The Associated Press has an article on federal income taxes and the fact that about half of Americans don’t pay them.
About 47 percent will pay no federal income taxes at all for 2009. Either their incomes were too low, or they qualified for enough credits, deductions and exemptions to eliminate their liability. That’s according to projections by the Tax Policy Center, a Washington research organization.
. . .
In recent years, credits for low- and middle-income families have grown so much that a family of four making as much as $50,000 will owe no federal income tax for 2009, as long as there are two children younger than 17, according to a separate analysis by the consulting firm Deloitte Tax.
As usual, I have mixed views here. On one hand, I think taxes have civic virtue. Paying them makes everyone invested in the community to some extent – sort of a pride in ownership effect. On the other hand, in political discourse these days, some folks have almost made a fetish out of the federal income tax, as if it’s the only sort of tax that matters. You’ll routinely hear a wailing and gnashing of teeth about how so, so many poor people (subtext: freeloaders) “don’t pay any taxes.” If you push, you’ll get a concession that it’s federal income taxes they don’t pay.
The people not paying federal income taxes are often paying other sorts of taxes: sales taxes, payroll taxes, property tax, user fees, excise taxes, etc. But, for whatever reason, those don’t count.
And, it’s no accident that the federal income tax soaks the rich. That was pretty much its entire purpose. The 16th Amendment allowing the income tax came from the socialists and the progressives agitating for a graduated income tax. And there is some justification to the disproportionate share of taxes paid by the wealthy. The wealthiest 25% of Americans control something like 87% of the country’s wealth. And, contrary to what we’d like to believe about ourselves, wealth (not that I have any great deal of it personally) isn’t solely (or even, arguably, primarily) a function of hard work and ingenuity.
A lot of it has to do with the system into which we were born – Gates simply wouldn’t have made his billions if he were born and raised in Somalia. And, apart from the system, there are obviously advantages to the particulars of one’s family and the like. I don’t spend a lot of time worrying about this sort of “unfairness.” But, it doesn’t seem unreasonable to require the prime beneficiaries of a system to do the lion’s share of funding it.
80% of wage-earners lose more to payroll taxes on income– a far more painful “income tax” if you will. This includes those in working poor households who are nowhere near paying a dime of “income tax”, but even at the poverty line, are pummeled for $1,000’s of dollars in payroll taxes.
And then there’s the state income tax– in 17 or 18 states, imposed on those at the poverty line. Indiana is among the worst at pounding the poor in this manner.
Brutal…
I’ve noticed that while I might get back $3k-$5k in federal returns (yes, I need to adjust my withholdings), I have had to pay between $100-$200 to Indiana at tax time the past few years.
Mainly, I don’t understand why my withholdings would be so wrong for one and not the other. Mind you, I don’t claim to be near the poverty line, but I did notice a big difference between Indiana and federal tax.
“The people not paying federal income taxes are often paying other sorts of taxes: sales taxes, payroll taxes, property tax, user fees, excise taxes, etc. But, for whatever reason, those don’t count.”
Doug, they only count if those people don’t receive EIC, WIC, extended unemployment benefits (beyond the traditional six months), disability, Medicaid or any other kind of government handout (many or most of them do). If any of the above are in play, then these “taxpayers” are paying those “taxes” with YOUR money. It’s a political shell game that reminds me of the fabled accounting prowess of the Arthur Andersen bunch, and to pretend otherwise just prolongs this (basically) idiotic debate. It’s like taking a handful of sand and tossing it back and forth from your right hand to your left hand over and over. It doesn’t take long before both hands are empty.
Possibly, but not necessarily. Let’s suppose that there are current beneficiaries of social welfare programs who worked in the past. And, further suppose that their labor generated value that exceeded their compensation. If that’s the case, it’s possible that the taxes are coming from someone who captured that sort of excess value in the past – an employer, maybe. In which case, it’s not necessarily a shell game.
That sounds like a pretty specific cosmic alignment. With 47% of people NOT paying income tax, the shell game (strictly by the numbers) is fully underway.
Those Indiana state taxes and local taxes just keep going up it seems, even though the republicants led by mitch declared they have not raised taxes and have actually reduced them. Cut tax rates on property, raise assessment value, get the same amount of revenue. Or simply pass the costs off to the local govt entities who then have to raise local taxes.
My wife and I have to pay near 30% in taxes and we pay more than many people earn, dam near the median income we pay in taxes.
But look at the great govt we get and the honorable legislators we get with our tax dollars. :)
The wording commonly used, “47% pay no taxes” is flat out incorrect. You cannot make a transaction outside of the underground economy without some taxes having been charged and paid somewhere.
As for the original income tax when the 16th Amendment became law, yes, it was a soak-the-rich law, to the tune of- get this- 1%. Couples earning $4,000/yr or single spersons earning $3,000/yr were subject to this tax.
Now, $4,000/yr in 1913 was a lot of money, but I like the tax rate. Somehow, our country got by.
I’m getting a refund, as I do every year. I’m not on WIC, unemployment, Medicare, Medicaid, don’t get the EIC, and have no dependents. I do have a mortgage, however. By the time I itemize deductions and figure out my taxable income, I always get a refund, because the amount withheld in the previous year exceeds the tax I’m supposed to owe by the time I get to line whatever on the 1040. I still paid taxes last year, however, and I have the check stubs to prove it. Like Jason, I may need to adjust my withholding. :)
If I understand them correctly, according to the Tax Policy Center, I’m among the 47% not paying taxes for 2009. Yet I did pay taxes. I’m just not sending a check to the IRS. I suspect that hypothetical family of four making $50,000.00 and “paying no taxes” would be like me. How is taking legal credits and deductions on the 1040 when you’ve already paid taxes via withholding not paying taxes? How is it freeloading? Is there something I’m not understanding about what the Tax Policy Center said?
I’m pretty sure they’re not referring to your situation Pila. I think they’re referring to people who have no federal income tax obligation at all — either they had no withholding or their refund equals or exceeds their withholding.
How do I get to be one of those people, LOL!
Simple: Don’t work; be poor.
Which calls for an Office Space quote:
When I did earn less, I remember a few years that my effective tax was at or under $1000 for the year.
However, my tax rate was still in the 15%-25% range, IIRC. The deal is that I tithe (give 10% to my church), I have a mortgage, I paid for daycare, and had other deductions.
Theses deductions work for both people that made less than $50,000 and for people that make $5,000,000. Just because I make less, I’m able to deduct almost my whole salary. I’m not taking advantage of the tax system any more than the person making $5,000,000.
If we want to fix this, I’m totally fine with saying that above a certain level (the point that people can pay for food & shelter), EVERYONE gets taxed at the exact same rate, no deductions. I don’t care how you make your money or how much your make, but no more deductions for anything.
Until we get the people who feel they’re paying everyone else’s taxes agreed to this, I don’t want to hear their complaining.
I don’t see this happening, though, precisely because the rich seem to like paying 17% while the middle class pays 30%:
http://www.washingtonpost.com/wp-dyn/content/article/2007/06/27/AR2007062700097.html
I wish I were writing a big check to the IRS, as I did a few years ago. That was awesome. I mean, I hated parting with that kind of dough for mainly things I oppose, but it meant I made a whole lot more. This economy has been a real kick in the balls.
Jason- I’d love to see a one person, one bill system, with no exceptions, no loopholes, just each person’s *fair share*, literally.
Jason: What you propose is actually the current system. At high income levels, most income-tax deductions are phased-out. Some people actually take issue with this setup, because it means that people who make less, but are in the phase-out range, actually have higher marginal taxation than taxpayers who make the most.
Paul, read the link I posted. Someone who made millions on millions paid 17% while someone making far, far less (a receptionist) paid 30%.
Our current system does not tax the highest incomes properly. However, I don’t think raising the tax rate for the super-rich works with a tax code that is so complex, hence the need for a very simple tax code: Incoming over X (X being poverty level) is taxed at Y percent. Our tax code in one sentence.
The more complex you make the code, the more likely you are to have unintended consequences.
Whether the consequences have been unintentional is debatable.
Doug – Agreed.
I do work, and I am not poor, but not comfortable either. ;-) It sounds as if at least some of the 47 percent work, too. The hypothetical referred to a family of four with an income of $50,000. Are we supposed to believe that the $50,000 is investment income? By the way, I’m still having a hard time buying the 47 percent figure. It seems way too high.
The consequences of the complex tax code are not unintentional. If you’d ever had to slog and sleep your way through tax class, you would know that.
Income Tax was a required class for me in law school. And a slog it was. I kept glazing over in class and not getting much out of it. Eventually, I had to prepare an extensive outline for myself preparing for the final exam. I think I escaped with a “B” and was quite pleased.
I was responding to Jason, actually. :) Should have made that clear.
I absolutely could not stand tax class. I would go to class and leave more confused every day. It did not help that the professor–I can’t even remember his name, thank goodness–would just start talking about anything with no order or sense to his lectures. To top it off, he’d written the textbook, so there was no going to the book to clear up what wasn’t said in class. The prof was a very smart man, but he could not communicate to save his life.
My brother went to school in Indy and had an ex-Marine (IIRC) as his tax prof. He learned tax backward and forward and (gag!) loves it. He took more than the minimum required tax class, if you can believe it.
Pila, I assume you mean the intention is to protect the wealthiest while appearing to help poorest?
Jason, I am not sure you got my meaning. You originally said:
“If we want to fix this, I’m totally fine with saying that above a certain level (the point that people can pay for food & shelter), EVERYONE gets taxed at the exact same rate, no deductions. I don’t care how you make your money or how much your make, but no more deductions for anything.”
That is already the case. What you are upset with is the lower rate for capital gains, and very little is salary, or “earned income.” People with the highest incomes receive most of their money as capital gains, which is currently taxed at 15%. That is why the percentages are different, not because of “deductions”.
Paul,
That would be the part where I said “I don’t care how you make your money”.
Earned income, capital gains, winning big at Vegas, selling your car, I don’t care.
Money that comes into your house gets treated the same.
Jason: Many people agree with you, however, there are very reasonable arguments that differ, and many people don’t think of capital gains as income at all. Let me provide you with an example:
I purchase a house in Indianapolis for $300,000 today. In fifteen years, due to inflation and an increase in the cost of housing, that house is worth $600,000. I sell the house at that time because the house doesn’t have the features I want.
Now, the govt. is going to take 25% (or whatever percent) of the $300,000 I made ($75,000). This means I can no longer afford a similar priced house because I don’t have the $75,000 just taxed by the govt, unless I dip into savings I may not even have. Does that sound fair to you?
If you don’t like the house example, feel free to use an asset of your choice.
Paul,
That’s correct, you’re buying something. If my TV doesn’t have the features I want and I buy a new one, I don’t get to buy a new TV tax-free just because I want to replace my old one.
You would have to weigh if you want to sell your home or not knowing what you would have to pay in taxes. However, the calculation would be fairly easy to make and you can make your decision based on that.
Yes, no one wants to pay taxes, but this is the most fair way. You still made $75,000 in your example, complaining that you have to pay more taxes for making more money is silly.
Actually, Jason, there are all sorts of things written into the tax code that have very much intended consequences. I’m not just talking about rich v. poor.
Pila,
I think I understand what you’re talking about. Things like tax credits for home efficiency improvements, tax credits for being a teacher in a undesirable location, etc…correct?
Yes, I think there are good ideas in there. However, I would rather the government, if they feel it is a good idea to do this, just give the money as cash up front. They can subsidize with the manufacturer, or just write a check to the teacher, etc.
It makes it so things are more up front rather than being hidden as “tax breaks”. Let’s have everyone pay their fair share of taxes, then if the government wants to give money after taxes are paid to people, do that, but call it what it is.
Jason,
In my example above, let’s say that the reason the people are selling the house is because it is too large for them, as their kids have left the home (a common situation). And you want to tax them at their marginal tax rate for downsizing their house and consuming less then they were previously consuming? That’s a bad tax code. Some might even call it foolish.
For the record, when a component of the “return on capital” is really just equal to the cost of inflation, you did not “make money” at all. You broke even. Yet you still have to pay tax on “breaking even” at capital gain rates. That is not fair at all.
Well, hell. Labor doesn’t get any discount for inflation. Giving up time and effort to perform some service is worth something, but you don’t get to deduct the principal worth of that piece of your life, let alone adjust it for inflation.
“Labor doesn’t get any discount for inflation. ”
Doug:
1) Since Reagan, the tax code has indeed been indexed for inflation. So, if you made $10 an hour in 1987, and it’s equivalent in 2009 ($20) you are taxed at the same rate. If the value of your time goes up due to inflation, your time is indeed compensated for such a rise.
2) Of course, it also should be said that if you have X assets, and you earn (or I give you) $1, you now have increased capacity for consumption. If you buy an asset for X, and it increases in value by $1 due to inflation and you sell it, you still have the same consumption. If we tax the sale, you actually have lost consuming power.
I am not trying to be argumentative here, but both Democrats and Republicans have accepted that reduced taxation of capital gains is the right play, for both fairness and economic growth perspectives. See here (note this is a JOINT economic study), for more on this subject.
http://www.house.gov/jec/fiscal/tx-grwth/capgain/capgain.htm
Maybe it’s good for economic growth. I’m not qualified to say if that’s true or if it’s an impression created by effective marketing by the moneyed classes and policy endorsed by politicians who get campaign contributions from the same people.
As far as fairness, I’m not sure how that argument plays out. If you trade the life of your machine to produce something, you get to deduct the loss of machine life from your income for taxation purposes. If you trade the life of your body to produce something, you do not.
In addition, I’m not sure how you justify – from a fairness perspective – a higher tax rate for labor-based income than applied to other kinds of income.
But, then, I’ve always been puzzled by the urgency of repealing the estate tax before the income tax. I’ve always thought a man had a stronger moral claim to the fruits of his labor than an heir had to an estate. And yet the class of people leaving and receiving estates seem to be better at capturing lawmakers’ attention. So, I guess I just don’t get it.
Their claims are equally morally strong, because in both cases the wealth was acquired via legitimate means–and that’s all that matters.
There are three fairness issues I am aware of. However, the most significant one is inflation. While inflation has been very low over the past decade or two, there are periods where it has not been. If my assets increase by the amount of inflation over a year, I have no increase in my “wealth”. However, if I earn income over that year, that is an increase in my wealth from before I earned it.
The estate tax is considered unfair because these assets were paid for in life, and this results in second taxation without any increase in wealth whatsoever. You are basically taxed because you didn’t have enough consumption/fun before you died.
It probably should be mentioned that both of these issues also lead to our low national sales rate and our over-consumerism. Why save now and spend later if any increase in your assets due to saving get taxed more.
Incorrect:
YOU are not taxed, your heirs are. Huge difference. They are getting a very large increase of wealth above inflation.
No one is talking about taxing you when your house goes up in value. If your house goes up and then back down and you don’t cash out, it won’t count against you. By the same token, if you cash out and lose money, that is negative income and should be subtracted from your income for the year.
I have a real hard time with blaming taxes on over-consumerism. It is pretty plain that people want what they want and want it now, regardless of what financial situation that puts them into. I know plenty of people that have done very well for themselves by saving money and not going into debt, taxes didn’t discourage them from doing it.
Since Reagan, the tax code has indeed been indexed for inflation. So, if you made $10 an hour in 1987, and it’s equivalent in 2009 ($20) you are taxed at the same rate.
Of course, if you made $10/hr during the Reagan administration, odds are you’re still making $10/ hr today.
Jason: Your correction is incorrect. The federal estate tax is just that… an ESTATE tax, it is on the decedent’s ESTATE. A tax on your heirs would be an INHERITANCE tax. Indiana, for example, has an INHERITANCE tax, which taxes your heirs on what they receive. That is a very different methodology. You really should learn the law before you attempt to correct someone who does.
“No one is talking about taxing you when your house goes up in value. If your house goes up and then back down and you don’t cash out, it won’t count against you. By the same token, if you cash out and lose money, that is negative income and should be subtracted from your income for the year.”
“If we want to fix this, I’m totally fine with saying that above a certain level (the point that people can pay for food & shelter), EVERYONE gets taxed at the exact same rate, no deductions. I don’t care how you make your money or how much your make, but no more deductions for anything.”
Assuming a taxpayer eventually sells their house (which most people do), you advocated that people that sell their house for more money than they purchased it should pay full income tax on those gains. That is just not good policy.