Lies, Damned Lies, and Tax Day Lies

Over the next week count how many times you hear this statement repeated: “A record 47% of Americans paid no income tax in 2009.”

Shocking at first blush, and technically correct — if you define “income tax” in a very specific way.  That definition requires that you ignore payroll taxes altogether, including Social Security and Medicare taxes.  And if you live in a state with a state income tax, ignore that as well because the definition only includes federal income tax. Throw your local taxes to the wind, too.

If you’re fine with those exclusions, then stick with the 47% revelation. For everyone else, consider this:  payroll taxes account for a far greater percentage of paid taxes every year than federal income tax, since 84% of us (averaged across all income brackets) pay them.  As a point of comparison, in 1990 only 70% of us paid them–so claiming that our tax burden has been reduced is plainly not true. 

Simply removing Social Security, Medicare and other mandated payroll taxes from the equation doesn’t ring true, either.  Take a look at the graphic below to see how federal tax dollars are allocated, and pay special attention to the very last box that shows the second highest spending category.

See what I see?  Social Security, in real 2009 dollars, got more of our money than all but three categories combined.  One of those three categories (HHS) includes Medicare and Medicaid. So when you carve it all up, about 60% of the annual federal budget covers the items that we pay for via payroll taxes–the same taxes the statement I started this post with totally ignores.

It is true that less people today will be writing a check to the IRS than in 2007, as the graphic below shows.

But it’s also true that in 2007 the lowest three income quintiles paid most of the payroll and federal income taxes. The three corrective credits that changed the situation–the child tax credit, the making work pay credit, and the earned income tax credit–have benefited the lowest and middle income quintiles the most, hence the change from 2007 to 2009. 

In other words: the middle class finally got a break.  As someone who thinks that our middle class has been getting squeezed out of existence for the last several years, I’m not troubled by the numbers. 

Unless we want an economy with a bottom and top and virtually no middle, I think we can stand to reduce the enormous load the middle has traditionally shouldered, particularly since the tax relief offered by the tax credits will steadily fall over the next five years and the percentage of us writing fat checks to the tax man on April 15th will be jumping right back up.

Federal spending chart from Wikipedia

Tax filers 2007 vs 2009 chart from Economics21

Historical trends in income vs payroll tax stats from the Tax Policy Center


3 thoughts on “Lies, Damned Lies, and Tax Day Lies

  1. this is very good
    always I want to see more info
    I heard that singles on 20,000 actually pay about 20% (all taxes) because they pay payroll tax and consume gas,beer etc and taxable items. Also I looked at very small apts and the property tax was almost as high (1500)as a big 3 bd-3ba house on a big lot (1900)
    Some towns in Ohio have income taxes and even estate taxes…so if these anti tax senators were for real they should maybe abolish or control those .The US govt would get more money
    Anyway the tax thing is very complicated

  2. Pingback: Infographic Look at US Banks and Deposits by County | Political PWN

  3. A lot of people don’t understand the real tax to working class that payroll and mandated employer costs represent.
    Of course, with the top down structure of the economy, any excess liquidity or inflation in the money supply that does become available to the bottom consumer economy, as opposed to the banking sector, is immediately reflected in price inflation and interest rate increases. These along with taxes and other mandated costs like auto/health insurance (insurance being the #1 buyer of municipal bonds, BTW… srsly) ensure there will never be enough available money to satisfy debt. The only “liquidity” that exists is in the hands of credit gatekeepers.
    I feel bad for those still under the illusion that payroll and income taxes are used to fund essential services, when they don’t even begin cover the interest on the debt or unfunded liabilities. Clearly, if they knew better they wouldn’t be so snarky about these ridiculously obvious propaganda ploys that only serve as “gotcha” ammo for the partisan games of the Neo-Flavian Amphitheatre.

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