Thoughts: In re: Taxes on the Poor


In continuation of a discussion with Dr. Richard Bullock on Twitter. To sum up, he states:

[The percentage of income paid by the poor] differs by state, but in AL, families making less than $13,000 pay more than 25% in direct taxes, another 15% indirect. This does not include property taxes, passed alog to renters through higher rents and other pass through taxes. The rich in AL rarely pay more than 15% overall. The average is more like 35%.

There are a couple things funny with this argument however. First, to only make 13,000/yr pre-tax at minimum wage you’re only working 36 hours a week (assuming 51 weeks a year.) (I’m assuming Dr. Bullock had a reason for picking his $13k/yr figure.)

Second, for the head of hypothetical situation of a family of four to only be making minimum wage seems unlikely: an established family would indicate an work history, which would make even an unremarkable worker likely to be yielding a higher return for their time.

Third, the Poverty Threshold for a family of four in 2009 was $21,756/yr, if you adjust that for New Orleans’s 106.1 Cost of Living Index in 2009 you get $23,083/yr.  So what’s the point of all this? Because how far net income is below the poverty threshold is used when determining eligibility for Welfare.

Specific $ amounts for our $13k/yr hypothetical family aren’t easily forthcoming, but states that a family for four receives $500/mo in food stamps and $900 in cash assistance on average nationally. That’s $1,400/mo, or $16,800 year, more than our minimum wage earner could make even if he was working 40 hours a week. So, with welfare our single minimum wage income, family of four, is making $29,000/yr.

(That dosen’t include welfare assistance available through HUD, which would decrease their tax burden by eliminating a property taxes on their dwelling.)

However, welfare is tax free. Assuming our family is paying 40% of earned income in tax (as Dr. Bullock estimates), they only pay that 40% on their earned $13k. That is, they pay $5,200 a year in taxes.

But, $5.2k is only 22% of $29,000; making a family of four’s effective tax rate 18%. While that’s more than the rich’s estimated 15%, it’s far less than the 35% that the middle class was estimated to pay.

So, I don’t find that the poor’s effective tax burden is really as hard as it seemed at first glance.

What do you think?

Did I miss something?

Amendum: Alternatively, if you considder all monetary (or monetary equivilent) actions between people and the government under the term “tax”—I’d use a different term if I could think of one—then welfare is a form of tax return.

In that case, our family’s net tax “burden” of +$11k/yr, which is 85% of the $13k/yr they make working. Thus, their effective tax rate is a positive (i.e. in their favor) of 85%.

In other words, they effectively don’t pay any sort of taxes; as they receive more from the government then they put in. (Not counting the valuation of public services such as roads that they receive.)

Now that’s an interesting way to look at it…