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It’s that time of year when we all get to hear about how those poor, beleaguered rich people pay so much more federal income tax than the rest of us. There are two important facts missing from this annual gripe. One: Those in the top 10 percent pay the most income tax because they have most of the income. Two: When looking at who pays the most in other taxes, it’s actually the people with the lowest incomes who pay the highest percent.
Income taxes make up only a portion of the taxes each of us pays every day. We also pay sales, excise and property taxes. If we work, payroll taxes are deducted from our wages. Since we don’t pay these taxes once a year in one lump sum, we don’t think about them the same way we think about income taxes. But they impact many of us much more than income taxes do.
The lower your income, the more these taxes impact your bottom line. Let’s say you earn just $16,000 a year. In 2009 you paid almost 11 percent of your income in state and local taxes in New Mexico. At this level, you don’t even earn enough to pay state or federal income taxes. In fact, you qualify for a refundable earned income tax credit. Even so, more than 10 percent of every penny you earn goes to pay taxes. At your income level, that $1,600 is a lot of money. It can mean the difference between putting food on the table every night and going hungry. No one could possibly say you’re getting a free ride. But, because you don’t pay income taxes, that’s exactly what people are saying about you.
Now let’s say your uptown uncle earned more than $365,000 that same year. He probably sent the IRS a check for the income taxes he owed. If he complained to you about it, you could have told him that he paid just over 5 percent of his income that year in state and local taxes. So, even though he earned 22 times more money than you, the percentage he paid in these everyday taxes was half of what you paid.
Here’s why you pay double the tax rate as your uncle: When you earn just $16,000 a year, you have to spend every penny of your take-home pay on day-to-day necessities. Every time you buy diapers for the baby, pay the utility bills and rent, and fill up the gas tank, you’re paying taxes. You don’t earn enough money to set any aside in a tax-deferred retirement account. Your uncle, on the other hand, can clothe the family, put a roof over their heads, and gas up the Cadillac and still have money to spare for that retirement account. Despite the vast difference in your income levels, you both pay the same tax rates on the things you purchase. The tax rate your uncle pays on gasoline for his Caddy is the same rate you pay on gas for your old Nova. But it eats up a bigger portion of your income.
What’s more, every penny you earn is subject to payroll taxes. Your uncle, however, pays those taxes on less than a third of his income. The rest – about $250,000 a year, in your uncle’s case – is payroll tax free.
Your uncle still doesn’t see this as being unfair to you because he’s quite certain that you benefit much more from government spending than he does. In fact, he likes to say that he’s always “paid his own way” when it comes to building his company. What he doesn’t realize is that his online company is possible only because of the government’s investment in Internet technology. He and his company also benefit from government investment in satellite technology, air traffic controllers, patent and copyright protections, the court system, international trade agreements, insurance on his bank accounts, and more. He even relies on the National Weather Service to determine the best times to truck his products over the government-created-and-maintained interstate highway system. You know – the highway system you also pay for every time you gas up the old Nova.
New Mexico Voices for Children is a nonpartisan nonprofit advocating for public policies that help eliminate child poverty and improve the health and well-being of New Mexico’s children, families, and communities.
