The S&L Crisis: A Chrono-Bibliography

[NOTE: This chronology and bibliography is provided solely for informational purposes. The inclusion or exclusion of a source constitutes neither an endorsement nor a rejection by the FDIC of the opinions expressed in that source.] General Books and Articles Causes of the S&L Crisis Charles Keating and Lincoln Savings and Loan Criminal Activity Associated with S&L Failures Depository Institutions Deregulation and Monetary Control Act of 1980 Deregulation of the S&Ls Financial Institutions Reform Recovery and Enforcement Act (FIRREA) Garn - St Germain Depository Institutions Act of 1982 Interest Rate Vulnerability Southwest Plan State Deposit Insurance Funds - Ohio and Maryland Taxation and Accounting bibliography                  A basic bibliography to provide an overview of the S&L Crisis.                         Background materials for understanding what led to the S&L Crisis.                         Details on one of the costliest S&L failures that involved 5 U.S. Senators.                         The goods on specific criminal investigations of S&L owners and directors.                         Details on the 1980 law (DIDMCA) that eased the distinctions among savings institutions.                         Working papers and analysis covering the deregulation of the S&L industry that led to the crisis.                         The law enacted in August, 1989, to bail out the S&L crisis and create the Resolution Trust Corporation.                         Analyses of the 1982 law that allowed S&L's to diversify their activities with the view of increasing profits.                         Bibliography for understanding S&L interest rates, and S&L vulnerability during this time period.                         The plan to consolidate and package insolvent Texas S&Ls and sell them to the highest bidder.                         S&L failures in Ohio and Maryland and the end of the State Deposit Insurance Funds/                         Understanding the tax and accounting rules for S&L's 1966-1979   Market interest rates fluctuate with increasing intensity and S&Ls experience difficulty with each interest rate rise. Interest rate ceilings prevent S&Ls from paying competitive interest rates on deposits. Thus, every time the market interest rates rise, substantial amounts of funds are withdrawn by consumers for placement in instruments with higher rates of return. This process of deposit withdrawal ("disintermediation") and the subsequent deposit influx when rates rise ("reintermediation") leaves S&Ls highly vulnerable. Concurrently, money market funds become a source of competition for S&L deposits. S&Ls are additionally restricted by not being allowed to enter into business other than accepting deposits and granting home mortgage loans. 1967--State of Texas approves major liberalization of S&L powers. Property development loans of up to 50% of net worth are allowed. 1972--Hunt Commission recommendations would have created federal savings banks to replace S&Ls. The banks would have had additional authority to make commercial loans and invest in commercial paper. 1973--FINE Study would have granted same powers for S&Ls as for banks, including checking accounts. Also recommends consolidation of the regulators. Interest rate insurance was recommended if S&Ls are to remain primarily involved in housing finance. 1978--Financial Institutions Regulatory and Interest Rate Control Act of 1978 enacted. Weak version of previous recommendations. Allows S&Ls to invest up 5% of assets in each of land development, construction, and education loans. 1979--Doubling of oil prices. Inflation moves into double digits for second time in five years. 1980-1982   Statutory and regulatory changes give the S&L industry new powers in the hopes of their entering new areas of business and subsequently returning to profitability. For the first time, the government approves measures intended to increase S&L profits as opposed to promoting housing and homeownership. March, 1980--Depository Institutions Deregulation and Monetary Control Act (DIDMCA) enacted. The law is a Carter Administration initiative aimed at eliminating many of the distinctions among different types of depository institutions and ultimately removing interest rate ceiling on deposit accounts. Authority for federal S&Ls to make ADC (acquisition, development, construction) loans is expanded. Deposit insurance limit raised to $100,000 from $40,000. This last provision is added without debate. November, 1980--Federal Home Loan Bank Board reduces net worth requirement for insured S&Ls from 5 to 4 percent of total deposits. Bank Board also removes limits on the amounts of brokered deposits an S&L can hold. August, 1981--Tax Reform Act of 1981 enacted. Provides powerful tax incentives for real-estate investment by individuals. This legislation helps create a "boom" in real estate and contributes to over-building. September, 1981--Federal Home Loan Bank Board permits troubled S&Ls to issue "income capital certificates" that are purchased by FSLIC and included as capital. Rather than showing that an institution is insolvent, the certificates make it appear solvent. 1982-1985   Reductions in the Bank Board's regulatory and supervisory staff. In 1983, a starting S&L examiner is paid $14,000 a year. The average examiner has only two years on the job. Examiner salaries are paid through OMB, not the Bank Board. During this period of supervisory and examination retraction, industry growth increases. Industry assets increase by 56% between 1982 and 1985. 40 Texas S&Ls triple in size between 1982 and 1986; many of them grow by 100% each year. California S&Ls follow a similar pattern. January, 1982--Federal Home Loan Bank Board reduces net worth requirement for insured S&Ls from 4 to 3 percent of total deposits. Additionally, S&Ls are allowed to meet the low net worth standard not in terms of generally accepted accounting principles (GAAP), but of even more liberal regulatory accounting principles (RAP). April, 1982--Bank Board eliminates restrictions on minimum numbers of S&L stock holders. Previously, it required at least 400 stock holders of which at least 125 had to be from "local community", with no individual owning more than 10% of stock and no "controlling group" more than 25%. Bank Board's new ownership regulation would allow a single owner. Purchases of S&Ls were made easier by allowing buyers to put up land and other real estate, as opposed to cash. December, 1982--Garn - St Germain Depository Institutions Act of 1982 enacted. This Reagan Administration initiative is designed to complete the process of giving expanded powers to federally chartered S&Ls and enables them to diversify their activities with the view of increasing profits. Major provisions include: elimination of deposit interest rate ceilings; elimination of the previous statutory limit on loan to value ratio; and expansion of the asset powers of federal S&Ls by permitting up to 40% of assets in commercial mortgages, up to 30% of assets in consumer loans, up to 10% of assets in commercial loans, and up to 10% of assets in commercial leases. December, 1982--In response to the massive defections of state chartered S&Ls to the federal system, Nolan Bill passes in California. Allows California-chartered S&Ls to invest 100% of deposits in any kind of venture. Similar plans adopted in Texas and Florida. 1983--Lower market interest rates return many S&Ls to health. 35% of institutions, however, still sustain losses. 9% of all S&Ls (representing 10% of industry assets) are insolvent by GAAP standards. March, 1983--Edwin Gray becomes Chairman of the Federal Home Loan Bank Board. Beginning in 1984 and continuing throughout his tenure, regulatory and supervisory measures passed by the Bank Board begin the reversing of deregulation. November, 1983--Bank Board raises net worth requirement for newly chartered S&Ls to 7%. March, 1984--Failure of Empire Savings of Mesquite, TX. "Land flips" and other criminal activities are a pattern at Empire. This failure would eventually cost the taxpayers approximately $300 million. April, 1984--Bank Board moves jointly with the FDIC to attempt to eliminate deposit insurance for brokered deposits. Federal court rejects this attempt in mid-1984 as overstepping statutory limits. July, 1984--Bank Board requires S&L management to adopt policies and procedures for managing interest rate risk. January, 1985--Bank Board limits the amount of brokered deposits to 5% of deposits at FSLIC insured institutions failing to meet their net worth requirements. Bank Board also limits direct investment (equity securities, real estate, service corporations, and operating subsidiaries) to the greater of 10% of assets or twice the S&L's net worth, provided the institution meets regulatory net worth. March, 1985--Ohio bank holiday. Anticipated failure of Home State Savings Bank of Cincinnati, OH and possible depletion of Ohio state deposit insurance fund cause Governor Celeste to close Ohio S&Ls. Eventually, those that can qualify for federal deposit insurance are allowed to reopen. May, 1985--S&L failures in Maryland eventually cause loss to state deposit insurance fund and Maryland taxpayers of $185 million. Ohio and Maryland S&L failures helped kill state deposit insurance funds. July, 1985--Chairman Gray begins transfer of federal examiners to the twelve regional Federal Home Loan Banks so that they are no longer overseen by OMB and their salaries are paid directly by the Bank Board system. August, 1985--Only $4.6 billion in FSLIC insurance fund. Chairman Gray tries to gain support for recapitalizing FSLIC on Capitol Hill. In 1986, GAO estimates the loss to the insurance fund to be around $20 billion. December, 1985--Bank Board allows S&L examiners to "classify" questionable loans and other assets for the purpose of requiring loan loss reserves. 1986-1989   Compounding of losses as insolvent institutions are allowed to remain open and grow, allowing ever increasing losses to accumulate. August, 1986--Bank Board raises net worth standard gradually to 6% with up to 2% points offset for reduced interest rate-risk. 1987--Losses at Texas S&Ls comprise more than one-half of all S&L losses nationwide, and of the 20 largest losses, 14 are in Texas. Texas economy in major recession: crude oil prices fall by nearly 50%, office vacancy is over 30%, and real estate prices collapse. January, 1987--GAO declares FSLIC fund insolvent by at least $3.8 billion. Recapitalization has stalled on Capitol Hill until now by claims of powerful S&L lobbyists that Bank Board regulations are too harsh and arbitrary. February, 1987--Bank Board requires prior supervisory approval for S&Ls making direct investment in excess of 2.5 times their tangible capital. April, 1987--Edwin Gray ends his term as chairman of Federal Home Loan Bank Board in June. Before his departure, he is summoned to the office of Sen. Dennis DeConcini. DeConcini, with four other Senators (John McCain, Alan Cranston, John Glenn, and Donald Riegle) question Gray about the appropriateness of Bank Board investigations into Charles Keating's Lincoln Savings and Loan. All five senators, who have received campaign contributions from Keating, would become known as the "Keating Five". The subsequent Lincoln failure is estimated to have cost the taxpayers over $2 billion. May, 1987--Bank Board begins phasing out the remains of the liberal RAP accounting standards. S&Ls must conform to GAAP accounting standards, as banks do. Effective date of this rule postponed by new Chairman of the Federal Home Loan Bank Board, M. Danny Wall, to 1/1/1989. August, 1987--Competitive Equality Banking Act of 1987 enacted. The Act authorizes $10.8 billion recapitalization of the FSLIC with only $3.75 billion authorized in any 12-month period. Also contains forbearance measures designed to postpone or prevent S&L closures. February, 1988--Bank Board introduces the "Southwest Plan" to consolidate and package insolvent Texas S&Ls and sell them to the highest bidder. The strategy is to resolve insolvencies quickly while conserving scarce cash for FSLIC. The Bank Board uses a number of strategies to pay for the difference between assets and liabilities of the failed institutions: FSLIC notes, tax incentives, and income, capital value and yield guarantees. The Bank Board disposes of 205 S&Ls through the Southwest Plan with assets of $101 billion. November, 1988--George Bush elected President. S&L problem not part of election debate. 1989--President Bush unveils S&L bailout plan in February. In August, Financial Institutions Reform Recovery and Enforcement Act (FIRREA). FIRREA abolishes the Federal Home Loan Bank Board and FSLIC, switches S&L regulation to newly created Office of Thrift Supervision. Deposit insurance function shifted to the FDIC. A new entity, the Resolution Trust Corporation is created to resolve the insolvent S&Ls. Other major provisions of FIRREA include: $50 billion of new borrowing authority, with most financed from general revenues and the industry; meaningful net worth requirements and regulation by the OTS and FDIC; allocation funds to the Justice Department to help finance prosecution of S&L crimes. Additional bank crime legislation the next year (i.e., the Crime Control Act of 1990) mandates a study by the National Commission on Financial Institution Reform, Recovery and Enforcement to uncover the causes of the S&L crisis, and come up with recommendations to prevent any repetition.

GOP’s disgraceful elitism

Tuesday, Sep 18, 2012 02:40 PM EDT

Romney is one of myriad conservatives who believe that our country's poor are lazy -- and should be punished

By Sally Kohn

Mitt Romney and Paul Ryan (Credit: Reuters/Brian Snyder) It’s not just Mitt Romney.  When anyone argues that the very rich should pay their fair share in taxes, conservatives frequently respond by shifting blame to the supposed 47 percent of Americans who don’t pay taxes.  The message is simple:  How come you liberals want to blame the wealthy but let poor people off the hook?  And so, with apologies to Republicans who seem congenitally allergic to facts as of late, let’s look at who actually doesn’t pay taxes in America, and why, and what this means for our economy and the election.
It is true that roughly 47 percent of Americans pay no federal income tax.  This is because they are too poor to fall within even the lowest tax bracket in America.  However, more than half of these folks still pay other forms of taxes — including payroll taxes, not to mention the sales tax and gas tax and others to which all consumers are subject.  And yes, many of these 47 percent do benefit from tax credits — because they are students or they are elderly or they are poor.

The actual percentage of Americans who have no federal tax liability and are not elderly?  6.9 percent.  These Americans make less than $20,000 per year in wages.  These are the working poor, who were always struggling to get by even in good times but are hit extra hard by high unemployment and the fact that, in the slow recovery, more and more solid middle class are being replaced by low-wage work.  These, supposedly, are the very people Mitt Romney should be seeking to help with his candidacy — not attack.
Now, what’s interesting is that, while complaining that poor people don’t pay enough in taxes, conservatives also complain that the wealthy pay too much.  They do this by focusing on the absolute dollar amount paid, as opposed to percentage.  So, for instance, when Warren Buffett states that he pays lower taxes than his secretary, conservatives protest.  Buffet pays far more in actual dollars, they argue.

Which is, of course, true — 1 percent of $1 billion is $10 million whereas 40 percent of $100,000 is only $40,000.   In absolute dollars, sure, the billionaire is paying far, far more than the middle-class family, let alone a poor family.  Yes, conservatives are right, the top 10 percent of Americans pay more than half of the nation’s total tax revenues — but that’s because the top 10 percent enjoy more than half of the nation’s income.  And that gulf of inequality is only growing.

But does anyone really think the richest of the rich should pay an effective 1 percent income tax rate while the middle class pays 40 percent?

Oh wait, right — Mitt Romney and Paul Ryan think that’s a grand idea!  Under Paul Ryan’s budget plan, which Mitt Romney endorsed, taxes for the middle class would go up while tax rates for millionaires and billionaires would be slashed to unprecedented lows.  And under this tax plan Mitt Romney, who currently pays a less-than-fair share of 15 percent would pay just 0.82% percent in taxes.
In other words, it appears Mitt Romney isn’t angry that desperately poor people don’t pay taxes — he’s jealous!

Increasingly, I’ve come to think this debate is not really about conservative faith in trickle-down economics, which all real-world evidence gleaned over decades now proves just doesn’t work.  Instead, I think Mitt Romney and many conservatives simply believe that the wealthy are more deserving and the poor are lazy.  Therefore, we should reward the rich with whatever they want — lower tax rates, unlimited campaign spending, you name it — and punish the poor.  This eerily echoes the conservative response to the violence swelling in the Middle East, their unwillingness to acknowledge the context of violence and instead insist that those doing bad are just bad people.  Romney conveyed this broadly dismissive attitude about all Palestinians in other secret footage from the same donor event.

Conservatives seem to believe that 47 percent of our own country is filled with bad people who don’t work hard and feel lazy and entitled — and these 47 percent should be condemned, contained and controlled.  And who better to do so than our moral and economic superiors.  The facts of tax policy and how hard poor people are trying to get ahead are irrelevant.  Conservatives are pushing a flagrantly elitist and immoral hierarchy to reward the rich and demonize the poor.  It is a sick vision for a nation founded on liberty and justice for all — that is, 100 percent.

G.E.’s Strategies Let It Avoid Taxes Altogether

But Nobody Pays That

by DAVID KOCIENIEWSKI

Published: March 24, 2011

General Electric, the nation’s largest corporation, had a very good year in 2010.

 

Drew Angerer/The New York Times

A PRESIDENT’S BUSINESS LIAISON
In January, President Obama named Jeffrey R. Immelt, General Electric’s chief executive, to head the President’s Council on Jobs and Competitiveness. “He understands what it takes for America to compete in the global economy,” Mr. Obama said.

But Nobody Pays That

The company reported worldwide profits of $14.2 billion, and said $5.1 billion of the total came from its operations in the United States.

Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion.
That may be hard to fathom for the millions of American business owners and households now preparing their own returns, but low taxes are nothing new for G.E. The company has been cutting the percentage of its American profits paid to the Internal Revenue Service for years, resulting in a far lower rate than at most multinational companies.

Its extraordinary success is based on an aggressive strategy that mixes fierce lobbying for tax breaks and innovative accounting that enables it to concentrate its profits offshore. G.E.’s giant tax department, led by a bow-tied former Treasury official named John Samuels, is often referred to as the world’s best tax law firm. Indeed, the company’s slogan “Imagination at Work” fits this department well. The team includes former officials not just from the Treasury, but also from the I.R.S. and virtually all the tax-writing committees in Congress.
While General Electric is one of the most skilled at reducing its tax burden, many other companies have become better at this as well. Although the top corporate tax rate in the United States is 35 percent, one of the highest in the world, companies have been increasingly using a maze of shelters, tax credits and subsidies to pay far less.

In a regulatory filing just a week before the Japanese disaster put a spotlight on the company’s nuclear reactor business, G.E. reported that its tax burden was 7.4 percent of its American profits, about a third of the average reported by other American multinationals. Even those figures are overstated, because they include taxes that will be paid only if the company brings its overseas profits back to the United States. With those profits still offshore, G.E. is effectively getting money back.
Such strategies, as well as changes in tax laws that encouraged some businesses and professionals to file as individuals, have pushed down the corporate share of the nation’s tax receipts — from 30 percent of all federal revenue in the mid-1950s to 6.6 percent in 2009.
Yet many companies say the current level is so high it hobbles them in competing with foreign rivals. Even as the government faces a mounting budget deficit, the talk in Washington is about lower rates. President Obama has said he is considering an overhaul of the corporate tax system, with an eye to lowering the top rate, ending some tax subsidies and loopholes and generating the same amount of revenue. He has designated G.E.’s chief executive, Jeffrey R. Immelt, as his liaison to the business community and as the chairman of the President’s Council on Jobs and Competitiveness, and it is expected to discuss corporate taxes.
“He understands what it takes for America to compete in the global economy,” Mr. Obama said of Mr. Immelt, on his appointment in January, after touring a G.E. factory in upstate New York that makes turbines and generators for sale around the world.

A review of company filings and Congressional records shows that one of the most striking advantages of General Electric is its ability to lobby for, win and take advantage of tax breaks.
Over the last decade, G.E. has spent tens of millions of dollars to push for changes in tax law, from more generous depreciation schedules on jet engines to “green energy” credits for its wind turbines. But the most lucrative of these measures allows G.E. to operate a vast leasing and lending business abroad with profits that face little foreign taxes and no American taxes as long as the money remains overseas.
Company officials say that these measures are necessary for G.E. to compete against global rivals and that they are acting as responsible citizens. “G.E. is committed to acting with integrity in relation to our tax obligations,” said Anne Eisele, a spokeswoman. “We are committed to complying with tax rules and paying all legally obliged taxes. At the same time, we have a responsibility to our shareholders to legally minimize our costs.”

The assortment of tax breaks G.E. has won in Washington has provided a significant short-term gain for the company’s executives and shareholders. While the financial crisis led G.E. to post a loss in the United States in 2009, regulatory filings show that in the last five years, G.E. has accumulated $26 billion in American profits, and received a net tax benefit from the I.R.S. of $4.1 billion.
But critics say the use of so many shelters amounts to corporate welfare, allowing G.E. not just to avoid taxes on profitable overseas lending but also to amass tax credits and write-offs that can be used to reduce taxes on billions of dollars of profit from domestic manufacturing. They say that the assertive tax avoidance of multinationals like G.E. not only shortchanges the Treasury, but also harms the economy by discouraging investment and hiring in the United States.
“In a rational system, a corporation’s tax department would be there to make sure a company complied with the law,” said Len Burman, a former Treasury official who now is a scholar at the nonpartisan Tax Policy Center. “But in our system, there are corporations that view their tax departments as a profit center, and the effects on public policy can be negative.”

The shelters are so crucial to G.E.’s bottom line that when Congress threatened to let the most lucrative one expire in 2008, the company came out in full force. G.E. officials worked with dozens of financial companies to send letters to Congress and hired a bevy of outside lobbyists.
The head of its tax team, Mr. Samuels, met with Representative Charles B. Rangel, then chairman of the Ways and Means Committee, which would decide the fate of the tax break. As he sat with the committee’s staff members outside Mr. Rangel’s office, Mr. Samuels dropped to his knee and pretended to beg for the provision to be extended — a flourish made in jest, he said through a spokeswoman.
That day, Mr. Rangel reversed his opposition to the tax break, according to other Democrats on the committee.

The following month, Mr. Rangel and Mr. Immelt stood together at St. Nicholas Park in Harlem as G.E. announced that its foundation had awarded $30 million to New York City schools, including $11 million to benefit various schools in Mr. Rangel’s district. Joel I. Klein, then the schools chancellor, and Mayor Michael R. Bloomberg, who presided, said it was the largest gift ever to the city’s schools.
G.E. officials say the donation was granted solely on the merit of the project. “The foundation goes to great lengths to ensure grant decisions are not influenced by company government relations or lobbying priorities,” Ms. Eisele said.
Mr. Rangel, who was censured by Congress last year for soliciting donations from corporations and executives with business before his committee, said this month that the donation was unrelated to his official actions.

Defying Reagan’s Legacy
General Electric has been a household name for generations, with light bulbs, electric fans, refrigerators and other appliances in millions of American homes. But today the consumer appliance division accounts for less than 6 percent of revenue, while lending accounts for more than 30 percent. Industrial, commercial and medical equipment like power plant turbines and jet engines account for about 50 percent. Its industrial work includes everything from wind farms to nuclear energy projects like the troubled plant in Japan, built in the 1970s.
Because its lending division, GE Capital, has provided more than half of the company’s profit in some recent years, many Wall Street analysts view G.E. not as a manufacturer but as an unregulated lender that also makes dishwashers and M.R.I. machines.

As it has evolved, the company has used, and in some cases pioneered, aggressive strategies to lower its tax bill. In the mid-1980s, President Ronald Reagan overhauled the tax system after learning that G.E. — a company for which he had once worked as a commercial pitchman — was among dozens of corporations that had used accounting gamesmanship to avoid paying any taxes.
“I didn’t realize things had gotten that far out of line,” Mr. Reagan told the Treasury secretary, Donald T. Regan, according to Mr. Regan’s 1988 memoir. The president supported a change that closed loopholes and required G.E. to pay a far higher effective rate, up to 32.5 percent.
That pendulum began to swing back in the late 1990s. G.E. and other financial services firms won a change in tax law that would allow multinationals to avoid taxes on some kinds of banking and insurance income. The change meant that if G.E. financed the sale of a jet engine or generator in Ireland, for example, the company would no longer have to pay American tax on the interest income as long as the profits remained offshore.
Known as active financing, the tax break proved to be beneficial for investment banks, brokerage firms, auto and farm equipment companies, and lenders like GE Capital. This tax break allowed G.E. to avoid taxes on lending income from abroad, and permitted the company to amass tax credits, write-offs and depreciation. Those benefits are then used to offset taxes on its American manufacturing profits.
G.E. subsequently ramped up its lending business.

As the company expanded abroad, the portion of its profits booked in low-tax countries such as Ireland and Singapore grew far faster. From 1996 through 1998, its profits and revenue in the United States were in sync — 73 percent of the company’s total. Over the last three years, though, 46 percent of the company’s revenue was in the United States, but just 18 percent of its profits.
Martin A. Sullivan, a tax economist for the trade publication Tax Analysts, said that booking such a large percentage of its profits in low-tax countries has “allowed G.E. to bring its U.S. effective tax rate to rock-bottom levels.”

G.E. officials say the disparity between American revenue and American profit is the result of ordinary business factors, such as investment in overseas markets and heavy lending losses in the United States recently. The company also says the nation’s workers benefit when G.E. profits overseas.
“We believe that winning in markets outside the United States increases U.S. exports and jobs,” Mr. Samuels said through a spokeswoman. “If U.S. companies aren’t competitive outside of their home market, it will mean fewer, not more, jobs in the United States, as the business will go to a non-U.S. competitor.”
The company does not specify how much of its global tax savings derive from active financing, but called it “significant” in its annual report. Stock analysts estimate the tax benefit to G.E. to be hundreds of millions of dollars a year.

“Cracking down on offshore profit-shifting by financial companies like G.E. was one of the important achievements of President Reagan’s 1986 Tax Reform Act,” said Robert S. McIntyre, director of the liberal group Citizens for Tax Justice, who played a key role in those changes. “The fact that Congress was snookered into undermining that reform at the behest of companies like G.E. is an insult not just to Reagan, but to all the ordinary American taxpayers who have to foot the bill for G.E.’s rampant tax sheltering.”

A Full-Court Press
Minimizing taxes is so important at G.E. that Mr. Samuels has placed tax strategists in decision-making positions in many major manufacturing facilities and businesses around the globe. Mr. Samuels, a graduate of Vanderbilt University and the University of Chicago Law School, declined to be interviewed for this article. Company officials acknowledged that the tax department had expanded since he joined the company in 1988, and said it now had 975 employees.
At a tax symposium in 2007, a G.E. tax official said the department’s “mission statement” consisted of 19 rules and urged employees to divide their time evenly between ensuring compliance with the law and “looking to exploit opportunities to reduce tax.”

Transforming the most creative strategies of the tax team into law is another extensive operation. G.E. spends heavily on lobbying: more than $200 million over the last decade, according to the Center for Responsive Politics. Records filed with election officials show a significant portion of that money was devoted to tax legislation. G.E. has even turned setbacks into successes with Congressional help. After the World Trade Organization forced the United States to halt $5 billion a year in export subsidies to G.E. and other manufacturers, the company’s lawyers and lobbyists became deeply involved in rewriting a portion of the corporate tax code, according to news reports after the 2002 decision and a Congressional staff member.
By the time the measure — the American Jobs Creation Act — was signed into law by President George W. Bush in 2004, it contained more than $13 billion a year in tax breaks for corporations, many very beneficial to G.E. One provision allowed companies to defer taxes on overseas profits from leasing planes to airlines. It was so generous — and so tailored to G.E. and a handful of other companies — that staff members on the House Ways and Means Committee publicly complained that G.E. would reap “an overwhelming percentage” of the estimated $100 million in annual tax savings.

According to its 2007 regulatory filing, the company saved more than $1 billion in American taxes because of that law in the three years after it was enacted.
By 2008, however, concern over the growing cost of overseas tax loopholes put G.E. and other corporations on the defensive. With Democrats in control of both houses of Congress, momentum was building to let the active financing exception expire. Mr. Rangel of the Ways and Means Committee indicated that he favored letting it end and directing the new revenue — an estimated $4 billion a year — to other priorities.
G.E. pushed back. In addition to the $18 million allocated to its in-house lobbying department, the company spent more than $3 million in 2008 on lobbying firms assigned to the task.
Mr. Rangel dropped his opposition to the tax break. Representative Joseph Crowley, Democrat of New York, said he had helped sway Mr. Rangel by arguing that the tax break would help Citigroup, a major employer in Mr. Crowley’s district.

G.E. officials say that neither Mr. Samuels nor any lobbyists working on behalf of the company discussed the possibility of a charitable donation with Mr. Rangel. The only contact was made in late 2007, a company spokesman said, when Mr. Immelt called to inform Mr. Rangel that the foundation was giving money to schools in his district.
But in 2008, when Mr. Rangel was criticized for using Congressional stationery to solicit donations for a City College of New York school being built in his honor, Mr. Rangel said he had appealed to G.E. executives to make the $30 million donation to New York City schools.
G.E. had nothing to do with the City College project, he said at a July 2008 news conference in Washington. “And I didn’t send them any letter,” Mr. Rangel said, adding that he “leaned on them to help us out in the city of New York as they have throughout the country. But my point there was that I do know that the C.E.O. there is connected with the foundation.”

In an interview this month, Mr. Rangel offered a different version of events — saying he didn’t remember ever discussing it with Mr. Immelt and was unaware of the foundation’s donation until the mayor’s office called him in June, before the announcement and after Mr. Rangel had dropped his opposition to the tax break.
Asked to explain the discrepancies between his accounts, Mr. Rangel replied, “I have no idea.”
Value to Americans?
While G.E.’s declining tax rates have bolstered profits and helped the company continue paying dividends to shareholders during the economic downturn, some tax experts question what taxpayers are getting in return. Since 2002, the company has eliminated a fifth of its work force in the United States while increasing overseas employment. In that time, G.E.’s accumulated offshore profits have risen to $92 billion from $15 billion.
“That G.E. can almost set its own tax rate shows how very much we need reform,” said Representative Lloyd Doggett, Democrat of Texas, who has proposed closing many corporate tax shelters. “Our tax system should encourage job creation and investment in America and end these tax incentives for exporting jobs and dodging responsibility for the cost of securing our country.”

As the Obama administration and leaders in Congress consider proposals to revamp the corporate tax code, G.E. is well prepared to defend its interests. The company spent $4.1 million on outside lobbyists last year, including four boutique firms that specialize in tax policy.
“We are a diverse company, so there are a lot of issues that the government considers, that Congress considers, that affect our shareholders,” said Gary Sheffer, a G.E. spokesman. “So we want to be sure our voice is heard.”

A version of this article appeared in print on March 25, 2011, on page A1 of the New York edition with the headline: At G.E. on Tax Day, Billions of Reasons to Smile

Misconceptions and Realities About Who Pays Taxes

PDF of this report (10pp.)

By Chuck Marr and Chye-Ching Huang

Updated September 17, 2012

Related Areas of Research

• Tax — Federal
  • 2001/2003 Tax Cuts
  • Earned Income Tax Credit
  • Individuals and Families
  • Taxes and the Economy

Executive Summary

Close to half of U.S. households currently do not owe federal income tax.  The Urban Institute-Brookings Tax Policy Center estimates that 46 percent of households will owe no federal income tax for 2011. [1]   A widely cited figure is a Joint Committee on Taxation estimate that 51 percent of households paid no federal income tax in 2009.[2]   (The TPC figure for 2009 also is 51 percent.) [3]
These figures are sometimes cited as evidence that low- and moderate-income families do not pay sufficient taxes.  Yet these figures, their significance, and their policy implications are widely misunderstood.

• The 51 percent and 46 percent figures are anomalies that reflect the unique circumstances of the past few years, when the economic downturn greatly swelled the number of Americans with low incomes.   The figures for 2009 are particularly anomalous; in that year, temporary tax cuts that the 2009 Recovery Act created — including the “Making Work Pay” tax credit and an exclusion from tax of the first $2,400 in unemployment benefits — were in effect and removed millions of Americans from the federal income tax rolls.  Both of these temporary tax measures have since expired.
  
  In 2007, before the economy turned down, 40 percent of households did not owe federal income tax.  This figure more closely reflects the percentage that do not owe income tax in normal economic times.[4]
• These figures cover only the federal income tax and ignore the substantial amounts of other federal taxes — especially the payroll tax — that many of these households pay.  As a result, these figures greatly overstate the share of households that do not pay federal taxes.  Tax Policy Center data show that only about 17 percent of households did not pay any federal income tax or payroll tax in 2009, despite the high unemployment and temporary tax cuts that marked that year.[5]  In 2007, a more typical year, the figure was 14 percent.  This percentage would be even lower if it reflected other federal taxes that households pay, including excise taxes on gasoline and other items.
• Most of the people who pay neither federal income tax nor payroll taxes are low-income people who are elderly, unable to work due to a serious disability, or students, most of whom subsequently become taxpayers.  (In years like the last few, this group also includes a significant number of people who have been unemployed the entire year and cannot find work.)
• Moreover, low-income households as a group do, in fact, pay federal taxes.  Congressional Budget Office data show that the poorest fifth of households paid an average of 4.0 percent of their incomes in federal taxes in 2007, the latest year for which these data are available — not an insignificant amount given how modest these households’ incomes are; the poorest fifth of households had average income of $18,400 in 2007.[6]   The next-to-the bottom fifth — those with incomes between $20,500 and $34,300 in 2007 — paid an average of 10.6 percent of their incomes in federal taxes. 
• Moreover, even these figures greatly understatelow-income households’ totaltax burden because these households also pay substantial state and local taxes.  Data from the Institute on Taxation and Economic Policy show that the poorest fifth of households paid a stunning 12.3 percent of their incomes in state and local taxes in 2011.[7]
• When all federal, state, and local taxes are taken into account, the bottom fifth of households pays about 16 percent of their incomes in taxes, on average.  The second-poorest fifth pays about 21 percent.[8]

It also is important to consider who the people are who do not owe federal income tax in a given year.

• TPC estimates show that 61 percent of those that owed no federal income tax in a given year are working households.[9]   These people do pay payroll taxes as well as federal excise taxes, and, as noted, state and local taxes.  Most of these working households also pay federal income tax in other years, when their incomes are higher — which can be seen by looking at the low-income working households that receive the Earned Income Tax Credit (EITC).
• The leading study of this issue found that the majority of households that receive the EITC get it for only one or two years at a time, such as when their income drops due to a temporary layoff, and pay federal income tax in most other years.  The study examined the filers who claimed the EITC at least once during an 18-year periodand found that they paid a net of several hundred billion dollars in federal income tax over that period.[10]   This finding shows that while some households will receive refundable tax credits in a given year whose value may exceed their payroll tax liability, they pay significant federal income taxes over time in addition to the payroll and state and local taxes they pay each year.
• The remainder of those who pay no income tax are primarily elderly, disabled, or students.

The fact that most people who don’t owe federal income tax in a given year do pay substantial amounts of other taxes — and also are net income taxpayers over time — belies the claim that households that do not owe income tax in a given year will form bad policy judgments because they “don’t have any skin in the game.”
Furthermore, although the federal tax system is progressive overall, state and local tax systems are regressive and undo a significant share of that progressivity.  There is nothing wrong with having one part of the overall tax system shield low- and moderate-income households, who pay substantial amounts of other taxes and generally pay federal income tax as well in other years.
To substantially increase the share of households that owe federal income tax, policymakers would have to take such steps as: lowering the personal exemption or standard deduction — which would tax many low-income working families into, or deeper into, poverty; weakening the EITC or Child Tax Credit, which would significantly increase child poverty while reducing incentives for work over welfare; or paring back the tax exclusion for Social Security benefits, which would subject more seniors with modest fixed incomes to the income tax.
This analysis now explores these issues in more detail.

Oft-Cited 51 Percent Figure Is Temporary Spike Caused by Recession

In 2007, before the economy turned down, the share of households with no federal income tax liability stood at 40 percent.[11]   In 2009, two factors combined to cause a large, temporary spike in the share of Americans with no net federal income tax liability — the recession, which reduced many people’s incomes, and several temporary tax cuts that have since expired.  The 51 percent figure for 2009 reflected these temporary factors.

• Recession-induced decline in incomes.  In 2009, unemployment was at its highest level in many years and rising sharply, and incomes were falling.  Income tax liabilities are designed to adjust to these cyclical factors, rising when the economy is strong and falling when it is weak; this automatic adjustment helps to stabilize the economy by cushioning the drop in people’s after-tax incomes — and thus their spending — during a downturn.  One consequence of the economic downturn was a sharp decline in both federal and state tax receipts, as millions of workers lost their jobs or had their work hours reduced.  For many Americans, the loss of income meant that while they owed federal income taxes in previous years, they did not in 2009.
• Temporary tax cuts.  Policymakers responded to the deep economic contraction by enacting policies to stimulate consumer demand, including targeted public investments and temporary tax cuts that removed millions more Americans from the tax rolls.  Roughly 95 percent of working families benefited from the Recovery Act’s Making Work Pay tax credit, which reduced their federal income tax liability in both 2009 and 2010 by $400 for individuals and $800 for married couples.  For some of these people, this tax credit eliminated their federal tax liability entirely.  Other temporary income tax cuts, including the exclusion of the first $2,400 in unemployment insurance benefits and a first-time homebuyer tax credit, eliminated federal income tax liability for additional taxpayers in 2009.

In other words, the federal income tax system did what it is supposed to do during the recession — take a smaller bite out of people’s incomes.  As the temporary tax cuts expire and the economy and incomes strengthen, people’s tax liabilities will rebound (see Figure 1).   For example, the Tax Policy Center estimates that the share of households with no federal income tax liability declined to 46.4 percent in 2011, when the aforementioned income tax cuts were no longer in effect (and the unemployment rate was a slight bit below the 2009 level). [12]   As the still elevated unemployment rate declines, this percentage will fall further.

Lower-Income People Pay Considerable Payroll, State, and Local Taxes

The notion that “half of Americans don’t pay taxes” not only overstates the share of households that do not pay federal income taxes in a typical year.  It also ignores the other taxes people pay, including federal payroll taxes and state and local taxes.  Policymakers, pundits, and others sometimes overlook this point.
At a Senate Finance Committee hearing in May 2011, Senator Charles Grassley said, “According to the Joint Committee on Taxation, 49 percent of households are paying 100 percent of taxes coming in to the federal government” (meaning that the other 51 percent pay no federal tax whatsoever).  At the same hearing, Cato Institute Senior Fellow Alan Reynolds asserted, “Poor people don’t pay taxes in this country.”  In 2010, Fox Business host Stuart Varney said on Fox and Friends, “Yes, 47 percent of households pay not a single dime in taxes.”[13]
None of these assertions are correct.  As the Tax Policy Center’s Howard Gleckman noted regarding a TPC estimate that almost half of Americans owed no federal income tax in 2009, “rarely has a bit of data been so misunderstood, or so misused.”  Gleckman wrote:

Let me explain — repeat actually — what [the figure] means: About half of taxpayers paid no federal income tax last year.  It does not mean they paid no tax at all.  Many shelled out Social Security and Medicare payroll taxes.  [….]  Some paid property taxes and, it is fair to say, just about all of them paid sales taxes of one kind or another.  So to say they pay no taxes is flat wrong.[14]

The reality is that the income tax is one of a number of types of taxes that individuals pay, both over the course of their lifetimes and in a given year, and it makes little sense to treat it as though it were the only tax that matters.  Some 82 percent of working households pay more in payroll taxes than in federal income taxes.[15]   In fact, low- and moderate-income people pay a much larger share of their incomes in federal payroll taxes than high-income people do: taxpayers in the bottom 20 percent of the income scale paid an average of 8.8 percent of their incomes in payroll taxes in 2007, compared to 1.6 percent of income for those in the top 1 percent of the income distribution (see Figure 2).[16]
There are two reasons why this is the case: high-income taxpayers generate much larger shares of their incomes than other households do from sources such as capital gains and dividends that aren’t subject to the Social Security payroll tax;[17] and earnings above $110,100 in 2012 aren’t subject to the Social Security tax.  That means that, as Aviva Aron-Dine wrote in a recent Milken Review article, “dishwashers pay a larger share of income in payroll taxes than, say, neurosurgeons.”[18]
Taking payroll taxes into account, in 2009, some 83 percent of filers paid either some federal payroll or some federal income tax.  In 2007, the most recent non-recession year, 86 percent of filers paid either some federal payroll or some federal income tax.[19]
In addition, Congressional Budget Office data show that lower-income households pay a significantly larger share of their incomes in federal excise taxes (levied on goods such as gasoline) than middle- and upper-income households do.
When all federal taxes are considered, it is clear that the overwhelming majority of Americans pay such taxes.  CBO data show that the poorest fifth of households paid an average of 4 percent of their incomes in federal taxes despite their low incomes in 2007, while the next fifth paid an average of 10 percent of income in federal taxes.
Low-income families also pay substantial state and local taxes. Most state and local
taxes are regressive, meaning that low-income families pay a larger share of their incomes in these taxes than wealthier households do.  The bottom fifth of taxpayers paid 12.3 percent of their incomes in state and local taxes in 2011, according to the Institute on Taxation and Economic Policy (ITEP).[20]   That was well above the 7.9 percent average rate that the top 1 percent of households paid (see Figure 3).
Considering all taxes — federal, state, and local — the bottom 20 percent of households pays an average of 16 to 17 percent of their incomes in taxes.  The next 20 percent of households pays about 21 percent of income in taxes, on average. [21]
In fact, when all taxes are considered, the share of taxes that each fifth of households pays is similar to its share of the nation’s total income.[22]   ITEP data show that in 2011, the bottom fifth of households received 3.4 percent of the total income in the nation and paid 2.1 percent of the total taxes.  The middle fifth of households received 11.4 percent of income and paid 10.3 percent of taxes.  The top 1 percent of households received 21.0 percent of income and paid 21.6 percent of taxes.  The tax system as a whole is only mildlyprogressive.[23]

Policy Options to Force People with Low Incomes to Pay Federal Income Tax Are Unsound

Some have implied or suggested that people who do not owe federal income tax are “freeloaders” who don’t have a “stake in the system,” and that making them pay federal income taxes would improve the tax code.
Yet the vast majority of the people who owe no federal income taxes fall into one of three categories (see Figure 4):[24]

• Approximately 61 percent are working people who pay payroll taxes.  As noted above, even the low-income households in this group pay substantial federal income taxes over time.  The main options to force these people to pay federal income tax in years when their incomes are low include cutting the EITC or the Child Tax Credit, which would tend to reduce work incentives and increase child poverty and welfare use, and lowering the standard deduction or personal exemption, which could tax many low-income working families into, or deeper into, poverty.
• An additional 22 percent of people who did not pay federal income taxes in 2009 are people aged 65 or older who have modest incomes (and do not have earnings).  The main option to make these individuals pay federal income tax would be to subject their Social Security benefits to taxation despite their limited income.[25]
• The remaining 17 percent includes students, people with disabilities or illnesses, the long-term unemployed, and other people with very low taxable incomes.  To make these people pay federal income taxes, policymakers would have to tax disability, veterans’, and similar benefits or make full-time students and the long-term jobless individuals borrow (or draw from any available savings) to pay taxes on their meager incomes.

As Urban Institute analyst Elaine Maag has written of non-income taxpayers, “most are elderly, poor, or unemployed (including people who are too disabled to work).  Whom, I wonder, should the tax man put on the block?”[26]

Another Way of Looking at Who Pays No Federal Income Tax

A separate TPC analysis categorized people who do not owe federal income tax in 2011 in a different way.* It found that of the filers who don’t owe federal income tax for 2011:

• 50 percent are in this category because their incomes are so low that they are less than the sum of the standard deduction and personal and dependent exemptions for which the household qualifies.  As TPC Senior Fellow Roberton Williams has noted, “the basic structure of the income tax simply exempts subsistence levels of income from tax.”**  Some 62 percent of the households who will owe no federal income tax in 2011 have incomes under $20,000.
• Another 22 percent do not owe federal income tax because they are elderly people who benefit from tax provisions to aid senior citizens, such as the exemption of Social Security benefits from income tax for beneficiaries who have incomes below $25,000 for single filers and $32,000 for joint filers and the higher standard deduction for the elderly.
• Another 15 percent (of the households who don’t owe federal income tax) don’t owe the tax because they are low-income working families with children who qualify for the child tax credit, the child and dependent care tax credit, and/or the earned income tax credit, and the credit(s) eliminate their income tax liability.*** 

* Rachel Johnson, James Nunns, Jeffrey Rohaly, Eric Toder, and Roberton Williams, “Why Some Tax Units Pay No Income Tax”, Urban-Brookings Tax Policy Center, July 2011; and Roberton Williams, “Why Do people Pay No Federal Income Tax” TPC TaxVox, July 27, 2011. For a further discussion of this TPC analysis, see Aviva Aron-Dine, “Trends”, Milken Institute Review, First Quarter 2012, pp. 5-11.
** Roberton Williams, “Why Do People Pay No Federal Income Tax?”, TPC TaxVox, July 27, 2011
*** The remainder of those who do not owe federal income tax, about 13 percent, don’t owe federal income tax because of itemized deductions or other tax benefits.

Cutting the EITC Would Discourage Work and Increase Poverty

From its roots as an idea from conservative economist Milton Friedman several decades ago, the Earned Income Tax Credit has become an increasingly important tool to make work pay more than welfare and enough to lift people working full time at the minimum wage out of poverty.  Research has demonstrated the EITC’s effectiveness.  Nobel laureate (and noted conservative economist) Gary S. Becker has written, “Empirical studies confirm . . . that the EITC increases the labor force participation and employment of people with low wages because they need to work in order to receive this credit.”[27]   (Becker also has applauded the EITC for being “fully available to families with both parents present, even where only one works and the other cares for their children [i.e., for being available to low-income working families with stay-at-home mothers].”)
Studies of the EITC expansions enacted in the 1980s and 1990s found those expansions induced more than half a million people to enter the labor force.  One prominent study identified the EITC as “a particularly important contributor to both the recent decrease in welfare use and the recent increase in employment, labor supply, and earnings” among female-headed families.[28]   The creation of the refundable component of the Child Tax Credit, which like the EITC is available only to families that work, has complemented the EITC’s pro-work efforts.  Moreover, the EITC and CTC lifted 8.9 million people — including 4.7 million children — out of poverty in 2010.[29]  These refundable credits lift more children out of poverty than any other program or category of programs at any level of government.
Several factors reinforce the importance of these credits in promoting and rewarding low-wage work.  In recent decades, incomes in the United States have grown increasingly unequal, with the lion’s share of the economic gains from globalization, advances in technology, and the like accruing to those on the upper rungs of the income ladder.  CBO data show that the average income among people in the lowest income fifth was $17,700 in 2007; if all incomes had grown at the same rate since 1979, that figure would have been $6,000 higher.  Our economy benefits from globalization and technological change, but there are winners and losers.  The refundable tax credits help to offset a portion of the effects of the stagnation of wages at the bottom of the income spectrum.
In addition, the weak labor market is likely to continue exerting downward pressure on wages over the next several years.  The unemployment rate remains stubbornly high, at 8.2 percent in March 2012.  CBO projects that it will not drop to under 6 percent until 2017.  Taking note of the bleak employment picture facing out-of-work men, columnist David Brooks wrote last year that “wage subsidies” should be on the list of future policy responses.  The EITC is a much-needed wage subsidy for low-income workers (although the EITC for poor workers without children remains very small and should be strengthened).
Finally, over the past several decades, policymakers have essentially relied more on the EITC to supplement low wages and less on the minimum wage, which they have allowed to decline by 19 percent in purchasing power since its peak in 1968 (i.e., the minimum wage has fallen by 19 percent in inflation-adjusted dollars).
For all of these reasons, scaling back the EITC in order to require more low-income working families to pay federal income taxes in years when their incomes are low would be a significant step backward, discouraging work and increasing poverty.

Corporations and Small Business Owners
Also Pay No Income Tax During Bad Years

As this analysis notes, in addition to paying other taxes each year (many of which involve significant tax burdens), most people who do not pay federal income tax in a given year do pay that tax over time.  For example, more than half of the tax filers who received the EITC between 1989 and 2006 received the credit for no more than a year or two at a time and generally paid substantial amounts of federal income tax in other years.  The taxpayers who claimed the EITC during this 18-year period paid several hundred billion dollars in net federal income tax over that period (in 2006 dollars) even after taking the EITC payments they received into account. *
The tax-paying record of both large corporations and small businesses follows an analogous pattern — in some years no taxes are paid, while in other years substantial taxes are paid.  During the years when they have net operating losses, companies that are subject to the corporate income tax generally have no tax liability.
A GAO study found that in every year from 1998 to 2005, approximately 55 percent of large corporations paid no corporate income tax. **  But just 2.7 percent of large corporations reported no net tax liability in all eight of those eight years.  This reflects a similar pattern as applies to families and individuals — those who do not pay income tax in a given year often do pay income tax over time.
This pattern also applies to small business owners and others who deduct business losses from their taxable incomes and thereby eliminate their income tax liability in some years.
* Tim Dowd and John B. Horowitz, “Income Mobility and the Earned Income Tax Credit: Short-Term Safety Net or Long-Term Income Support,” Public Finance Review (April 11 2011), pp 619-652; CBPP communications with authors.
** Large corporations are those with at least $250 million in assets or $50 million in gross receipts.  Government Accountability Office, “Comparison of the Reported Tax Liabilities of Foreign- and U.S.-Controlled Corporations, 1998-2005,” July 2008, http://www.gao.gov/new.items/d08957.pdf.

[1] Tax Policy Center, “Tax Units with Zero or Negative Tax Liability, Current Law, 2004-2011 (T11-0173),” June 14, 2011, http://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=3054.
[2] Joint Committee on Taxation, “Information on Income Tax Liability for Tax Year 2009”, memorandum, April 29, 2011. 
[3] Tax Policy Center, “Tax Units with Zero or Negative Tax Liability, Current Law, 2004-2011 (T11-0173),” June 14, 2011, http://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=3054.
[4] Id.
[5] Tax Policy Center, “Tax Units with Zero or Negative Tax Liability, Current Law, 2004-2011 (T11-0173),” June 14, 2011, http://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=3054.
[6] Congressional Budget Office, “Average Federal Taxes by Income Group,” June 2010, http://www.cbo.gov/publication/42870.
[7] Institute on Taxation and Economic Policy (ITEP) Tax Model, April 2012. 
[8] Institute on Taxation and Economic Policy (ITEP) Tax Model, April 2012.  The ITEP model shows the bottom 20 percent of households paying 5.0 percent of income in federal taxes, and 12.3 percent of income in state and local taxes, in 2011.  CBO data are not available on state and local tax burdens by income.  The latest CBO data on federal tax burdens by income group are from 2007 and show that the bottom 20 percent of households paid 4 percent of their income in federal taxes that year.
[9] Tax Policy Center, “Who Doesn’t Pay Federal Taxes,” http://www.taxpolicycenter.org/taxtopics/federal-taxes-households.cfm.
[10] Tim Dowd and John B. Horowitz, “Income Mobility and the Earned Income Tax Credit: Short-Term Safety Net or Long-Term Income Support,” Public Finance Review (April 11 2011), p.p 619-652; CBPP communications with authors.
[11] Tax Policy Center, “Tax Units with Zero or Negative Tax Liability, Current Law, 2004-2011 (T11-0173),” June 14, 2011, http://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=3054.
[12] Tax Policy Center, “Tax Units with Zero or Negative Tax Liability, Current Law, 2004-2011 (T11-0173),” June 14, 2011, http://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=3054.
[13] Media Matters, “Do conservative media figures want to raise taxes on middle- and low-income Americans?,” April 9, 2010, http://mediamatters.org/research/201004090030.  The 47 percent referenced is from a 2009 TPC estimate of the share of filers who owed no federal income tax in 2009; Howard Gleckman, “Who Pays No Income Tax?”, TPC TaxVox Blog, July 8, 2009, http://taxvox.taxpolicycenter.org/2009/07/08/who-pays-no-income-tax/.  TPC has updated the figure for 2009 to 51 percent.
[14] Howard Gleckman, “About Those 47 Percent Who Pay ‘No Taxes,’” TaxVox, April 15, 2010, http://taxvox.taxpolicycenter.org/2010/04/15/about-those-47-percent-who-pay-%E2%80%9Cno-taxes-%E2%80%9D/. 
[15] For 2011 tax year; TPC Table T11?0192.
[16] Congressional Budget Office, 2010.
[17] TPC Table T12-0010.
[18] Aviva Aron-Dine, “Trends”, The Milken Institute Review, First Quarter 2012, p. 6.
[19] TPC Table T11-0173.  TPC estimates that 82 percent of households owed either federal income tax or payroll tax in 2011.  The TPC data also show that in 2007, some 78 percent of households owed net federal income and payroll taxes; this percentage is somewhat lower because some filers paid payroll taxes but received an income tax refund that equalled or exceeded their payroll tax obligation.  In 2009, 71 percent of households had a net tax liability from income and payroll taxes combined; in 2011, 72 percent of households did.  This percentage will increase somewhat as the economy recovers.
[20] ITEP, 2012.
[21] The ITEP model shows the bottom 20 percent of households paying 5.0 percent of income in federal taxes, and 12.3 percent of income in state and local taxes, in 2011.  CBO data are not available on state and local tax burdens by income.  The latest CBO data on federal tax burdens by income group are from 2007 and show that the bottom 20 percent of households paid 4 percent of their income in federal taxes that year.  The ITEP model shows that the next 20 percent of households paid 11.7 percent of income in state and local taxes, in 2011. CBO data show that in 2007, that 20 percent of households paid 10.6 of their income in federal taxes that year.
[22] ITEP, 2012.
[23] Before taxes, the bottom 20 percent of households received 4 percent of national income and the top 1 percent received 19.4 percent in 2007.  After taxes, the bottom 20 percent of households received 4.9 percent of national income and the top 1 percent received 17.1 percent.  Congressional Budget Office, 2010.
[24] Tax Policy Center, “Who Doesn’t Pay Federal Taxes,” http://www.taxpolicycenter.org/taxtopics/federal-taxes-households.cfm.
[25] Under current law, Social Security benefits are not subject to the income tax for filers whose income is below $25,000 for individuals and $32,000 for couples.
[26] Elaine Maag, “So…Who Should Pay Income Taxes?”, TPC TaxVox, June 24, 2011.
[27] Gary S. Becker, “How to End Welfare ‘As We Know It’ — Fast,” Business Week, June 3, 1996.
[28] Jeffrey Grogger, “The Effects of Time Limits, the EITC, and Other Policy Changes on Welfare Use, Work, and Income among Female-Headed Families,” The Review of Economics and Statistics, May 2003.
[29] CBPP analysis of Census Bureau’s March 2011 Current Population Survey.

Lucky Duckies: The Working Poor who pay little or no taxes

Lucky duckies

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Lucky duckies is a term that was used in Wall Street Journal editorials starting on 20 November 2002 to refer to Americans who pay no federal income tax because they are at an income level that is below the tax line (after deductions and credits). The term has outlived its original use to become a part of the informal terminology used in the tax reform debate in the United States.

Contents 1 The original argument 2 Expansion and limits of the original argument 3 Precedents 4 Criticism 5 References 6 See also 7 External links

The original argument

The Journal defined the term in this way:

Who are these lucky duckies? They are the beneficiaries of tax policies that have expanded the personal exemption and standard deduction and targeted certain voter groups by introducing a welter of tax credits for things like child care and education. When these escape hatches are figured against income, the result is either a zero liability or a liability that represents a tiny percentage of income.^[1]

The worry of the Journal’s editorialist was that “as fewer and fewer people are responsible for paying more and more of all taxes, the constituency for tax cutting, much less for tax reform, is eroding. Workers who pay little or no taxes can hardly be expected to care about tax relief for everybody else. They are also that much more detached from recognizing the costs of government.”^[1]
For example, according to the editorial:

Say a person earns $12,000. After subtracting the personal exemption, the standard deduction and assuming no tax credits, then applying the 10% rate of the lowest bracket, the person ends up paying a little less than 4% of income in taxes. It ain't peanuts, but not enough to get his or her blood boiling with tax rage.^[1]




The Journal published three articles using the phrase “lucky duckies”: “The Non-Taxpaying Class”, the original article, on 20 November 2002;^[1] “Lucky Duckies Again” (20 January 2003);^[2] and “Even Luckier Duckies” (3 June 2003).^[3]

Expansion and limits of the original argument

In recent years, the number and percentage of Americans who pay no federal income tax has increased. According to a 2007 report by the Statistics of Income division of the Internal Revenue Service,^[4] in 2006 the Internal Revenue Service received 134,372,678 individual income tax returns, of which 90,593,081 (67.42%) showed that they paid or owed federal income tax for 2005. That is, 32.58% of those Americans who filed income tax returns did not owe any federal income tax at all for 2005. This percentage increased substantially in 2008, and for 2009 was 47%.
The federal income tax is only one of several taxes Americans pay. Americans who pay zero federal income taxes do pay other taxes, such as payroll taxes, excise taxes, sales taxes, tariffs, gift taxes, unemployment taxes, state income taxes, property taxes, and self-employment taxes (a.k.a. FICA).
Federal payroll taxes are imposed on nearly every American with income from employment (there are exceptions for certain students, certain religious objectors, and certain state/local government employees who participate in a state/local pension). Federal self-employment taxes are imposed on nearly every American with net income from self-employment above $400 (again with exceptions for certain religious objectors). So almost all Americans with some earned income do pay some federal taxes. However, the US also allows refundable tax credits to certain individuals, which can lower their income taxes below zero. When these refundable tax credits equal or exceed other federal taxes, the individual is said to pay "no net federal taxes."
As of 2006, according to New York Times columnist David Leonhardt, approximately 10% of Americans paid no net federal taxes ^[5]. Mr. Leonhardt did not have figures for 2010, and there were several refundable tax credits which were created or expanded between 2006 and 2010.
According to Congressional Budget Office estimates, ^[6] the lowest earning 20% of Americans (24.1 million households earning an average of $15,900 in 2005) paid an "effective" federal tax rate of 3.9%, when taking into account income tax, social insurance tax, and excise tax. For comparison, the same study found that the highest earning 1% of Americans (1.1 million households earning an average of $1,558,500 in 2005) paid an "effective" federal tax rate of 21.9%, when including the same three types of taxes.

Precedents

In 2001, U.S. Representative (now Senator) Jim DeMint (R-S.C.) told The New Yorker:

“I think we’ve got a major crisis in democracy… We assume that voters will restrain the growth of government because it becomes burdensome to them personally. But today fewer and fewer people pay taxes, and more and more are dependent on government, so the politician who promises the most from government is likely to win. Every day, the Republican Party is losing constituents, because every day more people can vote themselves more benefits without paying for it. The tax code will destroy democracy, by putting us in a position where most voters don’t pay for government.”^[7]

Criticism

The opening panel to one of Ruben Bolling’s comic strips that features Lucky Ducky^[8]

The Journal was frequently mocked for its use of the term “lucky duckies” to refer to people whose lack of a federal income tax burden is the direct result of their lower income. This attitude was satirized as “let them eat cake”-style myopia.
Ruben Bolling’s Tom the Dancing Bug comic in Salon magazine, for instance, periodically features a poor duck who keeps “outwitting” a fat, top-hatted oligarch by cleverly submitting to the misfortunes of his economic class.
Jonathan Chait, in The New Republic, reacted to the Journal editorial by writing:

One of the things that has fascinated me about The Wall Street Journal editorial page is its occasional capacity to rise above the routine moral callousness of hack conservative punditry and attain a level of exquisite depravity normally reserved for villains in James Bond movies.^[9]

And one "lucky ducky" wrote to the Journal editor, offering to share his luck (in a form of logical argument sometimes known as a modest proposal):

I will spend a year as a Wall Street Journal editor, while one lucky editor will spend a year in my underpaid shoes. I will receive an editor's salary, and suffer the outrage of paying federal income tax on that salary. The fortunate editor, on the other hand, will enjoy a relatively small federal income tax burden, as well as these other perks of near poverty: the gustatory delights of a diet rich in black beans, pinto beans, navy beans, chickpeas and, for a little variety, lentils; the thrill of scrambling to pay the rent or make the mortgage; the salutary effects of having no paid sick days; the slow satisfaction of saving up for months for a trip to the dentist; and the civic pride of knowing that, even as a lucky ducky, you still pay a third or more of your gross income in income taxes, payroll taxes, sales taxes and property taxes.^[10]

References

1. ^ ^{a b c d} “The Non-Taxpaying Class: Those lucky duckies!” The Wall Street Journal 20 November 2002 [1]
2. ^ “Lucky Duckies Again: Look at who won’t pay taxes under Bush’s plan” The Wall Street Journal 20 January 2003 [2]
3. ^ “Even Luckier Duckies: When a tax cut becomes a welfare check” The Wall Street Journal 3 June 2003 [3]
4. ^ “SOI Tax Stats — Individual Income Tax Returns Publication 1304” Internal Revenue Service [4]
5. ^ http://economix.blogs.nytimes.com/2010/04/13/who-doesnt-pay-taxes/
6. ^ “Historical Effective Federal Tax Rates: 1979 to 2005” Congressional Budget Office [5]
7. ^ Lemann, Nicholas “Bush’s Trillions: How to buy the Republican majority of tomorrow” New Yorker 19 February 2001[6]
8. ^ Bolling, Ruben “All’s Fair in Class & War!” 12 June 2003 [7]
9. ^ as quoted in Manjoo, Farhad “March of the ‘lucky duckies’” Salon 21 December 2002 [8]
10. ^ Petersen, Pier “‘Lucky Duckie’ Invites Editors into his Pond” as quoted in “&c.: A Daily Journal of Politics” The New Republic Online 12 June 2003[9]