"We're dismayed at the injustice that nearly half of all Americans don't even pay any income tax." - Burnt Orange Report

The Burnt Orange Report has started "The Light of Truth" series "on factually inaccurate and slanted information polluting Texas and National politics." For part one of the series Eric Robeson chose the quote from Governor Perry that I have used to title my posts on this subject, but he summarizes the national arena and then concentrates on Texas.

According to the Institute on Taxation and Economic Policy, the poorest 20% of Texans pay over 12% of their income in state and local taxes, but the richest 20% pay only 3%, making Texas is one of the Ten worst states when it comes to having regressive local taxes that hurt the poor.

 Second, when federal payroll taxes are included, a study by the Tax Policy Center, shows that 2/3rds of those who do not pay income taxes pay some form of federal income-based tax. 

Thus, before even counting federal consumption taxes like taxes on gasoline, aviation, alcohol and cigarettes, the Tax Policy Center calculates that only 13% of Americans are not federal tax payers.

 Further, if federal consumption taxes are included, analysis form [sic] the Tax Foundation, shows the bottom 20% often pay more than the richest 20% in many key categories.

Third, of the remaining 13% of Americans who do not pay income related taxes, the main reason is that they make little or no income.

Links to my posts:

“We’re dismayed at the injustice that nearly half of all Americans don’t even pay any income tax.”

“We’re dismayed at the injustice that nearly half of all Americans don’t even pay any income tax.” - Update

Link to a post that is not strictly a part of my series, but is definitely related.

Who were/are the unproductive Americans?

“We’re dismayed at the injustice that nearly half of all Americans don’t even pay any income tax.”

The above quote from Rick Perry's announcement of his presidential candidacy is true. In July the Tax Policy Center released a report, Why Some Tax Units Pay No Income Tax, which estimates that 46% of tax units, American households, will not pay any income tax in 2011. They go on to show why this is true in the graph below:

You can plainly see that the standard deduction and personal exemption in the US tax code are designed so that anyone with a taxable income up to $10,000 gets back all their money withheld for income taxes. In the $10-20,000 bracket about 20% of American households don't get all their withholding back. A new category, tax expenditures, arises in this bracket as well. These are categorized in the pie chart below:

So, about 45% of the households in the $10-20,000 bracket get a bigger deduction because they are elderly, are not taxed on some or all of their Social Security benefits, or about 30% receive the child tax credit, the child and dependent care tax credit or the earned income tax credit because they are children or the working poor. The working poor are still required to pay the Social Security and Medicare payroll taxes, federal excise taxes, state and local taxes, and various government fees. About 75% of households pay more of these taxes than they do income taxes. An example from Roberton Williams, one of the report's authors is helpful:

"...about half of people who don’t owe income tax are off the rolls not because they take advantage of tax breaks but rather because they have low incomes. For example, a couple with two children earning less than $26,400 will pay no federal income tax this year because their $11,600 standard deduction and four exemptions of $3,700 each reduce their taxable income to zero. The basic structure of the income tax simply exempts subsistence levels of income from tax."

 So Rick Perry's quote, “We’re dismayed at the injustice that nearly half of all Americans don’t even pay any income tax.” is rhetoric for political advantage - nothing new there. However, having lived in Texas all my life, my opinion is that he is sending a coded message to a constituency that wants to see the progressive income tax system abolished and replaced with what is now called a "Fair Tax" on all income groups, although it is the proposal that became identified with Malcolm S. Forbes, Jr. in the late nineties, when it was called the "Flat Tax." The latter name emphasizes abolishment of the progressive income tax that presently exists and gives rise to the graph and chart presented above. The Fair Tax rate usually cited is 10%, so all the people at subsistence income levels would pay that amount without any deductions, exemptions, credits, or relief from payroll taxes and the various other taxes listed. In other words, calling the Flat Tax a Fair Tax is just more rhetoric. The Fair Tax has no relation to the ordinary meaning of fair, not trying to achieve an unjust advantage.