Debunking A Myth About Taxes

I find that a tactic used on both sides of the political fence is to cite a statistic that seems so indefensible it cannot possibly be true. However, I am a fan of the cliché, “Liars figure, and figures lie.” (This, of course, is a derivation of another favorite, “Lies, damn lies, and statistics.) While statistics are vital when used properly, and serve an important purpose in politics, magnanimous statistics regarding ambiguous subjects should raise an immediate red flag when they’re used in such context.
Over the past month, a statistic I have heard cited over drinks more than once has been to support an Atlas Shrugged-esque argument about how over-taxed the wealthy are and how the lower classes are living off of the wealthy. Don’t get me wrong, I love the idea of no taxes and I love the idea of being wealthy. However, quoting misleading statistics is disingenuous, no matter how virtuous the aim the data is to support.
The specific statistic in question claims that 50 percent of American households don’t pay income taxes. (Granted, as usual, the ‘telephone game’ has made the statistic even more unseemly by stating 50 percent of all Americans don’t pay income tax.) Not only is the statistic misleading, it doesn’t even cite the correct number. The real statistic is that 1/3 of all tax filers in 2004 had no tax liability AFTER credits, deductions, AND the most important aspect… payroll tax. To be more technical, the figure relates to ‘taxable units’ who don’t pay the standard income tax, a taxable unit being a couple filing jointly or a person filing. This data is supported by one of the purported academic authorities who promote the statistic, the Tax Foundation.
As tax specialist Jay Bookman points out, “Payroll tax, in total, amounts to 15.3 percent of earned income up to a gross income ceiling that this year is $102,000. Above the ceiling amount, a taxpayer pays only 2.9 percent. (Employers technically contribute half the 15.3 percent, but economists classify the entire amount as a tax burden on the worker because it is a tax on their labor. If you’re self-employed, you have to pay that entire 15.3 percent yourself.) Because of that income ceiling, high-income workers end up paying the tax only on a relatively small part of their income, while poor and many middle-income households pay it on everything they earn. To put payroll tax into perspective, in 2007, the standard income tax brought in $1.17 trillion, while the payroll tax brought in $873.4 billion.
The point of this is to highlight the fact that the lower-income classes pay quite a fair share of taxes, as do middle-income earners, and high-income earners. The debate about tax rates is a fair philosophical argument, but to throw out such an over-arching comment about how few people pay income tax is academically dishonest.