Who Pays Taxes?

Taxes for the Common Good

In the United States, we are not just a collection of individuals—we are a society. Our lives, our families, our businesses and our communities depend on a broad structure that supports and allows us to function. Businesses provide jobs, and employers and employees working together generate wealth. At the same time, businesses need functioning schools, health care, research capacities and transportation and communication systems to prosper and support their customer base.

These basic services and structures cannot be provided by individuals, no matter how wealthy. The government needs to have consistent and adequate sources of revenue to be able to provide these services. As a country, we need to get our financial house in order so that we can begin again to invest in those things that support “the common good.”

While our current tax system is modestly progressive, it does not produce adequate revenues to meet our shared needs as a nation. Many individuals and corporations who could afford to contribute pay nothing. As new challenges loom on the horizon, it is critical that everyone who can fully contributes to the common good. Everyone benefits when the problem we face—from poverty to climate change—are addressed. Ideally, everyone pays according to their means to support these solutions.

Extreme wealth and extreme poverty hobble our ability to build economic and social structures that work for all. In the last decade, the wealth of the richest one percent in our nation nearly tripled. At the same time, poverty among children has deepened. The United Nations Children's Fund now ranks the U.S. as having the second highest rate of child poverty among developed nations in the world—outdone only by Romania. The U.S. now has the largest income gap in the world, which the CIA considers a mark of instability in its assessments of other nations.

Does Everyone Pay?

On average, people in the United States do pay taxes roughly according to their means when federal, state, and local taxes are counted. Yet news stories routinely state that close to 50 percent of all U.S. households didn't pay any federal income taxes in 2009. Is this true?

Yes, and it's not particularly surprising. Federal income taxes are modestly progressive and got more so during the recession when most workers received the “making work pay” tax credit. But even in “normal” times, about 40 percent of households do not owe federal income tax.

Of that number, more than half have incomes less than $20,000. Another 22 percent rely on Social Security income, which is not taxable for an individual making less than $25,000 a year ($32,000 for a couple). About 17 percent are low-income working families with children who qualify for tax credits that reduce their federal tax bill.

Some very rich people also don't pay any federal income tax. About 7,000 millionaires pay nothing, and some of the country's largest corporations pay no taxes or even receive tax refunds.

Whether rich or poor, most people pay state sales tax, Social Security tax, and state income taxes—all of which are less progressive than the federal income tax. This means, as the Center on Budget and Policy Priorities points out, that dishwashers pay a larger share of income in payroll taxes than neurosurgeons. The end result is that, with the exception of a few thousand millionaires, nearly all households pay taxes in rough proportion to their income levels.