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Taxes: About those folks who don't pay taxes ...

August 19, 2011 | 11:31 am

Federal tax distribution 2009 A common complaint among readers of Opinion L.A. goes something like this: "Under President Obama, 50% of the country pays no taxes." That's flatly false: Everybody pays taxes in some fashion, whether it be sales taxes, excise taxes, property taxes, payroll taxes or income taxes. But it is true that almost half of Americans pay no income taxes -- 46%, to be precise, according to a recent report by the nonpartisan Tax Policy Center.

The Wall Street Journal's Jonathan Weisman had a piece Friday that used the center's report as a jumping-off point to talk about how the income tax burden is distributed. It's definitely worth reading, as is the center's report, to understand why so many people are exempt from income taxes. For starters, though, it's worth remembering that most of the people who don't pay income taxes do pay Social Security and Medicare taxes, which (when you include the employer's share) amounts to about 15% of their wages.

According to the report, half the people who pay no income taxes do so because they simply don't make enough money. The tax cuts pushed by President George W. Bush explain part of this phenomenon: They raised the standard deduction for married couples and the tax credit available for each dependent child. The "Making Work Pay" tax credit included in Obama's stimulus package in 2009 also increased the number of lower-income workers with no income tax liability, but only temporarily; the credit expired at the end of 2010.

For the other half not paying income taxes, the main reason is tax policies specifically designed to help the elderly and low-income workers with children, the report notes. Other, less common reasons that enabled some wealthier taxpayers to escape income taxes include itemized deductions, preferential treatment for capital gains and dividends, education tax credits and other specialized tax breaks.

I'm not sure where the outrage lies in all this information, although some GOP presidential candidates are certainly trying to find some. If the working poor are getting too sweet a deal, blame Republicans -- President Nixon came up with the idea of the earned income tax credit, President Ford signed it into law and President Reagan championed it as "the best anti-poverty, the best pro-family, the best job-creation measure to come out of Congress." And good luck convincing the elderly that they should be paying more of their fixed income to the feds.

Granted, the idea that a little more than half the country is footing the entire federal income tax bill is disturbing. But the tax burden reflects the distribution of wealth in the U.S. Weisman quotes Republican economist Douglas Holtz-Eakin bemoaning the fact that 5% of the households in the U.S. pay 60% of the taxes. He didn't point out that, as of 2009, 5% of the households in the U.S. held 63% of the wealth.

Tax systems inevitably redistribute wealth, and I'm not arguing that the U.S. tax code should do so more aggressively. In fact, if you look at income distribution instead of wealth distribution, you could make a case that the tax code is too aggressive already. According to the Tax Policy Center, the 20% of U.S. households that earned 53% of the income in 2009 paid 67% of the taxes.

One other factor worth noting is that, while more Americans are moving into higher income brackets, the share of income accrued by those at the very top has increased dramatically since the early 1970s. In other words, a fraction of the country has been swallowing up an increasing percentage of the gains produced. That trend is what's driving Obama and fellow Democrats to argue for a bigger contribution from the wealthy, even as Republicans complain that the wealthy are bearing too much of the load.


Is it time to reform the tax code?

Deficit: The swirling pressures on the Gang of 12

Deficit: The right way to talk about tax reform

-- Jon Healey

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