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November 19, 2011

What 'Percent' Are You? The Numbers Behind the Tax Divide Debate

Statistics are funny things, and you can look at any one set of them a zillion different ways. As often as not the result you get depends on what conclusion you're looking for.

Both the right and the left have their own way of looking at how many Americans pay how much taxes, and I thought this article provided a pretty unbiased and fair analysis of the situation.

What 'Percent' Are You? The Numbers Behind the Tax Divide Debate
Daily Finance
by Bruce Watson
Posted 11:00AM 11/18/11

Political positions were, for a time, a matter of color: Republican were red, Democrats were blue, and nonpartisans and centrists -- when they could be found -- might claim purple. But since the Great Recession, percentages, not pigments, are becoming America's great dividers. With conservatives and liberals alike defining themselves and others as the 99%, the 1%, the 53%, the 47%, and various other percentages, it's time to ask just what these numbers mean -- and where the average American family fits in.

When it comes to dividing up our class structure, the middle is a good place to start -- namely, the 60% of households wedged between the poorest 20% and the richest 20%. These families make between $20,001 and $100,065 a year, and were the group hardest hit by the recession: In 2008, their average income fell by 3.6%, the biggest single-year drop in history. At the same time, they were also devastated by rising unemployment, mass foreclosures, soaring tuitions and frozen wages. By comparison, households below the 20% line often qualify for social welfare programs, were far less likely to own real estate, and were less affected by massive layoffs. In other words, they had less to lose, and ended up losing less.

On the other end of the spectrum, many of those above the 80% line were shielded from the harsher effects of economic downturns. And over the last 30 years, the top 20% have done quite well: Their share of all wages paid in the U.S. has gone from 50% to 60%. Everyone else has lost ground.

The 99% vs. the 1%

Members of the Occupy Wall Street movement and their allies don't think this is the best way of looking at America's households: The big dividing line in their view is the 99th percentile. In this country, they assert, there are the top 1% of households, and everyone else.

There's something to be said for Occupy Wall Street's math. As President Obama discovered when he suggested lowering the qualification line for the top tax rate to $250,000, where we place the dividing line between "the rich" and "everyone else" is highly controversial. But moving the wealth line from $100,065 to $1.1 million -- the boundary for the top 1% -- avoids the argument about who exactly is middle class fairly neatly. No matter where your political sympathies lie, it's hard to call millionaires middle class.

And the top 1% have done exceptionally well over the last 30 years: They receive 17% of all wages paid in the U.S -- more than twice the percentage they received 30 years ago. Meanwhile, the bottom 80% of households lost 9% of their income share in the same period, and now receive about 47% of all wages paid. Put simply, the richest 1% gained all the wages the rest of the country lost.

The 53% vs. the 47%

The dividing line between the 99% and the 1% is stark, but some argue there's a better one: The boundary between those who pay income taxes and those who don't. According to the nonpartisan Tax Policy Center, 53% of households pay federal income tax; the rest either break even or get back more in refunds than they pay.

In fact, the second-to-lowest 20% of the country -- households making between $20,001 and $38,043 -- get back about 0.4% more income tax than they pay; for families who make less than $20,000, it's about 6.8%.

Some conservatives -- notably on the Tumblr blog We are the 53% -- have taken these numbers to heart, arguing that this means the bottom 47% is getting a free ride. But the 53%/47% division is a bit misleading.

To begin with, almost all households pay state taxes, Medicare tax, Social Security tax, excise taxes, sales taxes, and a raft of other government fees. When this broader, and more accurate, assessment of taxation is used, the 47% doesn't look to be getting off so easy: The second poorest quintile -- the ones that got 0.4% of their income tax back -- still paid more 10% of their incomes in various federal taxes.

In fact, when everything is factored in, 86% of the country pays more than it gets back in federal taxes. As for the rest, it's not the split you might expect: More than half (8% of Americans) are senior citizens receiving Social Security.

And that last 6% -- the ones who really pay nothing to the federal government? They are unemployed, disabled, in school, or making very low incomes. But even this small group pays state and local taxes, sales taxes, and other government fees.

Where the Poor Pay More

When it comes to percentage of income, the line is even clearer: For some taxes, the bottom 20% of the Americans pay more than the top 20%. For example, a household on the bottom pays almost 54% more of its income into Social Security than a household on the top. The same goes for excise taxes -- fees attached to certain commodities like gasoline and alcohol: As a percentage of income, the poorest 20% pays more than four times as much as the richest 20%.

So where is the ultimate dividing line? The answer might have less to do with money than with the way we perceive it: In a recent poll, The Hill found that 66% of likely voters believe that the middle class is shrinking, and 55% believe that income inequality has become a big problem for the country. Surprisingly, worries about income inequality were higher among those who are doing better: 65% of respondents in the top 20% felt that income inequality was a big or somewhat big problem.

In other words, when it comes to the economy, worrying about the future may be the one thing that cuts across all class lines.

Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.

Posted by Tom at November 19, 2011 10:15 AM

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