When the Senate Finance Committee held a hearing on "fairness in taxation" last month, chairman Orrin Hatch (R-UT) used the opportunity to highlight the ways in which he thinks the tax code is unfair — to rich people. The poor aren't paying their fair share, he argued. As he declared in his opening statement, "The current situation — where nearly half the country is effectively shielded from the cost of funding the federal government — deserves some attention in tax reform."
Hatch is wrong — nearly half the country is not shielded from the cost of funding the federal government. While it's true that many households (43.3 percent in 2013) don't pay income taxes, almost all of them still pay taxes for Social Security and Medicare. Indeed, as a new report from the Joint Committee on Taxation shows, most Americans (65.4 percent of filers) pay more in payroll taxes than income taxes. It's only once you start looking at folks making over $200,000 a year that most people are paying more in income taxes.
Put together, people making under $40,000 a year get $81.1 billion from the income tax; that is, they get more refundable credits like the Earned Income Tax Credit than they pay in taxes. But that same group pays $121.5 billion in payroll taxes. They still, on net, contribute billions to the federal government every year. That puts a lie to Hatch's statement, and to the "47 percent" meme inaugurated by Mitt Romney in the 2012 campaign. Only 14.4 percent of households pay neither income nor payroll taxes, and almost all of those people are elderly or extremely poor.
Even apart from low-income people, payroll taxes dominate. Filers making between $40,000 and $50,000 pay almost 12 times as much in payroll taxes as income taxes; filers making between $50,000 and $75,000 pay more than twice as much. This helps explain why some policymakers — like Sens. Mike Lee (R-UT) and Marco Rubio (R-FL) — are exploring ways to reduce payroll tax burdens, for example by introducing a new tax credit for parents that can also count against payroll taxes.
Thanks to Howard Gleckman at the Tax Policy Center for the pointer to the JCT report.