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Dept. of Bogus Statistics: The Myth of the Non-Taxpaying Free Rider

David Callahan

Sometimes a bad statistic just won't die. Case in point: the endlessly repeated claim that half of all Americans pay no taxes and that this fact underscores how a dwindling band of hard working citizens is supporting a growing horde of free-loaders.

Just this week, this Hertigate Foundation released yet another report that stressed how many people aren't paying taxes. The report, The 2012 Index of Dependendence on Government, notes that:

One of the most worrying trends in the Index is the coinciding growth in the non-taxpaying public. The percentage of people who do not pay federal income taxes, and who are not claimed as dependents by someone who does pay them, jumped from 14.8 percent in 1984 to 49.5 percent in 2009. This means that in 1984, 34.8 million tax filers paid no taxes; in 2009, 151.7 million paid nothing.

The most obvious problem with this statistic, as many have pointed out before me, is that the narrow phrase "federal income tax" is misleading -- and, it would seem, deliberately so. Every tax analyst at Heritage well knows that federal payroll taxes, for Social Security and Medicare, now bring in nearly as much federal tax revenue as income taxes -- and also know that a great many Americans pay more in payroll taxes than income taxes.

Yet the payroll tax is barely mentioned in the Index of Dependence. Beyond obscuring the truth, this omission distracts attention from another important flaw of the report: Which is that many Americans who are supposedly wards of the state, "dependent" on Social Security and Medicare, are actually drawing on programs that they spent their working lives paying into. What's wrong with that? We don't go around talking about how retirees are  "dependent" on their 401k nest eggs.

Likewise, the report cites federal subsidies for higher education as another area of exploding dependency, noting that "In the 2010–2011 school year, 9.1 million students received Pell Grant scholarships—more than double the number of students who received Pell Grants in the 2000–2001 school year." What the report doesn't note is that the value of Pell Grants have slid steadily over decades, to the point that Pell Grants cover only one-third of the cost of attending a four-year public college. Pell Grant recipients are more likely than other students to take out loans and more likely to work to help pay for college. How does extending help to young people trying to build their human capital, and making sacrifices to do so, foster dependency?

Anyway, back to the big lie about who pays taxes. A 2009 analysis by the Tax Policy Center reported that only 13.4 percent of tax filers paid no payroll taxes. To put this another way, an accurate headline about taxes would be: 86.6 percent of Americans pay federal taxes.

As for the half of Americans who don't pay income taxes, there are some good reasons for that. About 30 percent of this group are either seniors or students and have very little income. Many others don't pay taxes because they don't make enough money and their tax liability is offset by tax deductions or the Earned Income Tax Credit. In other words, millions of working Americans are too poor to pay taxes -- a problem that we should be worried about. It's also worth noting that nearly half of all adults are not in the workforce at all right now. Millions who do work are underemployed.

The picture changes further when we consider all the taxes that people pay, including state, local and sales taxes, which tend to be regressive, and property taxes. A study by the Center for Budget and Policy Priorities noted:

Considering all taxes — federal, state, and local — the bottom 20 percent of households paid an average of just over 16 percent of their incomes in taxes (12.3 percent in state and local taxes plus 3.9 percent in federal taxes) in 2009. The next 20 percent paid about 21 percent of income in taxes, on average.

In fact, when all taxes are considered, the share of taxes that each fifth of households pays is similar to its share of the nation’s total income. The tax system as a whole is only mildly progressive.

That report was published a year ago. Unfortunately, it appears that it needs to be published every year.