As the push for a tax system that reintroduces higher taxes on the very rich gains steam, there are those who push for more taxes on the lower 40% of income earners. They will say that the bottom 40% pay no taxes.
To be clear, the lower 40% pay Payroll taxes. They pay Social Security and Medicare taxes. These are levied on all income earners. Ironically, those makeing over $168k don’t pay SS taxes on income over that amount. When we say they don’t pay taxes, what we are specifically talking about is the Income tax.
Also note, that “lower 40%” is not exactly accurate, but we’ll leave that alone for this conversation.
Why do the “lower 40%” not Income Tax?
The Cost of Living
Before we dive into the mechanisms of the tax system that make this possible, lets first touch on the range of cost of living. This is important because it informs the polcies behind the tax code. The source for the COL is from MIT and can be found at https://livingwage.mit.edu.
Obviously, the COL varies significantly across the country.
In Mississipy or Tennessee the pre-tax cost of living is in the low $40k range for a single person. That cost grows to $70k with a child. Two adults, the cost is about $60k in Tennessee, and similar in other lower income states.
In Chicago or New York City, its $55K and $89k for a single person, nearly double with a child.
Keep in mind that these lower level wages are only to pay the basic bills. No savings. No paying debt.
Understanding the cost of living is important to the “pay no taxes” conversation because it is used to inform tax policy.
How are people in the lower 40% not paying income taxes?
The practicle answer is simple, the Standard Deduction is higher than the person or household earned. It is set to about $15k for individuals, $24k for head of household, and $32k for married couples. In addition, there are credit provided for children, vets, or elderly. The standard deductions are higher than the amount that people are earning.
We all receive this benefit. Thats why its the standard deduction. Some people may earn enough and have high enough property taxes, charitable contributions, or other deductions that sum to more than the standard deduction. The rest of us are basically given a pass on the first $15k to $32k of our income and pay no taxes on that first chunk.
The real Implications of this issue
Nearly 40% of our fellow citizens don’t pay income taxes – it is an indictment of our society’s distribution of wealth and wages.
In the lowest cost of living states, the income needed to just survive is over $40k. The lower 40% are earning so little in our country that the Federal Government acknowledges that they don’t earn enough to afford taxes. With the standard deductions, and people not paying income taxes, people are earning much less than the the COL needed even for the most affordable states.
The lower income for so many U.S. citizens is the direct result of the rich and corporation shifting the GDP from the workers to profit and capital. Since the revenue from the GDP is being disproportionately funneled to the rich, it makes sense that the rich should be taxed to recover the revenue that isn’t available from the average wage earners.
For more on the shift of GDP from wages to corporations, this article explains it in the context of Social Security funding.