Who, Exactly, Are the 47 Percent?

This has nothing to do with tax policy, it’s just a hilarious photo.

The politisphere is blowing up this afternoon following the publication of a devastating series of clips from a private Mitt Romney campaign fund-raiser in which the GOP nominee makes a Marie Antoinette-esque statement about the 47 percent of Americans who, according to him, “pay no income tax.”

My job is not to worry about those people,” Romney said. “I’ll never convince them they should take personal responsibility and care for their lives.”

Setting aside the political implications of implying that roughly half of America is negligent and lazy, Romney’s almost right about the first bit. According to the Tax Policy Center, 46.4 percent of American households paid no federal income tax in 2011. So, although it’s been covered again and again, since Romney’s “47 percent” remark is likely to become a late-campaign meme, it’s worth asking yet again: Who are these people paying no taxes?

Well, for starters, it’s not accurate to say that 47 percent of Americans pay no taxes at all. Most people pay state taxes, local taxes, and property taxes. Almost all pay sales tax, and most pay payroll. According to the TPC, only 18.1 percent of American households paid zero or negative federal income tax and zero or negative federal payroll tax in 2011.

But back to the 47 percent. There are two primary ways to pay no (or negative) federal income taxes. The first is to be poor, and the second is to be elderly. In 2011, of the 18.1 percent of American households who paid no federal tax (meaning, no federal income or payroll tax), more than half were elderly, and most of the other half were non-elderly people making below $20,000 a year. The other sliver, roughly one in twenty non-payers, were people who made more than $20,000 in household income.

The reason being poor helps is because, with a combination of tax credits (like the earned income credit and the child credit) and deductions, many people earning under $20,000 a year can zero out their overall rate. The primary reason being elderly helps is that Social Security benefits aren’t taxed as income, so if all (or most) of your income comes from your monthly Social Security check, your taxable income is marginal or nonexistent.

There, are, of course, some exceptions to the old-or-poor rule. As Bruce Bartlett noted last year, roughly 12 million households making over $33,542 in 2011 paid no federal income tax. And there are an untold number of illegal tax evaders who haven’t paid a dime either. (Like Wesley Snipes!)

But the most egregious members of the 47 percent are the 3,000 people who made more than $2,178,866 in 2011 (putting them in the top 0.1 percent of taxpayers), and yet paid no federal income taxes.

Those people are likely hedge fund managers, real estate investors, or other wealthy financiers whose income comes primarily in the form of capital gains, which is taxed at a much lower rate than ordinary income. Combine the capital gains rate with a magical thing called a “tax-loss carryforward,” which allows an investor to use last year’s big loss to offset this year’s gains for tax purposes, and voila — no federal income tax.

The Tax Foundation mapped the non-payers of federal income tax in 2008 by state, and found that the leading states for zero or negative income tax liabilities also tended to be Republican strongholds. In Mississippi, for example, a full 45 percent of households paid zero or negative federal income tax. In Texas, it’s 39 percent.

So the moral of the story is: If you want your federal income taxes to be zero, be broke in Biloxi, elderly in Alabama, or a hedge fund manager in Miami.