The Agenda

Tax Myth?

On Sunday, Roberton Williams and Rosanne Altshuler of the Tax Policy Center published an op-ed on “5 Myths about your taxes.”

But does anyone really believe that “the poorest and the richest Americans pay no taxes”? The “and” here does a lot of work. Some Americans might believe that the richest Americans pay no taxes, though I’m guessing the number is small — a somewhat larger number might believe that the richest Americans don’t pay their fair share, or that they have access to sophisticated tax shelters, etc. And as for whether the poorest Americans pay taxes, well, it’s a nuanced question. After noting that 45 percent of households have no federal income tax liability (a pretty significant, non-mythical number), Williams and Altshuler write:

But even citizens who pay no income tax still pay other kinds of taxes. They pay Social Security and Medicare taxes when they work, sales taxes when they buy things and property taxes on their homes. Drivers pay gasoline taxes, and smokers and drinkers pay excise taxes on tobacco and alcohol. According to our research, more than 75 percent of us will pay at least some form of federal tax in 2010.

Those who pay no federal taxes are mostly the low-income elderly or very poor families with children. Even about half of those with annual incomes under $10,000 pay some federal tax, most often payroll taxes on wages.

Doesn’t this second paragraph reinforce the myth? And wouldn’t it be useful to look at one’s net position? In Jonah Goldberg’s latest column for USA Today, he points to a very interesting Tax Foundation analysis of this question by Scott Hodge. 

The results of this analysis show that federal tax and spending policies are already very heavily tilted to the poor and middle-class, even before we consider the Obama administration’s budget proposals. Indeed, in 2010, before any of Obama’s major policy initiatives-such as health care reform, cap and trade, and tax rate increases-are enacted, the bottom 60 percent of American families will as a group receive more in government spending than they pay in taxes. The lowest-income families will be targeted for $10.44 in spending for every dollar they pay in taxes. Remarkably, families in the middle-income group—who are the target of many Obama policies—already receive $1.15 for every dollar they pay in taxes (see the light blue columns in Chart 1).

By contrast, the top 40 percent of families pay more in taxes as a group than they receive in government spending benefits. In the case of the highest-income families, they are currently targeted for 43 cents in government spending for every dollar they pay in taxes, even though they disproportionately benefit from public goods such as national defense.

One concern is that households in the top 40 percent are more likely to be two-earner households with children in high-cost metropolitan areas, as Hodge argued in a Tax Foundation post back in 2006. That is, it’s not obvious that all households in the top 40 percent are particularly privileged, hence the bipartisan consensus around annual AMT fixes.

Reihan Salam is president of the Manhattan Institute and a contributing editor of National Review.

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