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The Working Poor Do Pay Taxes

Do the poor pay taxes? My conservative friends rant about how 40% of the people in this country pay no taxes, but that's a bit of sloppy thinking. More precisely, around 40% pay no federal income tax. That leaves many other taxes for those we call the "working poor" to pay either directly or indirectly.

Social security taxes, now split into Social Security and Medicare, totals 15.3% of all income earned for those who make less than $106,000 in 2009. That's what a self-employed handyman or a factory worker pays. The working poor may pay only 7.65% directly because the employer pays the other half, but economists will tell you that directly-paid wages are a function of total labor cost to employers, so the other half is paid indirectly through lowered wages.

Some say Social Security isn't a tax, since it's for retirement. The truth is the money is not set aside in a retirement fund, and never has been. Benefits are paid by taxing current workers, making it essentially a welfare program. If we renamed the general income tax the "Individual Government Services Investment Fund," would you then claim you pay no taxes? And if all who ever participated in income taxes at some point in their lives were promised access to all sorts of welfare, would that promise make it something other than welfare?

All of us pay sales taxes as well, which in some areas can be as high as 10% when state and local taxes are combined. When we lived in Colorado, we paid a 6.7% (state and local) sales tax. These taxes are paid by all, but they make up a larger percentage of the income of the poor, because as much as 50% of their income may be spent on taxable items. In other words, a poor family may pay out as much as 3% of their total income in sales taxes, while a wealthy family is likely to pay 1% or less.

I need to stop right here and point out that we are at 18.3% of income for some working men and women with just these two taxes. Warren Buffet recently mentioned that he paid only 17% of his income in all federal taxes while his secretary paid 30%. If we assume he paid 1% of total income in sale's taxes (unlikely to be that high), we now arrive at an interesting truth: That some poor families who pay no federal income tax pay a higher percentage of income in taxes than Warren Buffet.

Some will quickly point out that the child credits and the Earned Income Tax Credits refund much of this. Partly this is true, and these can be seen as welfare in some cases, since for some people the "refunded" income taxes were never paid, but not all workers have children. In any case, we probably should address this as a separate and complicating issue. Many of the wealthy get welfare as well, in many forms (hundreds of billions annually according to the latest research).

Other Taxes Paid by the Working Poor

State income taxes range from nothing up to 11% in some states. Here in Colorado, for example, we have a flat tax rate of 4.63%. These taxes are paid by more of the poor than federal income taxes, because there are fewer deductions available and they they start at lower income levels.

Property taxes are paid by all the working poor as well. Even those who rent are paying the true cost of property taxes. This is clear once you understand the principle that in business all costs have to be passed on to the consumer. If taxes were doubled on property, obviously landlords would not decide to eat the loss - they would pass the cost on.

The same is true of taxes on all imported goods. Those costs are passed on in the pricing, and so are paid by all consumers. Of course, this is a larger percentage of income for those who must spend a larger percentage of their income on basic goods.

By the way, the costs of corporate income taxes are also passed on in the products and services produced. If taxes on profits were paid only as owners received those profits as income, instead of at the corporate level also, as is now done, prices would likely be lower, so we pay those taxes indirectly as consumers. That's a complicated subject to be covered at another time (yes it suggests that getting rid of corporate taxes might benefit the poor, but there are reasons why even if we taxed the owners of the corporation we need to tax the business entity as well).

Now, let me clarify this a bit more, because I am sure that some will argue that renters don't pay property taxes or the other half of that social security tax, or anything that I designate as "indirect." But imagine for a moment if businesses paid the total social security and income tax burden that employees now pay. Would we really say that employees pay no taxes? It would be technically true that no individual person paid, but of course wages would be adjusted downward to compensate for the new taxes on business. No matter how you arrange the actual payment or collection of taxes, it is only the productivity of employees that creates the income which is then taxed.

Let me simplify this further. If in our business we could hire an employee and boost our revenue by $40,000 annually, we could pay $35,000 in total employee costs (assuming we want at least $5,000 additional profit for the trouble). If we were made to pay no other costs, we could pay the whole $35,000 to the employee. But what if we had to pay $15,000 in various taxes? Then we could only offer $20,000 in wages. So who's really paying those taxes? Clearly the employee is the source of the taxes collected.

Only the efforts of real people produce the wealth that is then taken as taxes, so we have to look beyond the labels and forms to see whose efforts are really paying what. You can hide the true cost to people in the various ways you arrange things, but the working poor pay taxes directly and indirectly. Most people work most of the time, by the way. According to the U.S. Census Bureau, the percentage of Americans on welfare is about 2% (this was written in 2008, and does not include those who get food stamps).

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Working Poor