The Working Poor Do Pay Taxes
Do the poor pay taxes? My conservative friends rant about
how 40% of the people in this country pay no taxes, but that's
a bit of sloppy thinking. More precisely, around 40% pay no federal
income tax. That leaves many other taxes for those we call the
"working poor" to pay either directly or indirectly.
Social security taxes, now split into Social Security and
Medicare, totals 15.3% of all income earned for those who make
less than $106,000 in 2009. That's what a self-employed handyman
or a factory worker pays. The working poor may pay only 7.65%
directly because the employer pays the other half, but economists
will tell you that directly-paid wages are a function of total
labor cost to employers, so the other half is paid indirectly
through lowered wages.
Some say Social Security isn't a tax, since it's for retirement.
The truth is the money is not set aside in a retirement fund,
and never has been. Benefits are paid by taxing current workers,
making it essentially a welfare program. If we renamed the general
income tax the "Individual Government Services Investment
Fund," would you then claim you pay no taxes? And if all
who ever participated in income taxes at some point in their
lives were promised access to all sorts of welfare, would that
promise make it something other than welfare?
All of us pay sales taxes as well, which in some areas can
be as high as 10% when state and local taxes are combined. When
we lived in Colorado, we paid a 6.7% (state and local) sales
tax. These taxes are paid by all, but they make up a larger percentage
of the income of the poor, because as much as 50% of their income
may be spent on taxable items. In other words, a poor family
may pay out as much as 3% of their total income in sales taxes,
while a wealthy family is likely to pay 1% or less.
I need to stop right here and point out that we are at 18.3%
of income for some working men and women with just these two
taxes. Warren Buffet recently mentioned that he paid only 17%
of his income in all federal taxes while his secretary paid 30%.
If we assume he paid 1% of total income in sale's taxes (unlikely
to be that high), we now arrive at an interesting truth: That
some poor families who pay no federal income tax pay a higher
percentage of income in taxes than Warren Buffet.
Some will quickly point out that the child credits and the
Earned Income Tax Credits refund much of this. Partly this is
true, and these can be seen as welfare in some cases, since for
some people the "refunded" income taxes were never
paid, but not all workers have children. In any case, we probably
should address this as a separate and complicating issue. Many
of the wealthy get welfare as well, in many forms (hundreds of
billions annually according to the latest research).
Other Taxes Paid by the Working Poor
State income taxes range from nothing up to 11% in some states.
Here in Colorado, for example, we have a flat tax rate of 4.63%.
These taxes are paid by more of the poor than federal income
taxes, because there are fewer deductions available and they
they start at lower income levels.
Property taxes are paid by all the working poor as well. Even
those who rent are paying the true cost of property taxes. This
is clear once you understand the principle that in business all
costs have to be passed on to the consumer. If taxes were doubled
on property, obviously landlords would not decide to eat the
loss - they would pass the cost on.
The same is true of taxes on all imported goods. Those costs
are passed on in the pricing, and so are paid by all consumers.
Of course, this is a larger percentage of income for those who
must spend a larger percentage of their income on basic goods.
By the way, the costs of corporate income taxes are also passed
on in the products and services produced. If taxes on profits
were paid only as owners received those profits as income, instead
of at the corporate level also, as is now done, prices would
likely be lower, so we pay those taxes indirectly as consumers.
That's a complicated subject to be covered at another time (yes
it suggests that getting rid of corporate taxes might benefit
the poor, but there are reasons why even if we taxed the owners
of the corporation we need to tax the business entity as well).
Now, let me clarify this a bit more, because I am sure that
some will argue that renters don't pay property taxes or the
other half of that social security tax, or anything that I designate
as "indirect." But imagine for a moment if businesses
paid the total social security and income tax burden that employees
now pay. Would we really say that employees pay no taxes? It
would be technically true that no individual person paid, but
of course wages would be adjusted downward to compensate for
the new taxes on business. No matter how you arrange the actual
payment or collection of taxes, it is only the productivity of
employees that creates the income which is then taxed.
Let me simplify this further. If in our business we could
hire an employee and boost our revenue by $40,000 annually, we
could pay $35,000 in total employee costs (assuming we want at
least $5,000 additional profit for the trouble). If we were made
to pay no other costs, we could pay the whole $35,000 to the
employee. But what if we had to pay $15,000 in various taxes?
Then we could only offer $20,000 in wages. So who's really paying
those taxes? Clearly the employee is the source of the taxes
Only the efforts of real people produce the wealth that is
then taken as taxes, so we have to look beyond the labels and
forms to see whose efforts are really paying what. You can hide
the true cost to people in the various ways you arrange things,
but the working poor pay taxes directly and indirectly. Most
people work most of the time, by the way. According to the U.S.
Census Bureau, the percentage of Americans on welfare is about
2% (this was written in 2008, and does not include those who
get food stamps).