Over and over, every April, we are informed by the media that a small number of income tax filers pay a large share of income tax, as though this were remarkable or even alarming. What we don't hear much about is why some pay more than others. The answer is quite simple: they receive most of the nation's income. Income taxes are, by design, somewhat proportional to income. If you have more, you pay more, or at least that's how it's supposed to work.
Here's another way of looking at it: If a small percentage of Americans receive a very large percentage of all the income, then a very large percentage of Americans must divide up what's left over. The gap between how much money goes to the few at the top and how little goes to the many at the bottom is called income inequality. And over the last several years it has gotten much, much worse. It's only right, then, that the fortunate few pay their fair share in taxes.
Here's how income inequality looks in New Mexico. In 2008, more than 70 percent of New Mexico tax payers earned just 29 percent, less than one-third, of all state income, according to the IRS. On average, this large majority of households earned just over $18,000 a year.
So who got most of the state's income? More than half of it (54 percent) went to just 16 percent of New Mexicans. But even within the top 16 percent, the income distribution remains highly skewed. Almost one-fifth of total income in New Mexico went to less than 2 percent of all filers.
We've also heard about Americans who don't pay any federal income tax at all. Many of these folks are of very modest income: retirees, working families, and the disabled.
What we don't hear about are all the taxes that low-income people actually do pay. No one in America escapes taxation entirely and this is particularly true for the poor. Like many states, New Mexico taxes the sale of most goods and services. Taxes levied on purchases fall disproportionately on lower-income people because they have no choice but to spend, and thus be taxed on, every cent they earn. Upper income households can divide their income between spending, saving and investing. For example, a New Mexican earning less than $16,000 will spend, on average, almost 11 percent of their income on state and local taxes. But a New Mexican with income upwards of $150,000 will pay just 6 percent in taxes.
Payroll taxes (deductions for Social Security and Medicare)are paid by everyone who gets a paycheck. But payroll taxes do not treat all wages the same. They cut off at $106,000, meaning that middle- and low-wage earners pay tax on everything they earn, while high-wage earners only pay tax on the first $106,000.
All wages are not equal, nor is all income. You've heard the saying "it takes money to make money." Not only is that true, but investment income (the kind of money you make with other money) is actually taxed at a lower rate than money earned from actual work. In New Mexico, half of all capital gains, the profit from the sale of assets, is excluded from income tax entirely. And most of the capital gains income in N.M. (80 percent) was reported by filers with adjusted gross incomes over $200,000. Thus, the lion's share of this generous tax preference went to a tiny minority of very fortunate taxpayers.
So, people with more money sometimes pay more taxes. Fair, but remarkable?
New Mexico Voices for Children is a nonpartisan, nonprofit organization advocating for policies to improve the health and well-being of New Mexico's children, families and communities.
By Gerry Bradley, the research director for New Mexico Voices for Children.