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How State Taxes Put a Bigger Pinch on the Poor

Poor taxesOver the last few months, as Republican presidential candidates have unveiled a stream of plans to cut taxes, they've consistently focused their rhetoric on a very narrow spectrum of our tax burden -- income tax as a percentage of income -- to suggest that the poorest Americans get a free ride at the expense of the wealthiest.

But, as a recent study points out, income tax is only part of the equation, and when all the other taxes we pay are factored in -- especially our punishing state taxes -- it's clear that the poor often pay a far greater percentage of their income in taxes than the rich.

The most striking number to come out of the tax debate is 47%: That's the portion of the populace that doesn't pay federal income tax. Taken at face value, this is true: According to the nonpartisan Tax Policy Center, thanks to a combination of dependent deductions and other tax breaks, nearly half the population ends up with a federal income tax of zero -- and, in fact, often gets a bit of money back on April 15.

But let's widen our gaze to the other taxes that workers pay to the federal government. A variety -- including Medicare and Social Security taxes -- are taken out of every paycheck. Beyond that, some portion of federal corporate tax falls on every consumer and employee of a private company, and federal excise taxes hit many consumers. When measured properly, 86% of taxpayers pay into the federal system -- a far cry from the 47% that critics claim. And most of the remaining 14% don't exactly fit the freeloader cliche: More than half -- 8% -- are the retired elderly, and the remainder are largely students or disabled. And yes, some are the unemployed or those earning very low incomes

In fact, when it comes to some taxes -- such as Social Security -- the poorest 20% of workers pay a far larger percentage of their income than the richest 20%. Still, taken as a total, the poor send less of their income to the IRS than do the rich: According to the TPC, the total effective federal rate -- the rate that people pay after all loopholes, tax breaks, deductions, and so forth -- is 4% for the poorest Americans and 25.1% for the richest.

So the poor are getting a huge break, right? Well, it depends on where they live. According to a recent study by the Corporation for Enterprise Development, while the federal tax rate is progressive -- that is, its levy increases as income increases -- state tax rates are all regressive. In other words, unless you live in Washington D.C., the richer you are, the smaller a percentage of your income you pay in state taxes.

Every State Puts More Burden on Low Income Workers

And the differences aren't minor: In the median state, Mississippi, the poorest 20% of workers pay almost twice as high a percentage of their income as the richest 1%. In Washington state, the worst, they pay 17.3% of their income -- more than six times as much as the top 1%. What's more, this is true in all states -- even those that don't have an income tax. In fact, states that rely on sales taxes to make ends meet tend to hit the poor even more harshly, as low-income workers spend most of their paychecks on necessities.

When state taxes are factored into our overall tax percentage, the results are striking. In Washington state, for example, adding 17.3% to the 4% effective income tax rate yields a whopping 21.3% tax on income. While still lower than the 27.7% total tax rate of a top income bracket worker, it's still pretty shocking.

The gap gets even wider when one considers the impact of historically low dividend and capital gains tax rates. For a Washington state billionaire like Bill Gates, most of whose income comes from investments, it's likely that his overall tax rate is lower than that of a bottom-tier worker.

Throughout its history, America's tax rate has been progressive -- the more you make, the greater a percentage you pay into the system. The main exception to that rule have been Social Security and Medicare: Since they're capped at a certain income level, the poor pay a larger percentage of their incomes into those programs than the rich. The political justification for this is that the poor take greater advantage of these programs than the rich, and should therefore pay more.

But do the poor take greater advantage of state roads or state parks, state police or state prisons? If not, the argument for making them pay a higher percentage of their income to the state seems to be a little thin.

State tax burdens

Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.

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Cities with the Lowest Tax Rates

The total amount of tax you pay reaches far beyond what you owe the federal government. Depending on where you live, most likely you're required to pay additional taxes, including property and sales tax. The disparity between the amount of tax you pay in a low-tax city and that in a high-tax city can be dramatic. Living in any of these 10 cities could save you a bundle, although the exact amount may fluctuate based on your income and lifestyle choices.

Cities with the Highest Tax Rates

Much ado is made in the press about federal tax brackets, but cities can carry a tax bite of their own. Even if you live in a state that has no income tax, your city may levy a variety of taxes that could eat away the entire benefit of living in an income tax-free state, including property taxes, sales taxes and auto taxes. Consider all the costs before you move to one of these cities, and understand that rates may change based on your family's income level.

Great Ways to Get Charitable Tax Deductions

Generally, when you give money to a charity, you can use the amount of that donation as a deduction on your tax return. However, not all charities qualify as tax-deductible organizations. While there are many types of charities, they must all meet certain criteria to be classified by the IRS as tax-deductible organizations. There are legitimate tax-deductible organizations in many popular categories, such as those listed below.

A Freelancer's Guide to Taxes

Freelancing certainly has its benefits, but it can result in a few complications come tax time. The Internal Revenue Service considers freelancers to be self-employed, so if you earn income as a freelancer you must file your taxes as a business owner. While you can take additional deductions if you are self-employed, you'll also face additional taxes in the form of the self-employment tax. Here are things to consider as a freelancer when filing your taxes.

Tax Deductions for Voluntary Interest Payments on Student Loans

Most taxpayers who pay interest on student loans can take a tax deduction for the expense ? and you can do this regardless of whether you itemize tax deductions on your return. The rules for claiming the deduction are the same whether the interest payments were required or voluntary.

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Wish the red state folks could read,

October 15 2012 at 8:01 AM Report abuse rate up rate down Reply
Alexander Shurygin

> Beyond that, some portion of federal corporate tax falls on every consumer and employee of a private company, and federal excise taxes hit many consumers.

This is trickery. By this logic, all 100% of the population pays taxes: they buy gas, cigarettes, alcohol and some other goods that are heavily taxed.

IMHO, Social security should not be included either - it is basically an insurance policy against unemployment (which poor people use more often than well-off), and old age. Social security, to the best of my knowledge, does not fund the government expenses like public schools, police, army, public employees, etc.

July 17 2012 at 1:41 PM Report abuse rate up rate down Reply

The righties hate this article because it shows that this country's taxes attack and exploit the poor and working class, which are, thanks to the fraudulent economic policies of the radical right corrupting America for the past three decades, increasingly one and the same.

States rely heavily on sales taxes which are heavily regressive. Their income tax programs are barely progressive if they are progressive at all. Ergo, states hit the working poor with an unfair tax burden. This is a fact - it's Econ 101. Even the dumbed down, drooling idiots that believe FOX and the other corporate media channels can count on their fingers and toes and see that this is true. The result is that they get slobbered up an attack anyone who dares to present the truth.

This country had its greatest success when taxes were progressive, unions were strong and corporations had limited control over the government. Now that the government is under the jackboots of the corporate overlords, taxes are regressive, and the rich are accumulating ALL of the wealth and resources of the country, leaving 90% of the people to fight over the scraps, America is in a death spiral - and the Amerikan right continues to make it worse.

February 20 2012 at 10:14 AM Report abuse +1 rate up rate down Reply

The bottom line is that America is being destroyed. It's not being destroyed by the unions, teachers, the poor, welfare recipients, public employees or any other working class or poor people. It is being destroyed by the "cavernous greed" of the most fortunate people in the history of humanity, the mega-rich of the USA.

February 18 2012 at 9:53 PM Report abuse +1 rate up rate down Reply

Gee, let me guess ... Is Bruce Watson at it again? More Obama extreme-left propaganda?

Talk about deceptive shell-games! The "poor" pay no federal income taxes (and most get Welfare including in the form of "earned income tax credit"). They pay almost no state income taxes. They pay very little in social security and medicare. (And yet they get all public services, social security and medicare.) SO, what is the "unfair" tax? The sales tax! (Even though almost no state taxes or fully taxes food and necessities.) When someone spends (and does not save) all their income (Welfare and all), then you can MANIPULATE the numbers to try to argue they pay too much.

So WHAT does Watson/AOL/HuffpuffPost want? Do away with even sales tax for "poor" people? (And WHY do they forget to SUBTRACT all the Welfare benefits from the sales taxes? - That would still make them net recipients of government gifts.)

Nope, this is not about "poor people" .... Its about class-warfare and RAISING taxes on the rich and middle class.

February 17 2012 at 11:05 PM Report abuse -1 rate up rate down Reply

Excellent article giving the lie to the right wing and its attacks on people collecting government benefits.


February 17 2012 at 10:09 AM Report abuse rate up rate down Reply

Professor of right wing ideology delivers lecture on self control and proper etiquette.


February 15 2012 at 5:54 PM Report abuse rate up rate down Reply

Better yet, repeal the raygun and bush tax cuts, end the privileges of unearned income over sweat labor income, and THEN require the states to do away with all taxes EXCEPT a fixed (by the state) percentage of the federal income tax liability. Would require a Constitutional Amendment, but would end the nonsense of targeting the working poor (and the overwhelming majority of the poor are WORKING POOR) with taxes and fees. All taxation on a progressive scale - not only the most fair, but the best for the economy as well.

February 15 2012 at 5:52 PM Report abuse +1 rate up rate down Reply

1% of say $1,000,000 is ... $10,000
30% of say $30,000 is...$9000

You may pay a higher percentage, but look at the real amount being paid! So many misleading "facts" in stupid stories like this!

Is it fair for one person to apy more than the other!? Isn't that what this arguement is about, the "poor paying more?"
It's all a mtter of perspective! And no one pays an effective tax rate of 30%, I put that number in there to show how ludicrious this whole percentage arguement is!

Americans are idiots!

February 15 2012 at 11:45 AM Report abuse -4 rate up rate down Reply

Congratulations, Vermont, but even your state fails to tax the rich at a higher percentage than the poor. So EVERY state is failing to do its duty and establish fair systems of taxation.

February 15 2012 at 1:16 AM Report abuse rate up rate down Reply
1 reply to miserabloldefart's comment

Once again, the American system of government is perverted by too much power held in the hands of the rich. This has always been true, of course, but there was a time when there were men of integrity in government who fought it. Now, they are mostly just corporate lackeys.

February 15 2012 at 1:18 AM Report abuse rate up rate down Reply