full brunt of these.) But I'm annoyed at arguments that push the notion that the U.S. is an exceptionally low-taxed nation. It's not, really. But IMO do not get the social benefits that our considerable overall tax burden should justify (Yes, I know, this is straying beyond Bartlett's target).


These are people, and they pay FICA, too.

Anyone pushing the theme of the Freeloading 47% as evidence that you're being overtaxed seems to be counting on you being too dumb to notice that they're playing a trick on you. They're only talking a piece of tax withholdings, not all withholdings. But they're want you to think 'all' when they talk about that piece.

So then, when they say, '47%,' they want you to think of all payroll tax withholdings, they want you to think about your FICA, you're health insurance, your 401K, you're state taxes. Because then you'll say to yourself, 'I pay taxes and support government, I'm not part of the freeloading-47%," (even though there's a 47% chance you are) and you'll get all worked up about how overtaxed we are.


Taxation is secondary...

From what I can see, the Tea Party people are angry at spending, growth in government and, somewhere down the line, taxation.

The government has something like a negative 50% profit margin. If you have someone doing work for you and they are not doing a very good job, do you keep giving them more to do?

The root of it all is common sense.


Keep telling yourself that...

If the tea-baggers really cared about about rising spending, growth in government, and future taxation they would've been around during the bush administration.

In reality their movement is just closet racism by a bunch of ignorant fools.


I'm outraged by the

I'm outraged by the combination of all taxes, my combined payroll tax withholding is over 50% and no Virginia I don't make a 6 figure income. That amount doesn't even begin to touch on all the hidden taxes, excise taxes on tires, gasoline, sales taxes, property taxes and that lovely tax in the new blue dress called increased "user fees". To claim that I don't understand the true burden of the taxes I can clearly see in every pay stub and every spending decision is the height of dishonesty.

When 50% of the populace isn't liable for income tax they have no skin in the game; there is no motivation to demand efficieny and accountability from Government, nor are people likely to vote against programs the benefit them at no cost. As far as I'm concerned they're gaming the system but then that's how the pols set it up knowing full well they can bribe the populace to vote for them with other people's money.

There needs to be a limit to how much Goverment can take from us. Unlike the Government we can't vote ourselves increased income. Most of us, even those who are still employed, are doing with less while the growth of irresponsible government spending continues unabated. Deficit spending and the future tax burden that will come from it is the source of my anger and unease. Any politician, of either party, that votes for deficit spending doesn't represent me.


"I'm outraged by the

"I'm outraged by the combination of all taxes, my combined payroll tax withholding is over 50%"

"When 50% of the populace isn't liable for income tax they have no skin in the game"

You're skipping between the two issues. Your first sentence is talking about total withholding, your second sentence you are talking only about federal income tax.

I do have sympathy with people who are bringing up payroll taxes. It might be because I was listening to Diane Rehm this morning and a topic of conversation was "Tea Partiers say 50% of people don't have any income tax," which got the response of "well, they do have payroll taxes to pay to the Federal Government, so the Tea Party people are being disingenuous!"

David Leonhardt had a very recent article about this.

In my book, to have a fair conversation, you should always be clear if you are including payroll taxes or not. Yes, technically the Tea Party is wrong about how much people pay in Federal Income Taxes, but they are technically right that so many people pay nothing in Federal Income Taxes. IMHO both those polarities should be flipped, but you have to flip them both to be fair.


You can't have it both ways

Do payroll taxes, etc, count, or not?

In your first paragraph, you're outraged by the total of the taxes you pay, not just income taxes but including payroll taxes, sales taxes and all the rest. In other words, those other taxes *do* count.

Then in your second paragraph, people who don't have an income tax liability have no skin in the game, despite the fact that they do pay payroll taxes, sales taxes and all the rest. So in other words, those other taxes *don't* count.

So which is it? You talk about dishonesty, but your own position looks pretty inconsistent at the very least.

I also have sympathy with those who are lumping in payroll taxes with income taxes, at least in the general population. They do look more or less the same, if all your taxes are paid on income. I have a lot less sympathy towards people who persist in talking about the issue all the time without bothering to look into it. I have to say, if I were going to be protesting against something I'd first at least try to know what I was against! Seems like it would work a lot better that way.

It would certainly help if we didn't have people disingenuously switching between one and the other, income taxes only or income taxes plus other federal taxes. One or the other, please, and try to make it clear which one we're talking about.


Fed. Income v. Other Taxes

I, too, think it's worth wasting some time on this. One way to do it would be to say: look, many conservatives get outraged by the idea that some people pay no federal income taxes. When someone points out that the people in question pay payroll taxes, sales taxes, etc., somehow this fails to count as "paying taxes", or (on one cable news show that I saw recently) "having some skin in the game". (The game, apparently, being our government.)

If they're going to insist that federal income taxes are the only taxes there are, and that noting that a lot of people who pay no federal income taxes nonetheless pay a whole lot of taxes generally is just a technicality, though, they do not then get to turn around and say: we nonetheless get to lump all tax payments in with federal income tax payments when it suits our ideological needs.


Taxes

By every measure taxes were significantly higher 10 years ago, but there were no tea parties. George W. Bush and a Republican Congress vastly expanded spending for pork barrel projects and enacted an unfunded, multi-trillion-dollar Medicare give-away to the elderly to buy re-election in 2004. But there were no tea parties. Why should I treat with respect people who have only suddenly noticed problems that have been around for many years that they turned a blind eye to? I suppose some will say better late than never, but not me. I want to see some consistency from people before I grant them credibility.


There is no inconsistency.

There is no inconsistency. The $trillion-plus deficits, the $800 billion stimulus boondoggle, the government takeovers of corporations, the ObamaCare boondoggle, etc, etc, have not been around for many years. Anyone who ignores these obvious factors has zero credibility.


Zero credibility

This kind of ignorance is exactly what Bartlett is talking about.

1) The 2009 budget, signed by Bush and already in place since October of 2008 was projected to be $1.2 trillion the day Obama took office. There would be trillion dollar deficits no matter who was elected president and no matter what policies they enacted. When the economy tanks, so do tax revenues. At the same time, more people qualify for unemployment insurance, welfare, medicaid, etc. This happens automatically.

2) The stimulus (itself 1/3rd tax cuts) cost half of what the Bush tax cuts cost.

3) It is mathematically impossible to take control of the deficit without tackling healthcare. Obamacare is largely the same policy proposed by Heritage in 1990, drawn up as the Republican alternative to Hillarycare in 1993, and enacted in Massachusetts by a Republican governor in 2006. Unlike the Medicare prescription drug giveaway, which will cost $700 billion over the next decade, this was fully paid for as endless reports from the CBO made clear.

4) The idea that any president was going to let the banks, AIG or even General Motors collapse is the fantasy of ideologues.


There is no inconsistency?

Really? As a poster earlier said, where were you during the Bush/Rove-Cheney/Rumsfeld years? Credibility you say? What about Bush's bailout of Fannie & Freddie? Or Tarp 2008? What about airline bailouts in 2002? How much was spent in Iraq playing where's waldo with Zarkawi, Saddam, and his sons, after not finding the WMD's and not being greeted as liberators? At least the insurgents did oblige when Bush taunted them "Bring 'em on" in 2004. And what about the human losses there? And what about Afghanistan? By sending only special forces the first part of the 'war', and relying on warlords (perhaps considered 'contractors'), they allowed one of the key objectives to walk out of the country (with a dialysis machine tied to a donkey?). Why don't you look at the costs of the illegitimate war in Iraq, the mishandling of the one in Afghanistan, the nexus of corruption arising from the privatization and no-bid awarding of these two wars, all while cutting tax revenues.


Income Taxes

I own a small company and in signing checks each week I can agree that many people pay little or no Federal Income tax. In our case about 1/3 of the people pay almost all the Federal Income tax. For many of my lower paid people the deductions for SSI, Pa Income, Medicare, and Philadelphia Wage tax are each higher than their Federal Income Tax.

However, to a man the distinction is immaterial as they look at the deductions and take home! Also, most of them smoke and pay a real penalty in tobacco taxes.

Personally, my wife and I just hit Obama's targeted "wealthy" group and we do pay over 20% Federal Income tax, and had the "pleasure" of being hit with the AMT because we live in a high tax state and also paying Self Employment tax on part of the income.

I am really tired of being told that people in the upper income groups benefitted by the Bush tax cuts. For people in my income group (250K)we get hit by the SSI and other deductions on our entire wages (working couple). If we want to reduce the deficit we have to perhaps pick on a wider group than was promised in the campaign.

Finally, I point out that the AMT has snared more and more people so that some of the "cuts" in fact did not reduce income taxes.


Social Security tax

You say that you are paying SSI tax on you and your wife's "entire wages". But isn't only the first $106k subject to the 6.2% social security tax (or 12. 4% since you are self-employed)? That is my understanding of the social security tax, but perhaps I am wrong. If you and your wife are making in excess of $250k, I assume your "effective" social security tax rate is therefore less than 12.4% since some of your income is exempt from that tax.

However, the Medicare tax of 1.45% (or 2.9% for self-employed) applies to all of your earnings.


Not that hard if you each

Not that hard if you each make approximately 100K and have other income from investments and savings. The wage SSI cap seems to track my income very well each year.


Why hasn't 25% reduction in Federal taxes brought happiness

Just to emphasize the last point Bruce made.

In 2000, the Federal revenue, the total of all taxes, income, FICA, corporate, gas, royalties, everything, was over 20% of GDP.

In the past two years, Federal revenue has been under 15% of GDP.

To put it in the terms of tax opponents, "the people are keeping 5% more of their own money and spending it more wisely than government because the Feds are only taking 15% instead of the 20% the jackboot big government Clinton did."

But spending that 5% more wisely seems to mean investing in pump and dump real estate inflation, pump and dump stock speculation, energy guzzling massive houses and gas guzzling cars in the face of rising oil prices.

On the other hand, we haven't seen investment in productive capital, whether in the form of new R&D and factories that create jobs and exports in the private sector, public investment in R&D with NSF/DARPA, nor investments in failing bridges and water systems that were built in the bad old days of big government under the socialists FDR, Truman, Eisenhower, JFK, LBJ, Nixon.

The 90s were begun with tax hikes in 90 and 93 that were forecast to cause recession. But instead of a recession, we got steady growth.

If you look at the NASDAQ, it grew at pretty much the same rate as everything else until the 1997 pump and dump asset inflation tax cut was passed: the 20% short term capital gains tax that is useful for pump and dump, but of no interest to capitalists.

From 2001 on, tax cuts have been promoted as growth engines. Cut taxes to boost employment. Cut taxes to grow wage income. Cut taxes to increase wealth. I count 10 tax cut bills and no tax hikes in the first decade of the 21st century 2000-2009.

But most important, we have a number of pump and dump promoting tax cuts, reduced to 15% to 0% for pump and dump gains. Buy real estate on credit, sell it a short time later for a higher price without doing anything and you pay less in taxes than if you labored for that money. Make $100K on pump and dump you pay $15K, but if you labor for a year for $100K, $15K for FICA to start, then add on income tax.

The conservative Republicans restructured the tax system to punish labor income, while rewarding pump and dump. The Republicans tout the asset inflation in stocks and real estate as proof their tax policies work, until they don't and the crash occurs, then they blame liberals.

The solution for capital gains is to index for inflation, or to simplify, tax short term at 50% to 1 year, 40% to 2 years, regular income to 5 years, then half the normal income rate with gain averaged over the entire time asset held. These rules would promote capitalism instead of speculative get rich quick pump and dump.


Using GDP as a crutch

Before getting all excited about the fact that such and such is only x% of GDP (a very common refrain these days, from certain segments of the political class) I think we need to have an extremely in-depth re-examination of GDP figures and methodology.

If the GDP figures turn out to be error-ridden, then a large number of certain political arguments are going to be overturned.

For instance, I'd like to see someone reconcile (in some depth) the fact that household incomes have stagnanted/declined over the last decade, while the GDP has allegedly increased markedly.

Please identify the specific sectors where all this phantom wealth has come to rest (provide numbers as well).

In my book, for all the macroeconomic and statistical discussion/debate on the web, there has been an amazing (Enron/AIG/Fannie-like) degree of studied disinterest in the specific details of how the GDP is compiled and calculated.


You are right about income

You are right about income stagnation of most households, but I think the explanation is rising inequality of income, i.e. the rich getting richer. I'm not sure where you want to go with the GDP calculation critique. If you think GDP is less than reported, so the 5% shrinkage goes away, why would the earlier one be accurate, but this one inaccurate? More productive would be to go to the shadowstats web site and check out the arguments that inflation has been much higher than reported, thanks to the Greenspan Commission of 1980s. He's everywhere, I tell you!




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