Tax Time: One of Life's Certainties

With income tax filing deadline looming, Rutgers Economics Professor Rosanne Altshuler debunks tax time myths

In a week or so, your 2010 tax returns are due. In preparation, Rosanne Altshuler, a professor of economics at Rutgers' School of Arts and Sciences whose research interests include public economics and the economics of taxation, will clear up some myths about this dreaded annual ritual. She has published numerous articles on the latter in journals and books. Altshuler is no stranger to the policy discussion in Washington, D.C. Altshuler recently returned to Rutgers after serving as director of the Urban-Brookings Tax Policy Center. Her prior stints in Washington  include serving as senior economist to the President’s Advisory Panel on Federal Tax Reform in 2005 and as a special adviser to the Joint Committee on Taxation.

Rutgers Today: Who pays taxes?

Altshuler: Last year, the big tax day story was that almost half of American households didn’t pay Federal taxes in 2009. Most people, however, do pay taxes – payroll taxes when they work, sales taxes when they buy things, and property taxes for their homes. In 2009, more than two-thirds of the households that paid no income tax did pay payroll taxes.We’ll see what this year’s big tax story is next week. In the meantime, it makes sense to clear up some common myths about who actually pays taxes.

Rutgers Today: Who doesn’t pay Federal taxes?

Altshuler: The Urban-Brookings Tax Policy Center reports that in 2009, 47 percent of households paid no Federal income taxes. Some families don’t pay the federal income tax because they have too little income while others reduce their tax liability to zero by claiming a range of tax credits that encourage work, education, and saving for retirement or help families with children.

Rutgers Today: Who paid neither income nor payroll taxes? 

Altshuler: Mostly the poor and the elderly. The Tax Policy Center reports that of the 14 percent of households who paid neither income taxes nor payroll taxes, more than half were elderly and nearly one-third were not elderly but had income less than $20,000.

Rutgers Today: Can rich people avoid paying taxes?

Altshuler: We know that richest among us have access to the best tax planners. But are they able to pay no federal tax through ingenious tax avoidance schemes?  Not according to the statistics from tax returns. Estimates from the Tax Policy Center show that the rich do pay taxes, lots of taxes, although some do manage to avoid paying. Fully 99.7 percent of those with income over $1 million paid federal taxes in 2009 averaging 27 percent of their income (compared with an average of 18 percent for all Americans). And don’t forget that virtually every rich person who manages to avoid federal taxes gets hit at the state and local level with sales and property taxes.

Rutgers Today: Who pays the corporate tax?

Altshuler: It’s popular to say that corporations should pay more taxes. But corporations don’t pay taxes, people do. When a corporation is hit with a tax bill, management must cover the cost by raising prices – passing the burden to customers, cutting wages – passing the burden to workers, or decreasing shareholder profits, passing the burden to owners. While the corporation collects the tax and sends it on to the government, real people end up actually paying the tax! Who actually bears the burden of the corporate tax is controversial among economists, but recent studies suggest that workers may bear a significant share of the corporate income tax.

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