The table also shows the average, or effective, tax rate that taxpayers in each income group pay. For the entire universe of American taxpayers, the average tax rate is 11 percent of our AGI. The highest average tax rate paid by anyone earning under $100,000 is 8 percent. That shows the power of the sundry tax credits available to the "middle-class."The first two sentences are correct, if we accept the legitimacy (and practical necessity, in most cases) of using AGI as the appropriate denominator for measuring effective average tax rates, and if we focus solely on income taxes, rather than payroll taxes.
But the third sentence is unadulterated nonsense.
It is simply not true that "The highest average tax rates paid by anyone earning under $100,000 is 8 percent."
There are many, many individual taxpayers earning under $100,000 who pay more than 8% of their AGI in federal income tax. A taxpayer earning that amount who does not own a home (and therefore does not itemize) and who is unable to claim dependent children (even though he may be supporting elderly relatives and/or paying large amounts of his income in child support for children who live with a former spouse) can easily have an effective tax rate much higher than 8%.
As an illustration, lets take the case of Rose Hudson, the very first taxpayer in the VITA workbook this year, a simple scenario meant to be representative of a taxpayer who might use the services of a VITA site. She had an AGI of $31,951 and federal income tax liability of $2,946. That is an effective tax rate of 9.2%. Give her a $10,000 raise and her effective average tax rate goes to 10.6% on an income of $41,951. Give her a $20,000 raise and her effective average tax rate goes to 13% on an income of $51,951. Give her a $40,000 raise and her effective average rate goes to 16% on an income of $71,951. Give her a $60,000 raise and her effective average rate goes to 18.2% on an income of $91,951.
Warren Buffett has said that his effective average tax rate (for federal income and payroll taxes combined) is only 11% of his AGI. Rose pays that even before she hits $50,000 in income. And we have not even considered the additional 13% of her income that Rose Hudson pays in federal payroll tax on top of her federal income tax (using standard CBO incidence methodology.) If we include payroll tax, Rose's effective federal tax rate (payroll and income rates combined) exceeds Warren Buffett's rate even before she hits $20,000 in income.
And of course, we have not considered the myriad of other taxes that low and moderate income Americans disproportionately pay--either directly or indirectly (embedded in other taxes), including federal and state excise taxes on gasoline, airline tickets, alcohol, and tobacco; general sales taxes; state and local income taxes; and property taxes (borne partially by renters in the form of rents that are higher than they otherwise would be.)
But returning to the federal income taxes that were the subject of the article that spurred this post, many low and moderate income taxpayers with incomes well below $100,000 pay more than 8% of their income in taxes.
Even if we give our workbook example of Rose Hudson a couple of elderly relatives as dependents, her tax rate will be higher than 8% as soon as her income gets close to $40,000. It is complete nonsense, therefore, to say that "The highest average tax rates paid by anyone earning under $100,000 is 8 percent."
There is an enormous amount of variability in effective average tax rates among taxpayers earning under $100,000. Some taxpayers have extremely negative average effective income tax rates (around -40% for the lowest income working taxpayers, if they have a few "qualifying children" in their home), while others with incomes under $100,000 pay effective average federal income tax rates of close to 20% (even if they are the ones actually supporting those "qualifying children.") Taxpayers in the latter group are understandably aggrieved when they read inaccurate statements that nobody in their income group pays more than 8% of their income in taxes.
The original statement would be true if reworded more carefully--to refer to any "aggregated income group category" rather than to "anyone".
There is a huge amount of unacknowledged horizontal inequity hidden within group averages.