Tax Credits for Working Families Alleviate, Don’t Erase Tax Burden
The following is a cross-post from Tax Credits for Working Families’ blog.
We’ve already shared our thoughts on the misleading claim that wealthy Americans pay a disproportionate share of taxes while those on the bottom half of the income spectrum don’t contribute. This argument is flat-out wrong: It only looks at federal individual income tax, ignoring the fact that Americans are subject to many other types of taxes –from federal payroll taxes and excise taxes on gasoline and other items, to state and local taxes like sales, property and income taxes– that nearly every person in the country pays. And since these other types of taxes tend to be regressive, they impose a greater tax burden on low-income families than on wealthier families.
Now we want to share two items that explore this claim a little more. First, new numbers from Citizens for Tax Justice (CTJ) show that when we consider all federal, state and local taxes, low- and middle-income families are contributing a substantial portion of their income. For instance, the poorest fifth of Americans paid 12.3 percent of their income in state and local taxes in 2011, while the wealthiest one percent paid only 7.9 percent. Lower income earners also pay a higher share of some federal taxes. As Jared Bernstein points out, when it comes to payroll taxes, middle- and low-income households pay a higher effective rate than the wealthy.
When they looked at all taxes—federal, state and local—CTJ found that in 2011, the one percent of Americans with the highest incomes–those earning more than $1.3 million a year—paid only 1.5 percent more of their income in taxes than the bottom ninety-nine percent, with the total effective tax rate for the middle fifth of taxpayers– earning $42,000 a year – at 25.2 percent, only about four percentage points lower than the total effective tax rate for the richest one percent of Americans. The lowest 20 percent of earners, with an average cash income of only $13,000 a year, still paid 17.4 percent of that income in taxes.
Many taxpayers who fall in the bottom half of earners are eligible for the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC), which supplement their wages and help them make ends meet. But even with that relief, possibly reducing their income tax liability to below zero, they will still devote a significant chunk of their small income to taxes. These numbers emphasize the importance of tax credits for working families to offset a host of regressive taxes.
At the other end of the income scale, Bernstein points out that while the wealthy are paying a larger share of federal income taxes than other groups, that’s not because their tax rates have gone up. Effective tax rates for the wealthy have fallen substantially since the 1980s. Their share has risen because the wealthy have reaped the vast majority of the benefits of economic growth over the last few decades, so their taxable income has grown far more than other groups. In fact, as Citizens for Tax Justice explains, the share of total taxes paid by each income group is similar to that group’s share of total income. While that may sound fair, it’s not. Why? Because one percent of Americans have 21 percent of all income, while 20 percent of Americans have only 3.4 percent of the income, and this income inequality continues to grow. Tax credits for working families are a small, but very important way of helping to balance the scales.
See the original post.