Wednesday, August 27, 2008

Repeat After Me: The Poor Pay No Tax

In the comments to this Deseret News letter criticizing Senator McCain for being rich, comes another oft-repeated misconception. I'm quite certain it won't be the last time I hear it between now and November, so let's get it out of the way early on.
"Yes we would like to see the super wealthy CEO pay more percentage of their pay in taxes than the struggling mother earning minimum wage."
A "struggling mother earning minimum wage" pays ZERO income tax.

In fact, if we give that mother just one dependent child and have her take the standard deduction, then she not only owes zero tax, but she'll also get back $3,850 through the Earned Income Credit and the Child Tax Credit. With two children that number jumps to $6,710.

See here and here for previous posts on taxes.

21 comments:

rmwarnick said...

Two-thirds of corporations pay no taxes, yet Senator McCain wants to lower corporate tax rates anyway.

Cameron said...

I appreciate the attempt to change the subject, Richard. I assume this means you have no rebuttal to the fact that the poor don't pay any income tax, and in fact actually earn tax they never paid in the first place.

But as for the new topic you present, it might behoove you to read the comments to that Think Progress post.

They quite adeptly point out that the term "corporation" includes S corps and LLCs - entities that pass their income on to investors. And those investors then claim that income on their own personal income tax forms. So yeah, those corporations "pay no taxes", but that doesn't mean the income's not taxed.

Cameron said...

Here's a real world example-

I used to work for a company that builds homes. They were set up as one of those corporations that don't pay taxes on their own, but pass their income on to their owners.

One year they sold some land for a $3 million profit and used that money to buy out another builder. None of the owners/investors got any money from the sale of the land. In fact, that entire year none of the investors were paid any returns.

But when tax time came, all of them were on the hook to the IRS for that $3 million dollar "income".

Steve said...

Cameron, it is b/c that $3 million was income. LLC and LLP exist to protect the owners from liability, which is what the second L in all those stand for, which I know you know, but clarifying for others. There are different ways to shield your profits in either type, with a 'real' corporation being the best way, as you can claim R&D and other investments against your revenue.

The point with taxes paid the minimum wage worker is that they still PAY tax even if they do get that refund the next year. However, if I have to pay my tax now, how am I going to take my tax refund from NEXT April to feed my kids now?!?! Also, the other point is that the 15% the poor mother might be paying now is hitting her a lot harder than someone paying 28%, with the idea that the poorer need the money for more necessities, since by definition, I pay the 28% b/c I make MORE, thus take more home and can afford the nicer things in life. That is the crutch of the argument here.

bekkieann said...

Cameron, I see by your profile you are in accounting. So I'm sure you are familiar with the term "working poor". This doesn't just include those on minimum wage. Income is not going up as fast as expenses. We're all feeling the pinch.

There are no special tax breaks for those in the middle class (especially those on the low end). They make too much for tax breaks, but not enough to get ahead.

And as to your real-world example, you can be sure the owners made plenty off the company, whether or not it was tied to the deal. Don't tell me, but just in your mind think about their home, their lifestyle, and then compare it to your own.

It surprises me how working class people are so quick to defend our convoluted tax system.

Cameron said...

Steve,

"The point with taxes paid the minimum wage worker is that they still PAY tax even if they do get that refund the next year."

Not so. They can adjust their withholdings to take out only as much as their estimated tax liability will be. In this case, zero. And they can even get early EIC payments throughout the year so they don't have to wait until next year to get that $6,750.

Cameron said...

"it is b/c that $3 million was income."

In the technical sense, yes it was income. Which is why the IRS taxed it. But in the sense of actually seeing any of the $3 million in their bank account, no.

And that's the rub. We complain about the "struggling mother earning minimum wage" who earns income tax, and lambast the "rich" who are taxed on money they never see.

Cameron said...

Bekkieann-

"And as to your real-world example, you can be sure the owners made plenty off the company, whether or not it was tied to the deal. Don't tell me, but just in your mind think about their home, their lifestyle, and then compare it to your own."

Actually, in the year I worked for them, the investors didn't make any money from that company. Imagine their joy when finding out that not only had they invested a lot of money into a badly mismanaged company and hadn't seen a penny in return, but they were now on the hook for thousands in income tax because of it.

But that's not really the point. Had they made money off that company, they would be entitled to it, and they would be taxed on it. Richard's canard statistic of "two-thirds of corporations pay no taxes" is a big fat falsehood.

My point here is that the poor don't pay income tax. And it was Bush's tax cuts that made it so. It's simple political grandstanding to say otherwise.

Cameron said...

"So I'm sure you are familiar with the term "working poor". This doesn't just include those on minimum wage. Income is not going up as fast as expenses."

I am familiar with the term "working poor", and I know that expenses are rising quickly. I also know that those expenses are largely due to energy prices, and have little to do with income taxes.

For instance, in this post I linked two other of my posts which centered on income tax. This one showed how a middle class family making $45k a year with three kids and a mortgage would have paid $950 in income tax in 1999. In 2007 that same family, in that same situation, would have paid $0 in tax, and gotten $2,400 back.

The other post I linked highlights the fact that the top 0.1% of US earners make 9.1% of the country's total income. However, they pay 17.4% of the total taxes. The top 1% earn 19% of the total income, but pay 36.9% of the total tax. In contrast, the bottom 50% earn 13.4% of the income and pay only 3.3% of the total tax.

rmwarnick said...

You are nitpicking a minor point about income tax, while ignoring payroll taxes. You are also ignoring the Census report that came out yesterday. Household incomes are still less than before Bush took office in 2000.

This administration added $4 trillion to the National Debt while cutting taxes for the rich.

Unemployment is going up. Real estate values are going down. The dollar has tanked. We have a liquidity crisis. McCain wants more tax cuts for the rich.

Anybody who votes for McCain is either an unpatriotic millionaire or voting against their own economic self-interest.

Cameron said...

Richard,

You are correct that payroll taxes are a whole nother story. To clarify, there are basically two withholding sections on a paycheck: income taxes and Medicare/Social Security.

I have been discussing the fact that the poor pay zero income tax, and how that is conveniently forgotten in our public discourse. Richard obviously very much does not want to talk about that- and I don't blame him since he'd lose.

Richard correctly states that that still leaves the Medicare/Social Security part. Everyone pays that tax. Though technically you're supposed to get it back when you retire. It costs you 6% of your check, and your employer another 6%, for a total of 12%.

It's true that it probably disproportionately hurts the poor, the same way the sales tax on food does. But I have yet to hear any politician propose cutting that tax. The reason being that Social Security and Medicare don't have enough funding as it is. Plus, Democrats are getting plenty of mileage out of the "tax cuts for the rich" sloganeering already.

Obi wan liberali said...

Atleast in Utah, on average filers who show adjusted gross income less than 25,000 pay around 3% of their income on federal income taxes. State income tax for individuals within that range tend to be around 1.5%. These can be seen over at the Utah State Tax Commission sight.

Admittedly, the poor don't pay the 24% that millionaires pay, but millionaires also have more options as far as tax avoidance strategies which usually have to do with minimizing your AGI in the first place.

The poor do pay taxes. And I would suggest that the $1,100 tax bill on a couple who only makes $25,000 a year is more of a burden than the $1.9 million a couple pays who made $8 million last year. Only $6.1 mill to live off? Bummer dudes.

Cameron said...

"Unemployment is going up. Real estate values are going down. The dollar has tanked. We have a liquidity crisis."

And this is because poor people pay no taxes?

How much is enough Richard? How much should the rich pay? The top 1% pay 37% of the taxes in this country. Should they pay 45%? Or maybe 80%? But remember, it's important to know who really pays corporate taxes.

Cameron said...

Obi brings up a good point. There are a lot of variables to consider when talking about who pays tax and how much.

For instance, in my previous example a family earning $45k paid no tax and got back $2400.

But a married couple making $25k with no kids, taking the standard deduction and without any other credits would pay $750. (which btw, is your 3%)

Now, add a child to the mix and the couple no longer owes any tax and gets back $1,880. If they have any other deductions which allow them to claim more than the standard deduction, then that tax liability shrinks as well.

It all depends on the filing status and which of the various deductions you qualify for. The bottom line though, is that taxes for low and middle income earners have been slashed, and the country's tax revenues are almost completely dependent upon the rich. The image of the single mom working for peanuts not being helped by the Bush tax cuts is flat out wrong.

Anonymous said...

Two-thirds of corporations don't pay income taxes, but most of those not paying are very small. Three-quarters of large corporations paid income taxes. Of the one-quarter that did not, 85% did not have profits.

Cameron said...

One more thing that's pretty critical to the point of this post.

That married couple earning $25k and paying $750 in federal income tax this year? In 1999, before the Bush tax cuts took effect, that couple would have paid $1,841.

The said...

A low income family with children is paying nothing in federal income taxes. Here's the proof using 2008 data for a family with two parents and two children and AGI of $30,000

AGI = $30,000
Personal exemptions = 4 x 3,500 = $14,000
Standard deduction = $10,900
Taxable income = $5,100
Since 15% bracket starts at $16,050, this is all taxed at 10%. Therefore, pre-credit tax liability is $1,505.

Each child is worth $1,000 credit. Therefore, after credit, the taxpayer receives $495 back, assuming this is all refundable. Refundability is equal to 15% of income over $12,050.

SeƱor Dangriga said...

As a (former) captain in the US military, I never once paid income taxes in eight years on active duty. I always got it back in April, along with some of Bill Gates' and John McCain's largesse.

But that's Income tax.

I, and the working poor, and the illegal aliens, et. al., still paid taxes each of those years, regardless of what any W-2 said. There's Social Security tax, Medicare/Medicaid tax, sales tax, communications taxes, gasoline taxes, property taxes, and various and sundry "fees" that are tacked on to just living here. So no more of the "poor pay no taxes" argument. Income taxes tell only half the story. Everyone pays.

Cameron said...

Senor,

I know that, and talked about it in the comments.

But those things have nothing to do with the "Bush Tax Cuts" that are constantly criticized.

I am talking about the effect of those tax cuts, and how a wide swath of the US population are now tax earners rather than tax payers - a fact that is completely ignored by the majority of this country.

Frank Staheli said...

The problem is not with how much in taxes they pay. The problem is with how many kickbacks they get from the government to finance their pet projects.

Patrick said...

The "working poor" don't pay taxes, period. I don't care what is being held out of their checks, they get it all back. That's not paying taxes, that's giving a one year, interest free loan to the government.