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All posts by Dan Whalen,
Providence, RI (resume)

Thursday, September 27, 2012

"The 47%"

The biggest economicky news item in the last few weeks has been Mitt Romney’s comments about the 47%.”

In the media commentary and coverage the soundbite sparked, I’ve seen a lot of confusion about what, exactly, was said, and who "the 47%" are.

So I thought it would be worthwhile to try to give the comment back some of its lost context.  I hope that after reading this post, you feel a bit more confident thinking on your own about what Romney said, and what it means.

The Quote

Here is the comment in question.  Note the underlined bits…these are the parts I really want to talk about.

"There are 47 percent of the people who will vote for the president no matter what. All right, there are 47 percent who are with him, who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it -- that that's an entitlement. And the government should give it to them. And they will vote for this president no matter what. ... These are people who pay no income tax. ... [M]y job is not to worry about those people. I'll never convince them they should take personal responsibility and care for their lives."  
 Source

What’s Mitt talking about?

In July of 2011, a research organization called The Tax Policy Center (it’s a side project of the Urban Institute and the Brookings Institution) published a report called “Why Some Tax Units Pay No Income Tax.”   

The TPC’s analysis projected that 46.4% that of all tax units in the US would not pay federal income tax in the upcoming year.  This is the report/figure that Romney was referring to in the quote.

Ok, there’s a lot going on in that sentence alone.  Let me break that down.

Projected?

First off, the TPC’s number IS a projection.  But I will say that the Urban Institute and Brookings are very well respected, employ top academics and experts, and are generally recognized as producing the finest public policy research out there.  These guys are good.

And its not a crazy complicated number to crunch, nor does the study rely on too many assumptions.  Yes it’s an estimate, but its the best number we have to go on (and coming from a good source, so we'll assume its as accurate a number we can get).  

“46.4”?

Second, yes, 46.4%.  There is no ‘47%.’  Mitt got the number off by a smidge.

“Tax Units”?

Third: 46.4% of ALL TAX UNITS.  NOT 46.4% OF “ALL AMERICANS” as I’ve seen some misquotes in the papers. 

So what’s a “tax unit”?  A tax unit is any entity that files a tax return. 

A single person living alone, filing their taxes, is one tax unit.  A married couple filing together is one tax unit.  Two single tax payers living together are two tax units.  A married couple filing together, who has a son living with them who files his own return - that's two tax units.  Children have no income, so they aren't part of any tax units.  You get the idea.

The TPC report estimated in 2011 there were 164 million tax units in the USThe total population of the US in 2011 was 313 million

So the phrase “46.4% of all American’s don’t pay fed income tax” would be incorrect.  Its “46.4% of all tax units,” a much smaller group.

Anyway, Romney just used the word “people,” so the quote comes off a little vague on this point.  But this comment was an answer to an audience question, it wasn’t a prepared remark, so the ambiguity is kinda understandable.

Federal income tax?

Ok, here’s the big thing.  If you take nothing else from this post, take this:

The TPC (and Romney, for that matter), EXPLICITLY, said “46.4% of all tax units pay no FEDERAL INCOME tax. 

Nobody is saying that half of the tax units pay NO taxes.  Nobody’s even saying that half of the tax units paid no federal taxes.  But this specific type of tax, the federal income tax, that one kind of tax, yes - only half of the tax units paid it in 2011.

Federal income tax is a percentage of your salary or wages you fork directly over to Uncle Sam.  (For an explanation of how your income tax bill is calculated, see my earlier post: Income Taxes.)

An individual who pays no federal income tax is still likely to be paying:
  • Payroll Tax (aka FICA taxes) – This is a tax automatically deducted from every paycheck you receive, no matter what.  It goes to the federal government, but its proceeds can only be used to pay for Medicare and Social Security.
  • State Income Tax – A fraction of your income that the state you live in automatically takes from every paycheck.
  • Capital Gains Tax – Any money you make off of an investment, or the sale of a stock or other financial instrument is taxed at 15%.
  • Local Taxes – Things like excise taxes (sin taxes), sales taxes, property tax, school taxes...fees for garbage pick up, snow plowing, or removing leaves...
  • Estate/Death Taxes – A cut of any inheritance left to people in a will.  This varies a lot given the place, the size, and type of the bequeathal.  It can go to the your state or the federal government, depending.
  • Duties/Tariffs – You drive to an Ikea in Canada to buy a new desk?  You might have to pay a hundred bucks or so to the fed to bring it back across the border.
Heck, even if you don’t own a house, and just rent, you’re giving you landlord money so that he can pay property taxes on your building.  You “pay taxes” on your rental apartment indirectly – it's part of the cost of your rent!

EVERYBODY pays some taxes.  The “47%” just don’t pay the one kind - the federal income tax.
 
So who are “the 47%”?

If you’re unmarried, and make less than $8,700 a year, you are excused from paying federal income tax.  So are married couples making $17,400 a year.  

Why?  In the govt's judgement, this is the minimum amount of income one needs to sustain themselves, and it would be wrong to tax them to the point that their available income goes below that mark.  “Its already hard enough for you to pay all those little taxes anyway (sales, state income, property, etc.), so we’ll let you out of a bigger one like the fed income tax.”

For example, when I was a college student, I worked part time shelving books in the library.  I probably only made $2 or $3 thousand a year, and shored up the difference with student loans. 

During that time, I was a member of "the 47%" - my income was too low to be required to pay federal income tax.  I still paid taxes though - sales tax on groceries, textbooks, and beer, for example.

Ok, so the TPC figures about half of “the 47%” fell into this group.  They were excused from paying fed income taxes because their incomes were too low.

And the other half of “the 47%”?  They were people who started out owing some taxes, but got enough tax deductions or credits to reduce their bill to zero.  

What sort of credits/deductions did they receive? 

Most of the credits/deductions were associated with the tax units being: 1) working poor with children, or 2) elderly.  So let me be clear – these are folks who made more than the $8,700/$17,400 cut off, BUT received enough credits/deductions to get their final tax bill to zero after the fact.

Economystified’s take

Up to this point, I’ve mostly just rehashed the established facts.  Hopefully, you now have enough knowledge to feel comfortable thinking critically about “the 47%” story on your own.  You can stop reading now, and - if I did this right – feel like this post was worth your time.

So fair warning – from here on out is just my personal opinion on the whole thing.  Feel free to think I’m wrong!

Alright, Romney’s statement is essentially factually accurate.  47% (ok, 46.4%) of “people” (or rather, “tax units”) simply do not pay a federal income tax.  He’s got his numbers pretty much straight.

However, the normative parts of the comment – where he kinda implies those people are moochers and sloths – is quite a leap.  Especially seeing how the taxation structure that excuses these people from paying federal income taxes is something imposed on them, not something that they’ve created.

I don’t think that’s too radical an interpretation of events.  And some major Republicans seemingly would agree with me.

But here’s the thing that really bugs me: we’re starting to talk as if individuals are somehow responsible for their own tax rates.  They aren’t!! 

Congress has the power to set income tax rates, and to design the credits/deduction systems.  The president can veto measures, but the veto can be overridden by Congress.

“The 47%” aren’t all illegally hiding their incomes.  They don’t pay $0 in fed income tax because they’re stingy, or free-loaders.  They didn’t pay because they were not asked to pay!!  And that’s 100% the Congress' problem, not the individual's.

But this sword swings both ways!  Romney himself has taken flack for his 14% income tax rate.  That’s low, sure, but he didn't choose his rate.  That’s all he was required to pay!  Again, it’s Congresses call, not Romney’s.

So if your bothered by all this, make sure to aim your ire in the right direction.  Blaming individuals for not paying “enough” taxes is ridiculous, and won’t change a thing.

If you want to see someone pay more, you HAVE TO hold your leaders accountable for changing the tax infrastructure.  They’re the only ones who can change who pays what.

How many American’s end up paying federal income tax, and how much they pay, has nothing to do with the “national character,” or the values of the taxpayers.  It has everything to do with the constitution of our leaders.  So who's got the chutzpah to raise some tax rates around here?

3 comments:

  1. Both Romney and the study pointed out they meant income taxes, even though his conclusion from this is that "the government should give [services and programs] to them": so he cited the facts more or less correctly and interpreted them incorrectly.

    Separately, there are exceptions to choosing your tax rate: you can pay a higher tax rate any time by lowering what you deduct. This would be a nitpick, except that's actually what Romney did. http://bit.ly/PwuMdq

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  2. I'd like to come up with some witty scathing comment about Romney's twisting of the facts in this quote, but I can't. It's just some (/most?) politicians' modus operandi.

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  3. What Andrew is referring is a way that you can actually INCREASE your tax rate (namely not opting to take all the deductions that are available to you).

    Romney appears to have done so just that - paid an extra quarter million in taxes in 2011. The question is why? Did he overpay his taxes because his accountant goofed up? Did he just not want the hassle to file for the deduction?

    Or did he do it for a political reasons? Earlier in the campaign trail, Romney stated that he never had paid LESS THAN 13% in taxes. Some speculate he monkied his tax bills UP in 2011 to make sure he stayed below that 13% mark. (He should have been more image conscious and "chosen" the maximum 35%.)

    So ok, yeah. I said in the post “an individual can’t choose his own tax rate,” implying “can’t choose HOW LOW his tax rate is.”

    But yes, you could “chose” to make it higher. You can opt out of your deductions.

    But Romney here represents one hell of an exceptional case. I can’t imagine many people are going out of their way to raise their tax bill.

    And either way, this isn't really relevant to what I'm saying here.

    Romney’s tax bills are so low its newsworthy IN THE FIRST PLACE due to issues completely outside his control. But he seems to have figured the electorate are faulting him for it anyway. It might just be me, but someone feeling compelled to inflate a tax rate imposed on them by someone else as part of a strategy appear more electable - is really bizarre.

    Seems to imply to me that NO ONE is happy with how low some of these tax rates are! The public's ticked with the guy who isn't paying much, and the guy who isn't paying much is so ashamed of it, he's trying to fool the IRS into OVERBILLING him!!

    Tax loopholes and accounting dances (to limit your tax bill – or raise it, I guess) are legal. Yeah, they obey the letter of the law and not the spirit, but they’re legal all the same. Asking the Fed Govt to close them is the ONLY way to make sure NO ONE uses them.


    For more: http://abcnews.go.com/Politics/OTUS/romney-paid-required-raising-tax-rate-141-percent/story?id=17291504#.UGtJL66aut8

    http://www.thedailybeast.com/articles/2012/09/21/romney-cut-deductions-on-2011-taxes-to-maintain-campaign-pledge.html

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