Lowest Income Earners Always Get Screwed the Most

But the Republicans always give the poorest Americans all the blame.

The total U.S. population is 313.4 million and the labor force* (people willing and able to work) is 154.7 million (about half the population).

* The total labor force excludes persons under 16 years of age, all persons confined to institutions such as nursing homes and prisons, and persons on active duty in the Armed Forces. The labor force is made up of the employed and a portion of the unemployed. After one year the unemployed are not counted in the labor force (about 8 million). Many who are also not in the labor force are going to school, retired, or disabled.

Last year 50% of all U.S. workers in the labor force (77.3 million) earned less than $26,364 a year and were being paid in regular hourly wages. They only saved $445 with the Bush tax cuts, while also paying Social Security taxes on 100% of their income (They all fall into the bottom quintilla of the federal income tax brackets.)

Further below I explain why half of all Americans pay no federal income taxes. (Not half of all "working" Americans, half of all Americans.)

Someone earning $21 million a year with capital gains (like Mitt Romney in 2010) saved $1 million a year with the Bush tax cuts, while paying NO Social Security taxes at all on their income (There are also millionaires who paid no federal income taxes either.)

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Tax brackets and tax rates under Bill Clinton & George W. Bush, and who benefited the most

Under Bill Clinton the capital gains tax rate fell from 33% to 28%, then later to 20%. Clinton said in an interview on Meet the Press earlier this year that afterward he regretted lowering the capital gains tax rate.

Tax brackets under Clinton

Under George W. Bush the capital gains tax rate fell from 20% to 15%. Also the 15% marginal tax bracket's lower threshold was indexed to the new 10% bracket. Bush also made sweeping changes to the estate tax, gift tax, and generation-skipping transfer tax.

Last year 50% of all U.S. workers in the labor force (earned less than $26,364 a year, and only saw a 5% tax savings on the first $8,700 they earned with the Bush tax cuts.

By contrast, someone like Mitt Romney, who reported an income of $21.6 million in 2010, only paid a tax rate of 13.9% on capital gains.

The Republicans are fond of saving that "everybody" received a tax break under Bush, but neglects to tell us who got the biggest cut.

Someone earning $26,364 a year with regular wages only saved $445 in tax liability with the Bush tax cuts.
Someone earning $21.6 million a year with capital gains saved $1.08 million in tax liability with the Bush tax cuts.

Tax brackets under Bush

The Revenue Act of 1921 (near the end of the Gilded Age) was passed in Congress for the new Republican Secretary of the Treasury and banker Andrew Mellon, who had argued that "significant tax reduction was necessary in order to spur economic expansion and restore prosperity" - - just like the Republicans have been saying since George W. Bush.

Andrew Mellon obtained repeal of the wartime excess profits tax, and the top marginal income tax rate on individuals fell from 73% to 58%, but he preferential treatment for capital gains was also first introduced at a tax rate of 12.5%, effectively lowering the top marginal rate from 73% to12.5% for the wealthiest individuals.

The statutory capital gains tax rate was almost 40% in 1976, but even back then the average "effective" rate paid was only a mere 18%.

The same goes for corporate taxes, whose CEOs earn far more with stock options than with regular wages for capital gains. The statutory rate for corporate taxes is 35%, but the average "effective" tax rate paid was only about 18.5%, and 30 profitable corporations paid no taxes at all over the last three-year period --- and many actually received a refund!

Congress has been fully aware of this disproportionate tax break for the rich for the past 90 years.

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The "Throw the Dog a Bone" Strategy: 1) Give someone a meaningless small reward or a frivolous compliment at little cost to you. 2) Tax the very poor a little less and tax the very rich much less.

The Tale of Two Incomes

Someone earning $26,364 a year with regular wages only saved $445 a year with the Bush tax cuts

• Under Bush: 10% of the first $8,700 earned = $870 tax liability ($26,364 - $8,700 = $17,664 difference) (15% of $17,664 = $2,640 tax liability) $2,640 + $870 = $3,510 (total tax liability before personal exemption, deductions, child credits, etc)
• Under Clinton: 15% of $26,364 = $3,955 (total tax liability before personal exemption, deductions, child credits, etc)
• A difference of $3,955 under Clinton MINUS THE DIFFERENCE OF $3,510 under Bush = $445 savings with the Bush tax cuts (or $8.55 a week)
• Social Security taxes were deducted from 100% of their annual income.

Someone earning $21.6 million a year (like Mitt Romney and the top 1%) with capital gains saved $1.08 million a year with the Bush tax cuts.

• 20% capital gains tax on $21.6 million = $4,320,000 (tax liability under Clinton before personal exemptions, deductions, child credits, etc) MINUS THE DIFFERENCE OF $3,240,000 (15% capital gains tax on $21.6 million under Bush) = $1.08 million savings with the Bush tax cuts (or $20,769 a week).
• Social Security taxes were capped on their first $110,000 of any "regular" wages and salaries, effectively taxing them only 0.05% of their total income for Social Security.
• They do not pay the higher marginal tax rate because their income was mostly earned with capital gains, not with regular wages like those earning $26,364 a year do.

Again, congress has been fully aware of this disproportionate tax break for the rich for the past 90 years, but they refuse to change the tax code because they also benefit --- half in Congress are millionaires themselves and actually had to pass a Stock Act to prohibit them from illegal insider trading! Read: Why Congress Refuses to Tax the Rich

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Why half of all Americans pay no federal income taxes

77.3 million earn less than $26,364 a year. 55.8 million receive some form of Social Security benefits (retirement or disability). 12.7 million are unemployed (Of those, 6.7 million currently receive unemployment benefits). 7.7 million were only working part time (8 million long-term unemployed are no longer counted.) TOTAL = 153.5 million

The Republicans, based on a study that the conservative advocacy group the Heritage Foundation likes to flaunt, report that half of all Americans don't pay any federal income taxes.

From their website: "The percentage of Americans who don’t pay income taxes now accounts for nearly half of the U.S. population. Meanwhile, most of that population receives generous federal benefits. The percentage of people who do not pay federal income taxes, and who are not claimed as dependents by someone who does pay them, jumped from 14.8 percent in 1984 to 49.5 percent in 2009. That means 151.7 million Americans paid nothing in 2009. By comparison, 34.8 million tax filers paid no taxes in 1984."

(Note: There are 154.7 million Americans in the entire labor force.)

Politicfact backs up the claim: "Of the 46.4% not paying income taxes for 2011, about half was due to the fact that those household had no taxable income after subtracting the standard deduction and personal exemptions. The other half qualified for various exclusions, itemized deductions, special exemptions, preferential tax rates, and tax credits that wiped out any tax liability. About 22% would have a zero income tax liability and about 30% would actually get money back from the government."

But they don't tell you the whole story. Yes, the Tax Policy Center (TPC) estimates that 46% of all households (not all Americans who are working) will either pay no federal income tax in 2011 or will receive more from the IRS than they pay in.

TPC released a study that examines why these people end up paying no federal income tax. "The number one reason should come as no surprise. It’s because they have very low incomes." (They're poor!)

What the majority of Americans have for an income

A couple with two children earning less than $26,400 will pay no federal income tax because their $11,600 standard deduction and four exemptions of $3,700 each reduce their taxable income to zero. 77.3 million earn less than $26,364 a year, but everybody gets these exemption and deductions, even billionaires.

The second reason is that for many senior citizens, Social Security benefits are exempt from federal income taxes. That accounts for about 22% of the people who pay no federal income tax. For retired workers, their average monthly Social Security benefit was only about $1,230 a month at the beginning of 2012 (or $14,760 a year).

Disabled workers on Social Security disability averaged $1,111 a month (or $13,332 a year). The SSA reports a total of 55.8 million receive some form of Social Security benefits, and unless they earned another income, aren't required to pay federal income taxes on their very low incomes.

And then there are millions of people still out of work. The Labor Department reports 12.7 million unemployed. Of those, 6.7 million currently receive unemployment benefits. The average unemployed American collected only $295 in weekly unemployment benefits (or $15,340 a year) which only replaced about a third of the average worker's previous salary. But they still have to file a tax return.

The Labor Department also reports that 7.7 million were working part time because their hours had been cut back or because they were unable to find a full-time job.

If one were working a full-time 40-hour per week job (providing they could find one) and earned the federal minimum wage of $7.25 an hour, they would only be earning $290 a week, or $1,257 a month, or $15,080 a year. Try living on that!

At least 8 million unemployment Americas exhausted all their unemployed benefits without ever finding work again. (The Labor Department only reports 5.2. million are "long-term unemployed"). Some retired early, some became disabled (but many were also denied SSD benefits), and others moved in with family or friends. Millions now earn $0 and hour, or $0 a week, or $0 a year --- and now just subsist on food stamps --- so therefore, would owe no federal income tax. Ask the Republicans, "How much skin should they put in the game?"

These are the people that the Republicans complain about for not paying any "federal incomes taxes".

But it's decidedly untrue to claim that half of Americans pay no taxes. That simply isn’t so. Everybody does. There are many other taxes they pay, including payroll taxes, excise taxes, sales taxes, state income taxes, and property taxes. (Source)

And another thing the Republicans don't tell you: the Zero Tax Club also includes some very high-income households, although it is made up disproportionately of very low income households, there's also millionaires who pay no federal income tax either. Any many millionaires deliberately evade paying income taxes, but of course, they always blame the poor for a lack of tax revenues. "We don't have a revenue problem, we have a spending problem."

Yeah, right.