The Forty-Seven Percent Solution

NY Times econ reporter David Leonhardt does America a favor by putting to bed the "47% of Americans pay no Federal taxes" lie being cynically used by the Tea Party right to attack the current tax system.

All the attention being showered on “47 percent” is ultimately a distraction from that reality.

The 47 percent number is not wrong. The stimulus programs of the last two years — the first one signed by President George W. Bush, the second and larger one by President Obama — have increased the number of households that receive enough of a tax credit to wipe out their federal income tax liability.

But the modifiers here — federal and income — are important. Income taxes aren’t the only kind of federal taxes that people pay. There are also payroll taxes and capital gains taxes, among others. And, of course, people pay state and local taxes, too.

Even if the discussion is restricted to federal taxes (for which the statistics are better), a vast majority of households end up paying federal taxes. Congressional Budget Office data suggests that, at most, about 10 percent of all households pay no net federal taxes. The number 10 is obviously a lot smaller than 47.

The reason is that poor families generally pay more in payroll taxes than they receive through benefits like the Earned Income Tax Credit. It’s not just poor families for whom the payroll tax is a big deal, either. About three-quarters of all American households pay more in payroll taxes, which go toward Medicare and Social Security, than in income taxes. 

And at first blush, the 47% lie would seem to completely seem to undermine the argument of the Tea Party right.  After all, they keep telling us that TEA stands for "Taxed Enough Already".  If they're right, and 47% of Americans "owe no federal taxes" due to tax credits, you'd think that would be a fact the Tea party folks would not want to bring up at all.  Nearly half of Americans don't owe anything at tax time this month?  Kind of kills the momentum that we're overtaxed, right?

But you have to keep in mind the reality.  The reality is, as Leonhardt points out, only 10% of Americans pay no net federal taxes.  Which means there's a good 37% of Americans who owe nothing at tax time on income taxes, but do pay federal payroll or capital gains taxes anyway.  And these are the people who are going "Wait a minute, I don't owe income tax but I pay taxes, and you're telling me 47% of Americans don't?  Well why am I paying taxes then?  That's not fair!"

The lie is being told to foster the impression that 47% of America is being given a free ride when that's simply not true.  That lie is being compounded by suggestions that this mythical 47% is getting a free ride at the expense of the rest of us, and that the folks in that 47% must be...you guessed it...minorities.  It's the Reagan Welfare Queens driving Cadillacs myth all over again, updated for 2010.

"Why are my taxes paying for a free ride for those shiftless, lazy minorities!" the Tea Party screams.  The reality is not that taxes have gone up, either...on a massive majority of Americans those same federal payroll taxes went down.  It's who those tax dollars are spent on that the Tea Party has the problem with.  And when it comes to anyone more miserable or worse off, the Tea Party motto is "Cut them off."

Good for Leonhardt then to lance this particular boil.