Here’s What All The 47% Talk Is About

by MyDadBlog on September 25, 2012

in Criticism

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In recent weeks, there has been a lot of talk in the presidential election cycle about 47% of Americans that don’t pay federal taxes.  Most recently, Republican candidate Romney was secretly recorded where he highlighted this number of Americans that don’t pay federal taxes and that they are likely to vote Democratic and rely on the government.  Without getting into politics directly here, I thought I’d just share some objective facts about what he is referring to, the different taxes people pay in the US and how it might influence your opinion in future tax policy decisions and voting.

  • The 47% – It is true that in recent years, an increasing number of Americans do not have a federal tax liability at the end of the year.  While they may have been paying taxes out of their paycheck throughout the year, come refund time, the deductions and credits afforded to them through the tax code are high enough that they offset any taxes paid and get a full refund.  47% is about half the country; in prior years the number was lower, but the trend is increasing.  There are various reasons for this ranging from higher unemployment to an aging population to recently enacted tax provisions allowing deductions and credits.  The mix of these various factors seems to push the number up each year.  One oft-cited argument against why this is a bit misleading is that Americans pay all sorts of other taxes.  This is true, and for people that don’t have a high income, the share of their income going to these taxes is quite high!  For instance, if you’re making $30,000/yr but paying $10,000 a year in all the other types of taxes below, that’s a full third of your income, whereas a millionaire might only be paying a much smaller portion of their income, even if they spend $50,000 on taxes.
  • Payroll Taxes – This is a fixed tax that comes out of your paycheck and is paid by both the employer and employee.  The payroll tax goes to fund Social Security payments, so in theory, you’re just paying into a system that will pay you back in retirement.  It’s tough to argue that these taxes benefit someone else since it’s supposed to be net neutral and you should get out what you put in based on a calculation on how much you made during your career.
  • State and Local Taxes – Most people end up paying state taxes based on their income and don’t get the same credits and deductions that the federal income system allows.  So, people that make less money end up spending a higher portion of their payroll on state and local taxes.  These taxes pay for everything from local roads to schools.
  • Sales Taxes – State sales taxes are based on your consumption, so again, since people that don’t make as much money still need to buy gas, pay cable bills and other expenses that have a sales tax, they end up spending a higher portion of their income than rich people on taxes.

In all, the main reason fewer people are paying the federal income tax is not necessarily their fault; it’s just the way the tax system is structured and reflects the greater number of people without high paying jobs.  If the jobs situation were to improve and the government peeled back some deductions and credits, that number of Americans paying the federal income tax would increase.

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