Saturday, December 31, 2011

The 47%

Much has been made of the 47% who, allegedly, don't pay taxes. As better articles will note, this excludes a lot of taxes, such as excise taxes, sales taxes, state income taxes and property taxes, as well as Social Security taxes. What the 53% crowd is trying to say is that 47% of Americans don't pay federal income tax. And why is that?

Kevin Drum did the math and reports that:
  • 23% pay nothing because they're poor. A couple making less than $19,000, for example, doesn't owe anything after their $11,600 standard deduction and two exemptions of $3,700 each reduce their taxable income to zero....
  • 10% are elderly and pay nothing because their Social Security benefits are [generally] exempt from federal income taxes. 
  • 7% pay nothing thanks to provisions in the tax code designed to benefit low-income families: the earned income tax credit, the child credit, and the childcare credit account.

All of which leaves us with about 7% who don't pay federal income tax because of deductions, tax-exempt income and the like.

But everyone who worked paid Social Security taxes.

So a reader asked how much Social Security revenues are attributable to these folks who, allegedly, don't pay taxes. An exact answer is impossible with the data we found, but we can come up with something close.

According to the Social Security Administration, a little over 48% of Americans made less $25,000 last year. Yet this group still managed to contribute $25 billion dollars to Social Security -- some 4.7% percent. That's actually more than the top 1% contributed ($23 billion or 4.3%). Now, sure there are a lot more people making less than $25,000 a year (72 million, give or take) than there are in the 1% (roughly 1.5 million), but that 1% does control 40% of the nation's wealth. So they've got that going for them.

But there is something a bit odd about that 48% -- namely, a full 100% of their earned income was subject to Social Security taxation. In fact, the same is true for the bottom 94% of working Americans. It's really not until the top 1% where you can see the benefit -- to the very well off -- of capping Social Security taxable income at $106,800. At that point, only 9.4% of their earned income is taxed by Social Security -- and none of their income derived from capital gains.

A PDF of the Excel spreadsheet used to divine these numbers can be found here

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