Sunday, April 11, 2010

Are Americans Stupid, Brainwashed or Just Ignorant of Facts Regarding Federal Taxes?

Rasmussen has released a poll which suggests that Americans are either stupid, brainwashed or ignorant of facts regarding federal taxes. Here are some highlights from the poll, accompanied by a brief description of reality. 

* The poll finds that 2/3 of respondents believe that Americans are overtaxed.
According to the most recent data, however, 47% of American households will pay no federal income taxes. This figure does not include Social Security and other payroll taxes, but when these numbers are included, the data still show that roughly 50% of American households pay roughly just 13% of their income in taxes (which includes corporate taxes, federal income taxes, and payroll taxes for Social Security and Medicare).

* 55% believe that on average, Americans pay 30% of their income in taxes.
The latest data from the nonpartisan Tax Policy Center paints a completely different picture The vast majority of Americans do not pay anything close to 30% of their income in taxes. The actual projected mean for 2010 is 18.9% -- or 11% lower than the amount imagined by the poll's respondents. The effective federal income tax rate (which includes corporate taxes, federal income taxes, and payroll taxes for Social Security and Medicare) only reaches a mean of 30% or over for the taxpayers among the top percentile of the highest 4% of income earners.  The vast majority of Americans pay a lot less in taxes, and a large chunk of low income earners experience a net profit from the government -- because their credits and deductions exceed what they pay in taxes.

* Only 8% of Americans believe that Obama will cut taxes.
Obama has already cut taxes for most Americans! In fact, nearly half of the stimulus package was devoted to tax cuts.

* 43% of respondents believe that the average American should pay about 10% of their income in taxes in exchange for the services provided by the government.
The median effective tax rate for 2010 is 13.1% -- only slightly above the ideal share desired by the poll's respondents. Furthermore, many individuals actually have a net inflow of money from the federal government (see above).  The mean rate is 18.9, but this number is weighted higher than 10% not because of the tax load carried by "average" Americans, but because the mean liability among the top 2/5 of taxpayers is much higher than the rates for most people.

* Only 35% of the poll's respondents believe that most federal spending is on defense, Social Security and Medicare.
For fiscal year 2009, 53% of the federal budget went to defense spending (including Veteran's Affairs), Social Security and Medicare.

* 65% believe that the "middle class" pay a higher percentage of their income in taxes than the wealthy.
In reality, the numbers are very different. The mean tax liability for the middle quintile of taxpayers is 14.3%. For the next two quintiles, the figure jumps to 18.3% and 23.3%, respectively.

22 comments:

John said...

Nobody cares that Obama gave them an extra dollar a week in "tax cuts". They do care that a paycheck doesn't go much these days, the government doesn't know how to spend our money, and it still wants more.

Darren Lenard Hutchinson said...

Some of us, however, care about THE TRUTH. Carry on....

John said...

If the truth to you means an extra dollar a week is a "tax cut" then I salute you, oh truthy one.

Darren Lenard Hutchinson said...

John: Because you refuse to relinquish your false perception of federal taxation, you instead deal with distraction. The fact that you believe calling someone "truthy" is an insult is quite telling. Carry on....

John said...

Apparently to you, "just 13%" isn't enough in taxes, but the rest of us disagree. You brought up that Obama "cut taxes" so I don't know what you're crying about.

Josh Dowlut said...

Those earning an average of $345 million in 2007 (the 400 richest Americans), paid about 16.5 percent in federal income taxes: http://www.quickanded.com/2010/02/effective-tax-rates-of-the-richest-400-americans.html

This is primarily due to the fact that capital gains taxes (especially longterm) are much lower than income taxes (especially top marginal rates) and capital gains make up the majority of rich people's income.

It also looks like the poll results overlook state and local which as of 5 years ago looked to average about an additional 10%: http://money.cnn.com/pf/features/lists/taxesbystate2005/index.html

As for Obama complainers, on the tax front it's mostly anticipation/speculation (unless you're a smoker), but there is merit.

1. Health insurance mandates through the IRS coming in 4 years, conceding the debatable enforcement of them.
2. Cap and trade, if it passes due to the high price elasticity of demand for energy, nearly 100% of the cost will be passed onto consumers.
3. The inflation tax of debt monetized deficit spending, even zero inflation is a government tax if natural market forces would have created negative inflation (deflation). This last one is likely to have the biggest impact and is also the most misunderstood by the average American.

Darren Lenard Hutchinson said...

John: The respondents said that 10 was enough, but they thought they paid 30! That shows a disconnect, no matter how you slice and dice it.

Also, small or large, a tax cut is a tax cut. I "brought up" Obama's tax cuts, because the poll did -- and because respondents were simply wrong on the issue.

Finally ignorance seems like a safe space for you. Enjoy!

Josh: I agree that local taxes add to tax liability, but the poll only references the federal government. I do not think this is an accident. Rasmussen may take scientific polls but it has an agenda. The outcome of this poll was easy to project. Correcting the public's misperception is another issue altogether.

Most people already have insurance, so I really do not think the healthcare mandate fuels the misunderstanding around Obama and taxes.

Also, the Bush administration's monetary policy sent oil prices skyrocketing. So, again, energy costs are not something that sets Obama apart from anyone else.

I am not sure if your last category has the "biggest impact." But I accept it as a problem.

None of this explains public ignorance over income taxes -- which existed long before Obama came along. Your analysis is more nuanced than that of the average person (compare your response with "John's").

Josh Dowlut said...

For a good debunker on the mainstream econ academia belief that deflation is the devil and must be prevented at all costs read The Relationship Between Wage Rates and Unemployment written in 1933 by Emmett Welch. He looked at the relation between price and wage levels over the course of 30+ years. He found that while they move in unison (thus the mainstream argument that deflation leads to falling wages) prices were far more volatile than wages. During periods of inflation prices would out run wages to the point of no longer being affordable or sustainable. Falling prices or deflation was the correction that restored balance and affordability. During the first 4 years of the Great Depression, wages fell, but prices fell further so that the average worker when adjusting for the new lower price level actually got a significant raise. This is a powerful observation because almost all policy pertaining to banks and real estate has the goal of maintaining positive inflation.

Bush monetary policy was proactively reckless. Obama monetary policy is reactionary to reckless fiscal policy.

Hippi Chicki Niki said...

Interesting how instead of comprehending and conceding the point that many people don't really understand or believe the facts regarding federal taxes, some of the comments argue with the facts. This just illustrates the point.

And I love the subjects you teach. I'm a Psych (undergrad) and Law (grad) nerd that loves the area of Social Psych that deals with prejudices, stereotypes and discrimination. I'm also quite fond of Con Law. So the subjects you teach are right up my alley.

I think the last year has revealed that many Americans have a very distorted view of the Constitution, taxation and the way the 3 branches of government function. Sadly our education system has failed many Americans. The result of this is that many Americans are easily misled by people that misrepresent, distort and omit facts.

I think the best answer to the initial question is that many of us are ignorant of facts regarding more that just federal taxes and that some of those that are ignorant of facts are being purposely misled by people who profit from furthering those misconceptions. There are quite a few television personalities and politicians that further those misconceptions because they believe those misconceptions to be in their interests. Unfortunately many people do not see the value in researching and fact-checking for themselves.

This study and several others show the stark differences between reality and the beliefs people hold. And, human nature being what it is, people do not readily accept evidence that contradicts their beliefs. Admitting to ourselves that we have believed something that is really wrong often means accepting that we have been duped, misled, gullible or "stupid." Humans have a hard time admitting these things about ourselves. We go to great lengths to uphold our beliefs in our own intelligence and other good qualities. Check out the concept of cognitive dissonance. That is why people will argue with facts and refuse to believe what plainly contradicts their beliefs.

It's just humans being human and. sadly, facts are not likely to change us from following human nature.

Darren Lenard Hutchinson said...

Josh: I will check out the source you provided. Thanks so much (for adding to my summer reading list).

Darren Lenard Hutchinson said...

Niki: Thanks for the post. There are a number of legal scholars who explore the relationship between law and psychology. I think it is an important connection. Also, all I could think of was "cognitive dissonance" as I wrote this article.....and responded to John.

Hippi Chicki Niki said...

I love FactCheck.org and Media Matters too. They are some of the best sources for wading your way through spin. I also like one other site that you don't have on your list called govtrack.us. They provide completely objective information on how politicians vote and what bills they introduce.

I found the addition of townhall.com both humorous and enlightening. It's nice to see that you investigate sources that don't have the same point of view that you do. I like that.

Mel said...

Ouch.

I assure you that I am not stupid, brainwashed, or ignorant.

I know how much tax I pay out of my income (about 30%) and I make less than $40,000 a year.

I am very much aware of where my tax money goes. And it is precisely because most of it goes to "defense" that I object to it.

If the study only includes "corporate taxes, federal income taxes, and payroll taxes for Social Security and Medicare" then doesn't it exclude:

state taxes
city taxes
property taxes
sales taxes
luxury taxes
tolls
filing fees
permit fees
...

I'm sure I could think of more, but I've got to get back to work.

Just because some truly despicable people rail against taxes on the basis of a supposed mass of "undesirables" taking their money, that doesn't mean that everyone who has a problem with taxes is ignorant.

I gladly pay for anti-poverty programs. I do not gladly pay for bombs and prisons.

pete-who said...

I just filed my federal and state income tax returns. My income is average for the U.S., and my effective federal rate was indeed well below 30%. Adding state, property, and sales taxes still doesn't get me very close to 30%.

But adding payroll taxes (SS, Medicare, Medicaid) and government mandates (unemployment insurance) pushes me over 30%. I seem to recall progressives complaining loudly about the regressive nature of these taxes. If you're going to include them in the regressive-progressive tax debate, it seems only fair to include them in this debate as well.

Darren Lenard Hutchinson said...

Mel -- you missed one important fact: the poll (and my essay) discussed FEDERAL taxes. yes - people are taxed locally, but they seem to blame all of their taxation on the federal government -- which is stupid, ignorant or a product of brainwashing.

Niki: Reading sources that go against my views gives me something to argue!

Pete: I did include payroll taxes -- but apparently you skipped that part. Still, that brings the average for most taxpayers to 13 percent. The ONLY time I did not consider payroll taxes was with the 47 percent figure. Everything else does.

Also, the fact that most people do not pay 30 percent does change the fact that some people actually do -- another point that my analysis recognizes. Typically, people in that category are higher income earners, as the essay plainly discusses. Based on the limited information you have provided, you tax situation seems atypical (as is mine).

Lance said...

Darren,

From the article: "However, the latest Rasmussen Reports national telephone survey finds that most voters (55%) believe the average American actually pays 30% or more of their income in taxes."

No mention of federal or otherwise.

Also, payroll taxes by themselves are 12.5%. Even if you're one of those paying zero federal income tax, you're effective tax rate is still going to be greater than 12.5% due to sales and (possibly) state and property taxes. The only way to pay less than 12.5% is to be unemployed or have the payroll taxes somehow waived.

And I guess I wasn't clear: I was responding to your comment about the 47 percent figure. I don't have the numbers in front of me, but including payroll taxes brings a lot of people close to the 30% effective rate. I myself make slightly less than the national average, and as I said my total effective tax rate is just above 30%.

I also found an interesting paper from a couple years ago that suggests the average U.S. effective *marginal* tax rate is 40%.

http://people.bu.edu/kotlikoff/Does%20It%20Pay%20to%20Work%20and%20Save,%20December%209,2006.pdf

Josh Dowlut said...

NYT article throws a flag at the 47% free rider figure:

http://www.nytimes.com/2010/04/14/business/economy/14leonhardt.html?src=busln

Essentially pointing out the payroll tax+state and local tax (same basic argument I made). The 9.5% payroll tax they cite is actually twice that when you include the employer contributed side which most economist agree is paid for by employees through lower wages.

Paul Krugman really hit it on the head when a few days ago he said conservatives will eat this figure up while ignoring the fact that outside of the progressive federal income tax, just about everything else is somewhere between highly regressive and flat.

Back to the original headline question you posed, I think it's more a case of most Americans not zeroing in on the semantics of the question (keying on the "federal income tax" qualifier) and responding to what they feel and see the overall total impact of our tax code to be.

Mel said...

Darren, I just looked at the poll and they asked:
____

1* As a nation, is America overtaxed?

66% Yes
25% No
9% Not sure

2* When thinking about all federal, state and local taxes, what does the average American pay in taxes as a percentage of their income…..10%, 20%, 30%, 40%, 50% or more than 50%?
___

Clearly, they were not just asking about federal payroll taxes.

The more important point is that people don't seem to be capable of having conversations about taxes without calling each other names. It's totally unhelpful.

Darren Lenard Hutchinson said...

Josh: I saw that article this morning, and enjoyed reading it. It does not disturb what I have argued, because my argument only refers to the 47% figure ONCE -- and points out its weakness and then moves on to other stats.

Mel: I did not call anyone a name.

Lance and Mel: I strongly believe (but can't prove) that Rasmussen edited the article. Nonetheless, if you look at the questions, it is clear that they have jumbled the reporting on this issue at least once.

As you point out and which I gracefully concede, the question tab shows that the 30% figure refers to ALL taxes. But, question 3 refers to all taxes as well, but the article reports this as FEDERAL taxes (10 percent being the ideal level). I am fairly certain, but obviously could be wrong, that the article originally reported the 30% figure as either federal taxes or taxes paid to "the government." The discrepency between Question 3 and the article summary is exactly the problem that you have highlighted here (for which I stand corrected - with the caveat given).

Finally, this point still does not alter my analysis - except that it would show that people have a closer estimate of what they pay in taxes. Nevertheless, because the mean federal tax rate 18%, people would have to pay 12% in state and local taxes in order to get up to 30%. Either way, the 30% estimate is obviously closer if it indeed refers to ALL taxes.

In any even, the poll respondents do not accurately ascertain the gap between the preferred level for federal taxes and the actual level; the tax burden of wealthy individuals versus the middle-class; the composition of government spending; and whether Obama has cut taxes or not.

FLRN said...

Darren - Nice analysis - I agree Americans have a misunderstanding of the structure of federal taxation assessments. Most misunderstand their state and county structures as well...Something you (and I) firmly grasp. As for the country this is not ignorance it is perception, perspective, and perhaps a failure of Civics 101. Those same disconnects that led to a country and a populous to purchased mortgages they did not understand, entered fiscal credit agreements they could not comprehend and spend with joyous abandon.
Right after I finish re-reading Sinclair's The Jungle and today's Blink, I plan on picking up Welch's Relationship... - Thanks Josh! (I think I am in love!)
Some of the others out there may need a library card - the only kind of loan that really pays you back!

Darren Lenard Hutchinson said...

To all: Thanks for responding. I would love to curb government spending. But I think both sides need to sit down and approach things honestly. I think the failure of respondents to recognize that defense, SS and Medicare are the largest categories of expenditure is telling. These are also some of the most popular categories of spending. Cutting nickels and dimes from the remaining categories will not accomplish our objectives. So, can we create a better, less expensive retirement system -- yet, still maintain a safety net for elderly people? Can provide healthcare for elderly people without raising lunatic arguments about "death panels"? Is it possible to cut defense spending and preserve national security? Unless we do things about these three categories we are stuck with high spending. If GDP soars, this is less of a problem (because tax revenue will surge). But, if we want to implement cuts, we have to start with a painful conversation about what type of society we prefer (divorced from the distorting rhetoric of socialism, commies, etc.).

Josh Dowlut said...

Amen to that. Reminds me of McCain's pledge to freeze the budget, outside of SS, Medicare, Medicaid and defense. Well those plus interest on the national debt=about 70%. True discretionary is only about 10%.

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