I have a good friend, a Trump supporter, who complains that “45% of households don’t pay any tax.” He is bothered. “Everyone should pay their fair share.” He is correct about federal income tax. According to Market Watch, 44.4% of Americans paid no federal income tax in 2018. Why?
The Center on Budget and Policy Priorities found that 50% are working people who earn less than the standard deduction – they pay no federal income tax. Another 22% don’t pay because they are elderly or disabled. Their Social Security/disability income is tax-exempt. Then there are the 15% who don’t owe because they are low-income working families with children who qualify for the child tax credit, the childcare credit, the earned income tax credit. Finally, there are those who are not poor, but have enough itemized deductions or other tax benefits to avoid paying income tax.
What he doesn’t mention are the other entities that paid no federal income tax in 2018 – corporations, or the other taxes that the 44.4% pay.
The Tax Cuts and Jobs Act (TCJA), an act praised by many Republican members of Congress, dropped the corporate tax rate from 35% to 21%, quite a reduction. How did corporations respond? The Institute on Taxation and Economic Policy reported that, of the 379 Fortune 500 companies it examined (only those that made a profit), 91 paid zero federal income tax on $765 billion in U.S. pre-tax profit because of loopholes. At the 21% rate, they should have paid $161 billion in taxes. Instead, they enjoyed a net corporate tax REBATE of $73.9 billion dollars. That blew a $87.1 billion hole in the federal budget, money that could have been used for many domestic programs. In addition, the Institute’s report indicated that another 56 profitable American corporations paid an average federal income tax of 2.2%. Considering all 379 companies, they had an average rate of 11.3% compared to 13.9% for individuals. Did these corporations pay their “fair share?”
Another thing my friend points out is that the top 20% of income earners paid 65% of the total federal income tax. True. But they also made 62% of the total income. The more you make, the more taxes you pay. The real question is, what percentage of a person’s income went to ALL taxes paid, the effective tax rate (ETR)? It gets complicated.
In determining the ETR, we must consider all the taxes paid by an individual including income tax (federal, state, and city), payroll taxes (Social Security and Medicare), consumption taxes (sales tax, excise tax, and tariffs), estate tax, corporate tax, and property tax. Let’s look at what happens when we add up these taxes to determine the ETR for different income groups. You might be surprised.
First, let’s look at who paid the most in different tax categories in 2018. As you might expect, the richest people, with an average income of $456.5 million, have the highest proportion of their income going to corporate and property taxes (5.1% each) and estate tax (1.2%), but only 9.3% in income tax. People with incomes averaging $5.5 million paid the highest percentage of their income to income taxes (22.4%). Here is where it gets interesting. The people in the bottom 10% of income (average of $11,400) paid the largest share of their income to payroll taxes (11.3%) and consumption taxes (12.4%). The poorest people in the United States paid over $2,700 in taxes, a far cry from “pay no taxes!” They had only $8,700 left on which to live. So, who paid the highest ETR? Not the poor. The 20% of people with the lowest incomes ($7,978 – $21,197) paid an ETR of 21.5%. People in the middle of the income distribution ($37,494 – $60,241) paid 24.9%. The people with the highest income ($2.1 billion – $114 billion) paid only 23.1%, the lowest rate in history. I’m sure they had no difficulty living on what was left.
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