Exploding, Once Again, the “Non-Payer” Tax Myth

November 7, 2011 at 5:07 pm

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.

Low- and Middle-Income Households Pay Significant Payroll Taxes

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.

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Recovery Act Initiatives Kept Nearly 7 Million People Out of Poverty in 2010

November 7, 2011 at 3:08 pm

Six temporary stimulus initiatives that Congress enacted in 2009 and 2010 kept 6.9 million Americans out of poverty in 2010, according to a report that we issued today based on newly released Census data.

The six provisions — three new or expanded tax credits, two enhancements of unemployment insurance, and an expansion of SNAP (food stamp) benefits — were originally part of the 2009 Recovery Act, though Congress later extended or expanded some of them.

The official poverty measure counts only cash income, so to see how these measures affected poverty, we used an alternative poverty measure that also takes into account the impact of government benefit programs like SNAP and taxes.  Most experts prefer this broader measure, which adopts recommendations of the National Academy of Sciences.

Looking at the six initiatives individually, we found that:

  • Expansions in the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) kept 1.6 million people out of poverty.
  • The Making Work Pay tax credit, which expired at the end of 2010, kept another 1.5 million people out of poverty.
  • Expansions in the duration and level of unemployment insurance benefits kept 3.4 million people out of poverty.
  • Expansions in SNAP benefits kept 1.0 million people out of poverty.

(The figures outlined above, and also reflected in the chart below, total more than 6.9 million in part because some people were kept above the poverty line by more than one program, but in the total we counted each person only once.)

People Kept Above the Poverty Line by Selected

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Jared Bernstein and Chad Stone Discuss Long-Term Unemployment

November 5, 2011 at 5:32 pm

In this video, Chad Stone had this to say about long-term unemployment: “Long-term unemployment is, in this recession, and aftermath, has been at unprecedented levels. In the really bad recession in the 1980s we didn’t see anywhere near as much long-term unemployment.” He and Jared Bernstein discussed the policy implications of this problem.

To read Chad’s statement of November 4 on the October employment report, click here.

In Case You Missed It…

November 4, 2011 at 3:12 pm

This week on Off the Charts, we discussed the federal budget, federal taxes, the economy, state budgets, Social Security, and housing policy.

  • On the federal budget, we excerpted our analysis of the budget proposal from Republicans on Congress’ deficit-reduction “supercommittee,” and Robert Greenstein examined a recent proposal to the committee from Erskine Bowles, co-chair of the President’s fiscal commission.
  • On federal taxes, Chuck Marr noted a new Joint Tax Committee study that raises red flags about House Republicans’ effort to craft a corporate tax reform plan.  Chye-Ching Huang outlined several reasons why the federal tax system has become less effective in offsetting income inequality in recent decades.  Kathy Ruffing showed that government in the United States collects less revenue than most other developed countries.

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Why the Tax System Is Doing Less About Growing Inequality

November 4, 2011 at 1:30 pm

As we have explained, the joint congressional “supercommittee” — and any future efforts at deficit reduction — should raise significant revenues, and do so progressively.  A recent Congressional Budget Office (CBO) report highlights why.

It shows not only that income inequality has dramatically increased in recent decades (a point that we have previously discussed), but also that “the increase in inequality of after-tax income was greater than the increase in inequality of before-tax income.”  That is, the federal tax system as a whole did less to equalize the distribution of income in 2007 than it did in 1979.

There are three reasons why:

  1. The share of federal revenues coming from regressive payroll taxes has gone up. The federal tax system is progressive — meaning that higher-income taxpayers pay more of their income, on average, than low- and moderate-income taxpayers.  But the report explains that “[v]irtually all of the progressivity of the federal tax system derives from the individual income tax.  And the share of federal revenues coming from income taxes fell between 1979 and 2007, while the share coming from payroll taxes — which low- and middle-income families generally pay at a higher rate than high-income households — rose.  This shift from income taxes to payroll taxes made the tax system as a whole less progressive.

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