Have you heard the one about how nearly half of Americans don’t pay taxes? Nonsense, as the recent Congressional Budget Office report on income inequality reminds us.
As we have explained, in a typical year around 35-40 percent of households don’t owe any federal income tax. But most of them pay a significant share of their incomes in other taxes — particularly payroll taxes, as the CBO report points out:
People in the bottom four-fifths of the income scale pay more in payroll taxes than federal income taxes, on average. The Tax Policy Center estimates that payroll taxes (including both the employee and employer shares) outweigh federal income taxes for 82 percent of households. (Most economists agree that workers pay not only the employee share of payroll taxes but the employer share as well in the form of lower wages.)
Working-poor and middle-class Americans pay a much larger share of their incomes in payroll taxes than high-income people do (see graph). That gap has increased over the past 30 years, the CBO report shows. In addition, the share of federal revenues coming from payroll taxes has gone up while the share coming from income taxes has gone down.
When you count all federal taxes (income, payroll, and excise), even people in the bottom fifth of the income scale are net federal taxpayers, on average. This group, whose after-tax incomes averaged just $17,700 in 2007, paid 4.7 percent of their incomes in federal taxes that year.
Moreover, these figures don’t consider the significant state and local taxes that virtually all Americans pay — taxes that, like federal payroll and excise taxes, tend to demand more of lower-income people relative to their incomes.
When you count all taxes — federal, state, and local — the bottom fifth of households paid 16 percent of their incomes in taxes in 2009, on average, according to Citizens for Tax Justice.
Let’s put the canard about non-taxpaying Americans to rest once and for all.