47% of Americans Pay No Income Taxes

Politicians have found this message useful for whipping up a crowd’s outrage at the injustice of the tax system, and there’s a good chance it’s been one of those anonymous screeds that has arrived in your e-mail inbox at some point. It’s a claim that’s been around at least since John McCain said it during the 2008 campaign (when it was 40%, before the economic downturn destroyed still more income), and there it was again on the very first day of Rick Perry’s presidential campaign when he said in his speech, “we’re dismayed at the injustice that nearly half of all Americans don’t even pay any income tax”.

True. But the injustice is the other way ’round. First, 47% do not pay income tax because they make too little income, and that’s according to the rates put in place by fellow Texan George W. Bush, so there’s not a little irony to the governor’s complaint. Taxes are due on virtually every dollar of every American’s taxable income (click ‘Read More’ to see table), so no one should assume reading the 47% claim that there are income groups that go Scot free. But after the standard deduction, exemptions and application of the earned income tax credit, there are that many people in the United States who make so little that their income is entirely offset leaving nothing subject to tax. Many of them, remember, are the retired who, after paying taxes on their income all their lives, are now living on the Social Security payments that they also paid for all their lives.

And then there are the millions of unemployed today who have no income.

First rows of 2010 tax table. If you earn only $5 of taxable income in an entire year,
you still owe income tax

The 47% claim amounts to willful deception by all who spread it. Those same people at the bottom of the income scale pay plenty in taxes: other than whatever state and local income, sales and property taxes they pay, there are federal excise taxes on a list of categories such as gasoline, telephone, alcohol and so on, but those are dwarfed by the hefty bite taken from the top of their paycheck no matter little they’ve earned: 6.2% for Social Security (4.2% in 2011) and 1.45% for Medicare.

The burden is so significant that the independent Tax Policy Center reports that 74% of filers pay more in these payroll taxes than they pay as income tax.

We said that the injustice is the other way ’round. The 6.2% payroll tax for social security stops at $106,800. No tax is paid on income above that line, making Social Security the most regressive tax in the nation and handing the wealthy 6.2% more than the typical wage earner.

But the injustice gets far worse as we move up the wealth scale, where people tend to make most of their money on capital gains. If that’s how you make all your money, you pay no Social Security taxes, and your income is taxed at only 15%. Warren Buffet, in an op-ed piece in the New York Times revealed that he paid only 17.4% on 2010 income of almost $7 million whereas the 20 people on his office staff paid an average of 36%. So while the governor from Texas was complaining that “the liberals out there are saying that we need to pay more”, Mr. Buffett was saying the opposite. He titled his government-directed essay, “Stop Coddling the Super-Rich”.

Let’s Turn the Payroll Tax Upside Down

For 2011, the payroll tax (Social Security tax) has been 4.2% rather than the customary 6.2% in the hopes that the extra money the government has let us put in our pockets would increase spending to boost the economy and create jobs.

President Obama wants to extend that special rate through next year, but is facing headwinds from Congress in a strange reversal of roles. Those same Republicans who at the end of last year insisted on retention of the steep Bush tax cuts now say that we cannot afford the $115 that the 2% trimming of the payroll tax would cost. Those same Democrats who tried to force revenue increases as part of the debt ceiling pact now are arguing for this revenue reduction. Republican House Leader Eric Cantor says that temporary tax cuts don’t create jobs, only cuts that are “broad-based, immediate and permanent” as an op-ed piece in the Wall Street Journal said. That a tax cut which pertains to every employee’s paycheck throughout the land is not broad enough is a clear indicator that Republicans expect to make permanent the Bush tax cuts, which are also temporary, expiring at the end of 2012, and which would preserve cuts to all other income not subject to the payroll tax, particularly the 15% tax on capital gains and most corporate dividends.

When the 2% extension comes up for a vote by year-end, opposition is a risk for Republicans, who will effectively be voting for a tax increase on all lower level income earners. And it’s not small change: The 2% reduction would give a family earning $50,000 an extra $1,000 to spend during next year. Twice that for a $100,000 family.

The payroll tax is our most regressive tax by far. A higher percentage of one’s annual income is paid by lower income workers than by those making higher incomes. That is because it is levied against every dollar earned by the average worker — but then it stops if and when anyone’s income during a calendar year passes $106,800, no matter how large that income becomes. The more money one makes, the less the tax as a percentage of income until it ultimately becomes infinitesimal. At the extremes, those investment bankers and corporate CEOs who are paid, say, $10,000,000 in a year — they’re done paying their Social Security tax on January 4th, after just three days on the job. And those who make most of their money from investments rather than a paycheck pay nothing at all.

Turn It On Its Head

Here’s a suggestion for the President. For all these years, ever since Social Security began, those who made more than the cutoff — this year’s $106,800 — have had a free ride on that extra income. During these difficult times when the payroll tax is so burdensome on the average citizen, whether 6.2% or 4.2%, why not turn the tables. Charge no payroll tax at all until the $106,800 is reached; then charge the 6.2% only on all income that exceeds that threshold.

It’s a perfectly fair idea that does something to redress the inequities that have favored higher income people for so long. Of course, it will go nowhere in Congress. But their protests and its defeat would demonstrate how Congress “coddles” those who make the most money, to use Warren Buffett’s word, and we would get to watch the comedy of whatever twisted logic they come up with to justify their opposition.

Congress Dawdles As Postal Service Nears Collapse

The U.S. Postal Service is the second largest civilian employer in the nation. Its 570,000-plus workers handle an average of 563 million pieces of mail a day — an average of 1,000 pieces per employee. Yet the agency is regularly an object of scorn.


Anti-government tirades can be counted on to cite the USPS as proof that government cannot do anything well, no matter that it operates independently of government, no matter that there is so little basis for complaint. People sneeringly refer to “snail mail”, never mind that this is physical mail that we ask be carried from one place to another, perhaps thousands of miles, and never mind that the USPS does so with remarkable speed — and for the absurdly low charge of only 44 cents for a 1st class letter mailed as far as from Florida to Alaska.

But the postal service’s real woes lie elsewhere. The growth of personal mail by Internet; of banks, brokerages, mutual funds and others badgering us to accept statement delivery by e-mail to save them money; of electronic bill paying promoted by banks; of credit card and home equity loan offerings that once arrived daily in our mailboxes but which disappeared in the recession – all have combined to cut postal volume by 20% from 2006 to 2010 (more profitable 1st class dropped 28%) and leave the postal service with $8 billion in losses for two straight years.

Independent consultants characterize the agency’s up-from-the-ranks top management as strangely optimistic about the future, as if a Congressional fix is all that is needed. In March, management inked an agreement with one of its unions representing 250,000 workers for a 3.5% raise, an extension of its no layoff policy, plus cost-of-living increases.

In marked contrast, the U.S. Government Accountability Office, asked by Congress for a report by end 2011 on the postal system’s outlook, found the situation so dire that it delivered its report 18 months early in April 2010. And yet Congress — most recently so absorbed in the showdown over the debt ceiling as to seem incapable of doing anything else — has failed to act on any of five bills meant to lift the burdens that it has imposed on the service. Meanwhile, the USPS has maxed out a $15 billion loan from the government and says it will run out of cash by year end.

Would You Run a Business This Way?

Though nominally independent, the agency is boxed in, denied the ability to manage itself. On one side, the Postal Regulatory Commission decides whether it may raise postage rates to earn more revenue. On the other, Congress’s approval is needed to take measures to cut costs. Or to develop new revenue producing services, such as those in Europe. Then there’s the federal stricture forbids closing post offices for solely economic reasons. The postal agency wants to end Saturday delivery, which they say would save $3 billion a year, but that’s up to Congress, too. Most burdensome is the 2006 congressional bill that forces the agency to contribute $5.5 billion a year to the federal employee retirement fund – 100% advance funding for future retirees that is required of no other government agency.

The USPS says that this is overfunding and wants $75 billion already paid to be returned, which Darrell Issa (R-CA), chairman of the House oversight committee and author of one of the five bills, calls a “multi-billion dollar bailout funded by the taxpayers” — except it is the service’s own money. While Congress idled, the agency in June unilaterally discontinued the payments — $115 million every two weeks — to stave off insolvency.

The service proposes to shutter 3,653 post offices, mostly in rural America. The Wall Street Journal quoted

a former postal worker in the Hatchechubbee, AL, who said that the post office is a place where locals trade news about births and deaths and the occasional loose cow and it helps semi-illiterate customers pay their bills. Not hard to see why small town post offices don’t earn enough to pay for themselves.

That’s just the beginning. The USPS plans, across the next 10 years, to review fully 16,000 of its almost 32,000 post offices with an eye to closure. The service would then press to break its employment agreements to dismiss 120,000 workers and to manage its own retirement plan rather than contribute to the more costly government plan.

In place of closed post offices the agency would turn the sale of stamps and handling of mail over to local grocery stores, gas stations, etc., who are eager for the business. Aghast? Well, Europe did this long ago. Sweden runs only 12% of its post offices, Germany a mere 2%. Shopkeepers handle the mail. Free to engage in other businesses, Germany’s Deutsche Post bought DHL, a worldwide parcel delivery service like Federal Express. The result is that half its business is outside the country. Liberated to develop new ways to make money, unlike America’s postal service, Finland’s postal system offers e-mail service with the bonus of storing your e-mail in the cloud for 7 years. Switzerland will optionally scan your mail and deliver it electronically.

How are those European postal services making out? Why, just fine. They’re all profitable.

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Are Republicans Really Taking the Country Hostage?

The Hedge Fund CEO and the Secretary

“How can we ask a student to pay more for college before we ask hedge fund managers to stop paying taxes at a lower rate than their secretaries?” President Obama has often said this, probably to the bewilderment of most listeners.

But the point he makes is true. Here’s why.

In addition to a sizable annual fee, paid to them whether their fund makes or loses money, hedge fund managers typically pocket a whopping 20% of any gains earned by their funds. That percentage can come to many millions of dollars — billions even. In 2010, John Paulson took in $1.7 billion as the 20% cut from gains on his outside investors’ holdings.

The George W. Bush administration in 2003 reduced the capital gains tax rate from 28% to 15%, delivering a huge wealth redistribution to the upper income echelons, people with enough disposable income to own securities. Still earlier, the rates had been the same as for ordinary income.

Hedge fund managers on their tax returns treat their yearly 20% take as a capital gain and pay only %15 in tax to the federal government. That’s where the secretary comparison comes in. A single person with a mere $38,000 of taxable income pays the same 15% rate as that hedge fund CEO who claims his tens of millions of income is entirely capital gains. And any secretary making more than that $38,000 would pay a higher rate than the CEO as the president says. By refusing any tax adjustments in the debt ceiling bill, Republicans have continued to hand hedge fund owners this astonishing inequity.

In fact, it is worse. That income isn’t even a capital gain. The hedge fund CEO never owned the securities. His money was never at risk. He had no skin in the game. His pay was wholly for work and services rendered to his investors &#0151 just like your paycheck. That they are given this special deal is outright corruption.

For that you can thank New York Senator Chuck Schumer. He’s a Democrat who will always turn a trick for money, unperturbed at running entirely opposite to his own party’s position on such taxes, not to mention disregard for logic, fairness, and so on. He cravenly went to bat for those New York hedge fund managers to get them their most favored contributor deal.

Later, he would do the same for the New York banks, arguing that they should be allowed to continue charging an average of 43 cents on every debit card purchase you make, a charge which you get to pay for because the merchant must pass it on by inflating prices. The banks have been raking in a hugely profitable $16 billion a year of yours. The Dodd-Frank financial reform bill sought a limit of 12 cents per transaction. To keep those campaign contributions coming, Schumer went against his own party, which had championed the bill. Now there’s a senator who puts the people first.

There is no clearer example than Chuck Schumer of the extent to which Congress members will prostitute themselves to get campaign funding from big business; no clearer example of why the campaign finance laws are on track to destroy this democracy.