Pundits and politicians continually repeat the refrain that 46 percent of American households — 76 million returns — do not pay federal tax. A phrase frequently used is that they “don’t have any skin in the game.” These provocative words are usually expressed to suggest that these Americans are evading tax or that they are losers who avoid working.
Who is not paying tax? A large proportion is the working poor. Tax law, written by Congress, entitles everyone to a personal exemption of $3,700 and a standard deduction per household that varies based on marital status. These exist to provide a subsistence amount of tax-free income to a family. This amounts to $26,400 for a family of four and $9,750 for a single person in 2011.
Of the 76 million nontaxpaying households, 38.2 million do not pay tax because of this. A family of four living on $26,400 is not doing well.
What about the other 37.8 million? Congress smiles upon families. There are two credits related to children. One is a child care credit that allows families with children younger than 13 to deduct some of the cost of child care. Congress also added a $1,000 per child credit for children under age 17 — signed into law by President Clinton and renewed by Presidents Bush and Obama. A credit is a direct reduction of tax liability; 11.5 million households pay no tax because of the addition of these credits on top of the standard deduction and exemptions.
Examples for 2011:
• A married couple with two children (ages 15 and 7) earns $50,000. The couple gets a standard deduction of $11,600 plus four exemptions. Taxable income equals $23,600 and their tax liability equals $2,690. Now deduct $1,000 per child for the child tax credit and up to 2 percent of gross income equals $1,000 for the child care credit. The result is a $310 negative liability. This couple owes nothing and will get a $310 cash payment from the government.
• A single person earning $50,000 will end up with $40,500 of tax income and $5,650 of tax liability. This person pays more because of a smaller deduction, only one exemption and no tax credits.
Both households did pay Social Security and Medicare taxes of $3,755 ($50,000 times .0751). They paid sales tax on most of their purchases unless they live in a state without sales taxes. They also pay property tax directly if they own a home and indirectly if they rent.
Among the elderly, 16.8 million households have no tax liability. Those over 65 or blind receive additional partial exemptions. A retired person who only receives Social Security benefits pays no federal taxes. A working retiree may trigger a partial tax on those Social Security benefits but no more than 85 percent of them will ever be taxable.
The combination of an extra standard deduction, the Social Security exclusion and a credit for the elderly accounts for moving these households into the non-federal-taxpaying group. These people are truly poor. Almost 10 million of these households have incomes below $20,000.
This accounts for 66.5 million of the 76 million no-liability households: 38.2 million working poor, 11.5 million families with children and 16.8 million poor seniors. The Urban-Brookings Tax Policy (July 2011) paper includes data about the remaining 10.5 million.
It is worth noting that everyone who purchases anything is paying some of the income tax of the seller. To make a profit, sellers have to cover all their costs. The prices you pay as a customer are paying for the taxes (and other expenses) of the seller.
It would be nice to hear less vilification of the poor. This is the true class warfare – condemning the poor, the underemployed and the unemployed for their low incomes, claiming that the well-to-do are carrying all the burden of federal taxation.
Remember this: if all 66.5 million of these American households (representing almost half our population) were unable to buy anything, our economy, which is based on buying and selling things, would collapse.
Gloria Vollmers is a professor of accounting at the University of Maine.