The Urban-Brookings Tax Policy Center recently released a report saying that 61% of U.S. households had paid no federal income tax in 2020, up from 44% in 2019, as the pandemic led to high unemployment and loss of income. Although the number will likely revert to the mid-40% range over time, now is probably a good time to have a discussion about what the right percentage of people paying taxes should be.
But first, it’s always good to point out that while about half of Americans don’t pay income taxes, almost everyone who is employed pays payroll taxes of some sort in the form of the 6.2% that is withheld from the first $142,800 of income. It’s important to draw the distinction between income taxes and payroll taxes. Philosophically speaking, payroll taxes are intended to fund one’s own social security. Income taxes are intended to fund government spending, which has been increasing every year. The burden of funding the government falls on a smaller number of taxpayers. The top 20% of taxpayers paid 78% of federal income taxes in 2020, up from 68% in 2019, according to the Tax Policy Center.
What is the right number of people who should be exempt from paying income taxes? Most reasonable people should agree that number is far less than 61%. A household in the 61st percentile of income makes just under $90,000 a year. Almost nobody would consider a household income of $90,000 as affluent, but there is plenty of room to contribute. Consider that the median household income is $68,400, and that Bureau of Labor Statistics data from 2017 show that a typical household with $73,500 in pre-tax income has over $6,000 in savings and over $3,000 in entertainment expenses.
Except for the truly indigent, which I would characterize as households making less than $28,000 a year, we can all chip in. The idea of someone paying no income taxes is offensive to us all, no matter what their wealth and income. They don’t have to pay the same amount in percentage terms, but everyone should have a small financial stake in being a U.S. citizen. It’s what’s called “having skin in the game.”
This has very little to do with revenue generation (although if the government really was interested in raising more revenue, it would be easier to do it with the middle class than with the rich). It’s the principle that very little is asked of U.S. citizens in terms of participating in civic society. There is no military draft or compulsory service. Voting is not mandatory. All we should ask is that we all do our part and contribute a small amount to the cost of running the government. If people did, they might feel differently about its size and scope. Think of it as Homeowners Association, or HOA dues — nobody likes paying them, but we do.
From a political standpoint, getting everyone with a household income above $28,000 to pay their fair share of taxes would be very difficult to accomplish. It is political suicide to even suggest raising taxes on the poor or middle class. And people have different ideas of fairness. Some think it is unfair that the wealthy pay preferential rates on capital gains and dividends (we lowered those taxes years ago, for good reason). I happen to think it is unfair that 61% of Americans have no income tax liability. Whether you think it’s fair or not probably depends where you sit on the political spectrum.
Global leaders are currently having discussions about implementing a minimum tax rate of 15% for corporations. Why not a minimum tax rate for individuals? It doesn’t have to be much — even 5% would do. When you have a financial stake in something, you tend to care more about what happens to that thing. A small contribution would cause people to be much more concerned about how money is spent in D.C., which would be a good thing.
The next time you hear someone tell you with great indignation that they’re a taxpayer, remember that there’s a 61% chance that they are lying.
Jared Dillian is the editor and publisher of The Daily Dirtnap, investment strategist at Mauldin Economics, and the author of “Street Freak” and “All the Evil of This World.” He may have a stake in the areas he writes about.