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There Are a Lot of Tall Tales Told About Taxes

Mark Trahant
4/18/11

Tall tales are fun. Most of us love the story about the day we scored perfect on a test, caught the biggest fish or won a bunch of cash at the casino.

The best tall tales start off with what happened and then grow with each telling of the story. The test day becomes a full course. The biggest fish gains pounds and ferocity. And the money? Well the total amount might stay the same ... but we forget to say how much we carried into the casino or how much we later gave back.

This is the power of stories. They are fun to tell and to hear. The best stories stay with us for years and years, growing in scale over time.

It’s the same in public policy. Tall tales have been told about taxes over and over that sound really good to us, the listener. We hear and believe that we are the most taxed, overburdened people in the world and that our wealthiest citizens have lost their zeal to invest because government has ripped away all incentives to succeed.

David Cay Johnston, who won the Pulitzer Prize for his financial reporting while at The New York Times, once again took the time to break down the numbers. His latest work was published in dozens of newspapers last week, an important policy primer: “9 Things The Rich Don’t Want You To Know About Taxes.”

One myth he explodes: The poor don’t pay taxes. Instead of relying on telling a tall tale, Johnston looks at the data and “the poor bear a heavier burden than the rich in every state except Vermont.” Or the flip side of that idea is that the rich pay a disproportionate share of taxes. “It’s true that the top 1 percent of wage earners paid 38 percent of the federal income taxes in 2008 (the most recent year for which data is available). But people forget that the income tax is less than half of federal taxes and only one-fifth of taxes at all levels of government,” Johnston writes. “Social Security, Medicare and unemployment insurance taxes (known as payroll taxes) are paid mostly by the bottom 90 percent of wage earners. That’s because, once you reach $106,800 of income, you pay no more for Social Security, though the much smaller Medicare tax applies to all wages. Warren Buffett pays the exact same amount of Social Security taxes as someone who earns $106,800.”

Indeed the payroll tax, for most of us, has become the government’s primary tax vehicle. As the Tax Policy Foundation puts it: “For households in the bottom 20 percent of the income scale, the average payroll tax burden per household for tax year 2004 was $917, while the average federal income tax burden per household (excluding refundable portion of EITC) was $171.”

Yet the narrative, the story, is only about the income tax. There is an outright dismissal of those whose burden is the payroll tax. It’s almost as if that is not real money, not a real contribution. But the payroll tax is regressive -- and say a young single woman on a Indian reservation in Montana pays a higher percentage of her income in taxes than, say, Donald Trump. “I have Donald Trump’s tax records for four years early in his career,” Johnson writes. “He paid no taxes for two of those years. Big real-estate investors enjoy tax-free living under a 1993 law President Clinton signed. It lets “professional” real-estate investors use paper losses like depreciation on their buildings against any cash income, even if they end up with negative incomes like Trump.”

I have been concerned with the burden of the payroll tax for many years. Many folks remember my question to President George W. Bush about tribal sovereignty. But I also asked him about why when he talked about tax cuts, he only meant income taxes. “Well, obviously,” the president said. “I chose to provide tax relief by income tax cuts, not by payroll taxes, and the reason why is payroll taxes relief will affect the solvency of Social Security. So I chose not to deal with the payroll tax.”

So we who don’t make a bundle are taxed more because that money is set aside for Social Security (and Medicare). Ha! Now that’s a tall tale that no one believes.

Mark Trahant is a writer, speaker and Twitter poet. He is a member of the Shoshone-Bannock Tribes and lives in Fort Hall, Idaho. Trahant’s recent book, The Last Great Battle of the Indian Wars, is the story of Sen. Henry Jackson and Forrest Gerard.

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