Posted by Leonard Steinberg on April 16th, 2012

As politicians blabber about the Buffet Rule and taxation fairness, I thought a recent Wall Street Journal article outlined the ‘non-soundbite’ version of what is really going on tax-wise in the USA. The only conclusion I can draw is that the system is much too complicated. Here are some facts to ponder:

• Some multi-millionaires do pay a lower effective income-tax rate than some middle-income taxpayers; receiving a chunk of your income via long-term capital gains rather than a paycheck is just one reason that happens.
• The top 20% of income earners paid 70% of federal taxes in 2007, according to the most recent data available from the Congressional Budget Office. That group also pulled in 60% of total pretax income.
• 46% of taxpayers don’t pay any federal income tax, but they often pay a hefty portion of their income to levies at the federal, state and local level. Those include payroll taxes for Social Security and Medicare; state and local sales taxes on groceries, clothing and other purchases; and federal and state excise taxes on things such as gas, cigarettes, alcohol and airline tickets.
• The payroll tax for Medicare is paid by all workers, but the Social Security tax isn’t levied on income over $110,100 (in 2012). So people with bigger six-figure salaries pay a lower portion of their income to Social Security taxes than those earning less.
• In 2011, federal corporate income taxes ate up an estimated 7.7% of income for the top 1% of income earners, compared with a 0.4% bite for taxpayers in the lowest fifth of the income ladder, according to the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution.
• The top 1% of earners saw a smaller share of their income go to payroll taxes.
• State and local taxes: People in the lowest 20% of income earners paid about 17% of their income to federal, state and local taxes in 2011, versus about a 30% effective rate for the top earners, according to an estimate from the Institute on Taxation and Economic Policy. But the share of total taxes paid roughly matches the share of total income for each of the income groups.
• Sales taxes can have an outsize effect on lower-income people. A wealthier family is “more likely to have a portion of their income that they can put to savings or investments that will never be subject to sales taxes.”
• What about those 46% who don’t pay federal income tax?
• 46% of Americans pay no Federal taxes at all. 23% of U.S. taxpayers don’t make enough money to owe that tax once they take their personal exemption and standard deduction. Another 23% qualify for tax breaks that bring their bill to zero or provide a refund.
• Wealthier people face a tax rate as high as 35% on earnings but they get the biggest tax breaks. They start off with such a high tax that the biggest tax breaks don’t bring them down to zero. They’re benefiting hugely from tax breaks—much more than the poor people—but because they start off at the high level, their tax bills stay positive.
• 1,470 millionaires were among those who paid no federal income tax in 2009.