Are Low-Income Households Paying Too Little in Taxes?

Monday, August 22, 2011 at 5:00 PM by

Should We Aspire to a Texas-style Distribution of Taxes?

In Governor Rick Perry’s first major speech to kick off his presidential campaign he made a rather surprising comment about taxes – surprising at least to me. In that August 13th address in South Carolina, in which Perry called for minimizing the role of government and said the U.S. should “limit” taxes, he went on to complain that too few people have to pay income taxes:

“We’re dismayed at the injustice that nearly half of all Americans don’t even pay any income tax.”

It’s an odd complaint coming from someone as anti-tax as Perry seems to be. More importantly, it creates the very erroneous impression that low-income Americans aren’t paying a significant portion of total taxes in this country. An August 15 Washington Post column by Ruth Marcus thoroughly rebuts the notion that the tax system has gotten too progressive, with poorer households escaping or shirking any responsibility for financing government. This blog post outlines the facts regarding who pays taxes and compares the distribution of tax payments in Wisconsin and Texas.

It’s true that nearly half of Americans (46%) don’t have any federal income tax liability, but they pay other federal taxes, plus state and local sales and property taxes. In most states, Texas in particular, the progressivity of federal income taxes helps mitigate the regressivity of state and local taxes. (See America’s Tax System Is Not as Progressive as You Think.)

Figures from the Tax Policy Center show that that among the people who don’t pay federal income taxes, about three-fifths pay payroll taxes. And among the others – the 18% of all households who pay neither income nor payroll taxes – most are elderly and nearly all of the rest have an annual income of less than $20,000. 

Perry’s remarks about the “injustice” that too few people pay federal income taxes surprised me, considering: a) he seems to be very anti-tax, and b) Texas doesn’t even have an individual income tax. But upon further reflection, his income tax comment makes some sense – in light of the facts that a general theme of his campaign is that America should be more like Texas, and the Lone Star State has one of the most regressive tax systems. Lowering the threshold for who pays federal income taxes would make the country’s taxes more regressive, achieving Perry’s goal of spreading the Texas model. And that would be especially true if the increases at the lower end of the income spectrum are offset by tax cuts for the wealthy, which seems to be the Perry plan.

A short paper by Citizens for Tax Justice points out that the lowest earning fifth of Texans pay a higher percentage of their income for taxes than their counterparts in all but 4 other states. “In other words, Texas has the fifth highest taxes for low-income families.”  Other analyses by the Institute for Taxation and Economic Policy (ITEP) in November 2008 show a marked contrast between the distribution of taxes in Texas and Wisconsin:
  • In Texas the top 1% of earners pay 3.3% of their income in state and local taxes, compared to 8.5% of income by the middle fifth of Texas taxpayers, and 12.2% of income by the bottom fifth. 
  • Wisconsin’s tax distribution is much flatter, with the highest percentage contribution made by middle-income taxpayers. The top 1% of earners pay 8.0% of their income in state and local taxes, compared to 11.2% for the middle fifth, and 9.2% paid by the bottom fifth.
  • Using the ITEP figures to compute a ratio comparing the state and local tax rate for the lowest income fifth with the top one percent, the low-income households in Texas pay a rate 3.7 times as high as the wealthy in Texas, whereas that same ratio is 1.15 in Wisconsin.
The column by Ruth Marcus takes issue with Perry’s statement in his speech that “spreading the wealth punishes success while setting America on course for greater dependency on government.” She notes that “wealth hasn’t been spread so much as concentrated – at the top. The share of total income going to the top 1 percent of income earners more than doubled from 9 percent in 1970 to 23.5 percent in 2007.”

Though I strongly disagree with Perry’s comments about taxes, I’m glad he raised the issue of tax fairness and has generated some debate about it. The next time he addresses the issue, I hope he goes beyond a general observation about the “injustice” he perceives, and shares with us how he thinks the income tax should be broadened. A public airing of these issues and debate about a range of options for creating a fairer tax system would be a welcome development.

Jon Peacock

One Response to “Are Low-Income Households Paying Too Little in Taxes?”

  1. Nick says:

    I think the issue get’s framed wrongly. When people complain about 50% paying no taxes, I don’t think they want the poor to pay even more.

    I think the issue is that there is a larger and larger group of people who can vote for more and more government programs, and it costs them nothing.

    That’s why something like a Negative Income tax is appealing. Even if someone is getting money from the government in tax assistance, when the government spends more, their assistance goes down. That way everyone “pays” something when the government spends more… either in the form of increased taxes, or lower tax assistance.