“The 100 Percent” by John Edward

This is the first of a series of columns by John Edward, who teaches economics at Bentley and UMass Lowell, on economic issues related to the upcoming presidential election:

Quiz question: What percentage of Americans pay taxes?

Remember presidential candidate Mitt Romney writing off the “Forty-seven percent of Americans [who] pay no income tax.” The release of the video fed the perception that Romney favored the well to do. Even though he said people pay no income tax, he fed a common misconception.

Answer to the quiz: 100 percent!

Even low-income “lucky duckies” (so called by the Wall Street Journal) pay taxes on their earning. They make so little income they may get the tax back when they file their return. However they are not lucky enough to avoid regressive payroll taxes for Social Security. In most cases they pay state income taxes.

Everyone who spends money pays taxes. It could be a sales tax. It could be an excise tax.

Anyone lucky enough to have a place to live pays taxes. They either pay property taxes directly if they own, or indirectly if they rent.

Most people pay government fees. Remember how Governor Romney did not want to raise taxes? Instead he raised fees and added new fees of over $300 million a year.

Quiz question: Now that we know everyone pays taxes, who pay the most?

First, some hints. Remember Warren Buffet’s secretary paying a higher rate than him? Remember Mitt Romney paying an effective tax rate of 14 percent?

Answer to the quiz: The top income earners pay more taxes by far. They even pay a higher tax rate, on average, than the rest of us.

But not by much.

Citizens for Tax Justice recently came out with a report on Who Pays Taxes in America in 2016?. They estimate how much families pay as a percentage of income. They break it down by income groups. They include all major types of federal, state, and local taxes. They do not include fees.

The top 1 percent pay one-third of their income in taxes. Their average income is 1.7 million dollars a year.

Middle-income earners pay only a little less. Families making $300,000 pay 32.8 percent. At $125,000 the average tax rate is 31.9%. Even at an income of $80,000, the average salary for public school teachers in Greater Lowell, the tax rate is over 30 percent.

Most disturbing is how much the lowest income earners pay. For the bottom quintile, families making an average of $15,000, the average tax rate is 19.3%. For a family of four including two children the poverty level is $24,000.

The question is not why some people pay no income taxes. The real question is why families living well below the poverty line pay 1 out of every 5 dollars they earn in taxes.

The federal income tax is progressive, but nowhere near as much as it used to be. The top tax rate is now 39.6 percent (a married couple would have to make almost a half a million dollars to reach that tax bracket). It was 35 percent from 2003 to 2012. The rate was 39.1 percent when President George W. Bush took office in 2001.

In 1985 the top rate was 50 percent. In 1975 it was 70 percent. The Tax Reform Act of 1964 lowered the rate to 77 percent from 91 percent.

Quiz question: How was the economy doing back in the 50s and 60s when tax rates for the highest of income earners were so high?

Answer to the quiz: A heck of a lot better than it has been doing in the last few decades.

Meanwhile, social security taxes are very regressive. Everyone pays the same rate but only on income up to $118,500. Make more than that and the rate falls to zero.

State and local taxes also tend to be very regressive. That is because most states rely heavily on either sales taxes or property taxes, or both. For example, in Massachusetts the lowest income earners pay an effective tax rate roughly twice as high as the highest income earners. See The Third Rail of Massachusetts Politics for more details.

Now Donald Trump wants to cut taxes. He says he will cut income tax rates for everyone. However, the vast majority of the benefit will go to the wealthy (recent comments by Trump reveal he has not made up his mind as to how much to cut their taxes).

According to the Tax Policy Center, Trump’s proposal will reduce taxes by 1 percent for the bottom quintile of income earners. For the top 1 percent of income earners the cut will be 19 percent. (The huge increase to federal budget deficits will have to be a topic for another day.)

Hillary Clinton wants to raise taxes, but just on households that make more than a quarter of a million dollars (less than 5 percent of households). For everyone else she has not proposed any change to tax rates on earned income.

Could it work? Her husband raised taxes modestly. Tax revenues went up, and the economy improved. See Clintonomics for more details.

It looks like Trump and Clinton will be our two choices in November. An informed voter is our best citizen.

Coming next: Voodoo Two.

Quiz question: Will it be about sorcery, curses, or economics?

Answer to the quiz: All of the above.

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