Signs of Dissent: What About the 47% Who Pay No Federal Income Taxes?

By Derek Thompson

Welcome back to The Atlantic Signs of Dissent Project, where we bring economic context to some of the most provocative signs of the Occupy Wall Street movement. To date, we've used OWS signs to explain the student-loans crisis and the runaway wealth of the top 1%. Now let's pivot to a reaction against Occupy Wall Street, the "We Are the 53 Percent" movement, which refers to the 47 percent of Americans who don't pay federal income taxes.

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The Atlantic has written a lot about the 47 percent (or is it 51 percent?) of taxpayers who owe no federal income tax. It's a true stat, but the way it's used makes it a truthy stat--accurate, but misleading.

The three most important qualifying statements about the 47 percent who pay no federal income tax are: (1) Paying no federal income tax, or FIT, is not the same as paying no taxes, since payroll taxes account for as much government revenue as FIT, and state and local taxes still exist; (2) the vast majority of those who don't pay FIT make less than $30,000 a year; (3) the reason the "47 percent" exists is not because some people are lazy free-riders, but because Congress, at the behest and prodding of the public, has larded the tax code with benefits and deductions that can wipe out a family's tax burden.

Who pays no federal income taxes? I think I have the picture you're looking for. This piechart shows the households paying no FIT, with all inset numbers in thousands of dollars (i.e.: 20-30 means $20,000 to $30,000). The big takeaway is that more than half of the folks who pay no federal income tax make less than $20,000 a year. It is also true that 7,000 millionaires paid no federal income tax last year (more on that factoid here).

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Do the 47 percent still pay taxes? Most of them do. About one seventh of the country pays no payroll taxes or federal income taxes, because of deductions and working benefits. But when you zoom out to 30,000 feet, you see that even the poorest 20 percent of taxpayers fork over about 1/20th of their income to the IRS through all federal taxes, including payroll, income, and excise. The next 20 percent hands over about 1/8th. With each quintile, the effective tax rate increases.

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Is this fair? No answer here will satisfy everybody. If you think the 47 Percent are getting away with free-riding, consider that they're mostly poor families making $20,000, which means they would have to work for 116 years at that wage just to make the average annual salary of someone in the top 1 percent. Stats like this make it easy to see why we have a progressive tax code -- albeit one where ETRs have fallen at every income level over the last 30 years. I think there is an interesting civic philosophy question about whether it's preferable that 47 percent of the country votes on issues of defense spending, education department policy and other functions of government that are funded by federal income taxes, while they only contribute to excise and payroll taxes. But that's a little outside my boundaries as a business writer.

How can we "fix" this? The 47 Percent are mostly working families whose tax burden was offset by the Earned Income Tax Credit (invented by Republican President Ford and expanded many times since the 1970s), the child tax credit (doubled under Bush), and other exemptions passed into law by Republican and Democratic legislatures and administrations. The 47 Percent aren't running away from the law; they're benefiting from 30 years of Congress whittling away at the tax code. Some of this whittling was smart. Some of it wasn't. The only way to fix it is to raise taxes on working class families. I happen to support broad-based tax reform that would raise ETR in every quintile. But I'm still waiting for the popular protest movement to raise everybody's taxes in a way that also improves the progressivity of the tax code ... and I'm not holding my breath.

More from "Signs of Dissent":

"I'm a student with $25,000 in school loans"
"Can you feel the wealth trickle down?"

This article available online at:

http://www.theatlantic.com/business/archive/2011/10/signs-of-dissent-what-about-the-47-who-pay-no-federal-income-taxes/246721/