The math on Romney's tax claim doesn't tell whole story
The claim that nearly half of Americans pay no income taxes is based on a 2011 finding from the Tax Policy Center.
WASHINGTON — Mitt Romney's controversial claim that 47 percent of Americans "pay no income tax" and are "dependent upon government" put his presidential campaign on the defensive Tuesday as it scrambled to explain what he meant.
His comments came to light this week in a secretly recorded video of the Republican nominee speaking at a fundraiser in May. The claim that nearly half of Americans pay no income taxes is based on a 2011 finding from the Tax Policy Center, a joint tax-research arm of the centrist Urban Institute and center-left Brookings Institution. The center reported in 2011 that 53.6 percent of an estimated 164 million U.S. households paid some federal income taxes, while the rest — actually 46.4 percent — paid none.
More than 76 million households paid no income taxes last year, according to the Tax Policy Center. But about 60 percent still paid federal payroll taxes that support Medicare and Social Security, said Roberton Williams, a senior fellow at the tax center. Many also paid federal excise taxes, along with state and local sales, property and income taxes.
"So it's not that they're not paying any taxes," Williams said. "It's just that they're not paying federal income taxes."
The reason, he said, is that more than 38 million, or roughly half of the 76 million households that paid no income taxes last year, simply didn't earn enough to have a tax liability under the current tax code.
In a July 2011 blog post, Williams cited as an example a married couple with two children who earn less than $26,400.
"Their $11,600 standard deduction and four exemptions of $3,700 each reduce their taxable income to zero," he wrote.
But it isn't just low-income households that pay no federal income taxes, Williams said. He estimated that 1,400 millionaires didn't pay federal income taxes in 2009, with many likely taking advantage of foreign tax credits or charitable donations to lower their tax liability.
"These are things that people do to lower their tax rates," he said.
Apart from the more than 38 million households that paid no income taxes because they didn't earn enough, the other half of the 76 million without federal tax liabilities are mostly low- to moderate-income families that benefited from special tax deductions targeting specific populations.
Nearly two-thirds of these households — 28.3 million — are made up of seniors and low-income families with children.
In fact, nearly 17 million elderly households paid no federal taxes last year because tax laws allow them to exclude municipal bond interest and some Social Security benefits from their taxable income, Williams said.
Another 11.6 million low-income families with children paid no income taxes because they benefited from the child earned income and child-care tax credits, which erased their tax liability. The Earned Income Tax Credit (EITC) is the nation's largest anti-poverty program and helps pull the incomes of more than 5 million families over the federal poverty line each year.
"It's a subsidy for people who work," Williams explained of the tax credit, which has long enjoyed bipartisan support. "You don't get the EITC if you're not working. So (recipients are) not leeches. They're not just sitting around waiting for the government to give them something."
The tax credit is just one example of Congress using the tax code to provide financial support for families. The tax cuts enacted under former President George W. Bush, which targeted billions in tax relief for wealthy Americans, also canceled out the tax liability for 7.8 million low- and moderate-income families as well, according to a 2004 study by The Tax Foundation, a nonpartisan tax-research group.
In 2010, Romney himself saved $2 million in income taxes because his capital-gains income was taxed at a lower rate, Williams said.
"He pays a 15 percent tax rate on his capital-gains income as compared to the 35 percent rate that somebody getting the same dollars of income from a job would pay, so he's benefiting to the tune of 20 percent" in tax savings, Williams said.
Williams said the remaining 10 million households that pay no federal income taxes take advantage of a variety of tax breaks on public assistance.
These include above-the-line deductions taken before you calculate your adjusted gross income; itemized deductions like mortgage interest payments and charitable contributions; education credits; and capital gains and qualified dividend tax rates, which benefit mainly the wealthy.
Non-payers aren't the same people each year, Williams said. Households that don't pay income taxes one year because of job loss, for example, may pay again when they find work. People come onto the tax rolls as they leave school, pay more as they earn more, pay less as they have children and move off the tax rolls as they age and stop working.
Romney described non-payers as being dependent on government and feeling entitled to government-provided health care, housing and food assistance.
A total of 49 percent of Americans live in a household where someone receives at least one type of government benefit, the U.S. Census Bureau reported last year.
The federal government provides food stamps to 46.7 million people, or about 15 percent of the population. As of last year, 48.8 million people were enrolled in Medicare, the health program for the elderly.
The increases in the percentage of people not paying income taxes and receiving benefits have bipartisan roots. Republicans long supported the earned-income tax credit and the child tax credit. Democratic presidents created the largest entitlement programs — Social Security, Medicare and Medicaid.
Republicans lost control of Congress in 2006 and the White House in 2008, and the party reacted by becoming more skeptical of government action and entitlement programs. By the time Republicans regained the House in 2010, they were focusing more on the issue of people who don't pay income tax and proposing to curb spending on Medicare and Medicaid.
Romney's comments echoed statements by other Republicans, including Sen. Orrin Hatch of Utah, about the increase in the number of people who don't pay income taxes. Hatch has maintained since last year that it would be easier to restrain federal spending if everyone paid at least some income taxes and had more of a stake in the tax system.
The percentage of households that don't pay income taxes remained at about 20 percent during the 1970s and 1980s before increasing in the 1990s, according to a report by the Tax Foundation, which favors a simpler, flatter tax system.
The report cites policies that were favored by lawmakers in both parties. The child tax credit of $500 per person, for example, was created in 1997 under a Republican Congress and during the administration of Democratic President Clinton.
According to the Tax Foundation, states with the highest concentrations of non-payers are Mississippi, Georgia, and Arkansas. The lowest concentrations are in Alaska, Massachusetts and Connecticut.