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Here’s an actual fact. Almost half of all Americans, about 47 percent, don’t pay federal income taxes. Keep your eye on the pea. It’s under one of the shells. Watch me shuffle them around. The very next time I talk about it, federal has disappeared. So has income. All that’s left is taxes.
Then I will say, “Almost half of all Americans, about 47 percent, don’t pay taxes.” That statement is completely false.
We all pay taxes. If we’re working, we pay in for Social Security and Medicare. Every time we buy something we pay sales tax (except in Montana, New Hampshire, and Oregon), usually between 4 percent and 7 percent. Local sales taxes run from 0 percent to 8 percent. There’s always a special tax on gasoline, 18.4 cents federal, plus state taxes, coming to an average of 48.9 cents and going as high as 69.4 cents. If you own property, you pay property taxes and school taxes. If you rent, the landlord passes those costs on to you. Forty-three states have income taxes, seven of them have a flat tax, and some of those vary by locality.
There are two studies that attempt to combine all that data. Laurence J. Kotlikoff and David Rapson, Boston University economists, did a study for the National Bureau of Economic Research. It stated, “A 30-year-old couple earning only $20,000 a year has a marginal tax rate of 42.5 percent, while a 45-year-old couple earning $500,000 pays at 43.2 percent.” There are several odd points that step outside this range, but basically, “The average marginal tax rate on incomes between $20,000 and $500,000 is 40.3 percent, the median tax rate is 41.8 percent, and the standard deviation of all of those rates is 5.3 percentage points. Basically, most of us pay about 40 percent, plus or minus 5.3 percentage points.”
The Institute for Tax Justice came up with somewhat different numbers. They said that people at the low end, earning $13,000 a year or less, pay 17.4 percent. People who earn between a $250,000 and $1.3 million, pay the most, 30.4 percent. Once you earn more than that, your tax rate goes down slightly.
The difference seems to be that the Kotlikoff and Rapson looked at working-age adults, the Institute for Tax Justice looked at everyone. Tax payments fall off rapidly as people retire. Including them brings all the averages down, but more so at the low end. Neither study deals with people like Mitt Romney, in the top 1/10th of 1 percent.
According to his Federal Income Tax returns, Romney made $21.7 million in 2010, and paid $3 million in federal income taxes, just short of 14 percent. If we added in his other taxes, the way we did for everyone else, that would likely add only another one or two percentage points. He stops paying Social Security taxes after $110,000, a pittance in relation to $21,700,000. He didn’t make Medicare contributions on most of it, because it was unearned income. Yes, he has a California beach house, a New Hampshire lake house, a Michigan lake house, and a Boston house, but how much can their real estate taxes be compared to their income? How much can they spend on food, clothing, Cadillacs, and horses? At a certain point, the income curve leaves the spending curve behind.
That has them paying about half what average Americans pay in taxes. Average working Americans—a couple earning $20,000 a year, for example—pays a rate two-and-a-half-times greater than what the Romneys pay.
That’s the reality. But if you take that initial fact—47 percent of Americans don’t pay federal income taxes, and change it to “don’t pay… taxes,” by gosh and by golly, you’ve really got something exciting. You divide the world into the righteous, virtuous, hardworking taxpayers and the leeches.
The Wall Street Journal called them the “Lucky Duckies.” It’s a publication dedicated to finance, economics, and business. Yet, when they dropped the two magic modifying words—federal and income—they instantly convinced themselves that half the people in America were dependent drones. They were so traumatized by this self-inflicted delusion that they wrote, “as fewer and fewer people are responsible for paying more and more of all taxes, the constituency for tax cutting, much less for tax reform, is eroding. Workers who pay little or no taxes can hardly be expected to care about tax relief for everybody else. They are also that much more detached from recognizing the costs of government.”
This leap of counterfactual looniness was not limited to the Journal. The Heritage Foundation ran this headline on their website: “Government Dependency Grows as ‘Non-paying’ Taxpayers Hits Record Level.” The Constitutional Conservative blog took the federal income tax statistics, dropped the two defining words entirely, and concluded, “The top 1 percent pay 22.7 percent of taxes. The top 10 percent pay 50 percent of taxes. The top 20 percent pay 65.3 percent of taxes. The top 40 percent pay 84.3 percent of taxes.”
On some level it would be nice to think that the leaders on the Right are cynical, clever propagandists. That they know they’re deforming the statistics to make it seem like the rich are doing the heavy lifting, that only half of Americans are actually working, and their taxes are going to support the freeloading, loafing, nontaxpaying parasites. But it doesn’t seem to be the case. They seem to really believe, as Romney did when he was caught on tape in a private meeting, that 47 percent who don’t pay federal income taxes, don’t pay taxes, and the reason that they don’t is that government handouts have made them too dependent to bother going to work.
Each one of our big tax cuts has only been a tax cut for the very rich. For the country as a whole, and for most other people, it’s been a tax shift. However much they save on their federal income tax, other taxes go up. That’s why a couple making $20,000 a year ended up paying the same actual rate as a couple making half a million a year.
Now for some truly spectacular flim-flam. Keep your eye on the pea. Mitt Romney says, “We’re going to cut taxes on everyone across the country by 20 percent.”
Wait a minute. He’s only cutting federal income taxes. Forty-seven percent of us already pay zero taxes in that form. No cut at all for half of us. While he’s at it, he wants to cut taxes that only impact the very rich—estate and gift taxes—so that his kids can get his millions tax free. All together, 57 percent of the cuts would go to the top 1 percent.
See what you can do, just by dropping a couple of… adjectives.