Business Tax Reform First

For most folks, it is the little taxes that bite the most, not the big tax: the federal personal income tax. Hotelier Leona Helmsley once said, “We don’t pay taxes. Only the little people pay taxes.” That’s not quite true, as “the little people” often don’t pay the big tax. The bottom 40 percent of income earners have a negative income tax rate. The only people in the bottom 40 percent who actually pay the personal income tax are anomalies. For Leona, they’d be “the little people.” But others might see them as the collateral damage of an insane tax system.

In a June 2016 report from the Congressional Budget Office, we see at the bottom of page 11 that the four lowest before-tax income quintiles in 2013 had average effective tax rates of -7.2, -1.2, +2.6, and +6.1 percent. That translates into an average effective tax rate for the bottom 80 percent of personal income earners in 2013 of just +0.075 percent -- not even one tenth of one percent!

Of course, that average is brought down by the bottom two quintiles, which receive a ton of refundable tax credits, like the EITC. But when one looks at the third and fourth quintiles (i.e. the 41st percentile through the 80th), their average effective tax rate is only 4.35 percent, not even half of the lowest statutory tax rate.

One can use the IRS’s Tax Table only if one’s taxable income is below $100,000. Back in 2013, an unmarried income earner who took only the standard deduction could have used the Table only if her total income was below $110,000. A total income one penny below that would have gotten her a tax bill of $21,286, the highest liability on the 2013 Tax Table (see page 37). That amounts to an effective income tax rate of more than 19.35 percent.

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