What with April 15 coming up again, I have seen many articles and blog posts on the issues of taxes, fairness and so on. I am reproducing this chart from one of my favorite blogs, Carpe Diem, run by University of Michigan economist Mark Perry. The chart points out that many Americans do not pay income taxes even though they have income.
Source: Carpe Diem
Now, in all fairness, this chart does not give us the reasons why many in a given income category do not pay income taxes. For example, take two people who are earning $50,000 a year. One pays income taxes and one does not. Why?
If one person is single and has no major deductions, he or she will have to pay income taxes. But, if the other person is married and has two kids, the various deductions and credits may mean no income taxes are owed. That’s a result of our income tax policy and I’m fine with that.
Bob Williams, from the Tax Policy Center, points out that our income tax code really has two purposes [emphasis added]:
…The explanation is simple: the income tax serves two masters. On one hand, it raises nearly half of all federal revenues. On the other, it delivers a broad array of social benefits in the form of exemptions, deductions, and credits that reward people for government-favored behavior…
Over the past two decades, Congress has repeatedly used the income tax to encourage or subsidize specific activities. We subsidize kids with the child credit, college attendance with multiple higher education credits, retirement with all sorts of tax-favored savings plans, work with the earned income credit, and child care with, you guessed it, the childcare credit. And we've retained most itemized deductions that subsidize homeownership, state and local governments, and charitable giving…
As a result of all this tinkering with the tax code, there are winners and losers when it comes to who has to pay income taxes. We can make changes to all this, but Congress loves special deals it can offer taxpayers.
One final point. Now that you know that 47% of Americans pay no income taxes, poll results like this one from Gallup (taken last year at tax time) take on a little different meaning, don’t they?
Gallup Poll finds 48% of Americans saying the amount of federal income taxes they pay is “about right,” with 46% saying “too high” — one of the most positive assessments Gallup has measured since 1956…
Hmm. 47% pay no income taxes. Gallup says that 48% thought that what they paid is about right…You don’t think that’s pretty much the same group do you? Nah. Couldn’t be.
I realize that people who pay no income taxes still pay payroll taxes and sales taxes and so on. And, those taxes can be a high proportion of income. Nonetheless, payroll taxes go to cover Social Security or Medicare when someone retires, they do not fund the Federal government. Sales taxes go to states and cities, not the Feds.
I wonder what Gallup’s poll results would be if they only asked those that actually pay income taxes? Just sayin’
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Only taxpayers should be allowed to vote.
Taxpayer — The original Tea Party had a slogan, ‘No taxation without representation.’ What you’re suggesting, would make an interesting slogan, No representation without taxation. Not quite as catchy though.
Only people who can speak English, aren’t convicted felons, are US citizens AND have an IQ higher than a turnip should be able to vote.
Nonetheless, payroll taxes go to cover Social Security or Medicare when someone retires, they do not fund the Federal government. Really? Silly me.Here I thought the Federal government pays SSI and Medicare. Without those payroll taxes, how would the government pay the benefits? Furthermore, you can’t take a deduction or credit for SSI and Medicare taxes. How can these “taxes” not be considered an income tax?
I’m having trouble believing this, here’s why: I’m one of the working poor who’s been unemployed for over a year. Last year (2009) I received $16,757.00 in unemployment benefits. I took a $500.00 early distribution from my very modest IRA to get through a tough month. Because $ is so tight, I didn’t have the feds withhold any $ from either source of income. I’m single, rent, can’t itemize deductions and so, file the short form. It doesn’t get any more straightforward than my return. I used TaxAct online and, carefully checked my entries, which were straightforward and minimal.. After the standard allowances I had $5,477.00 in TAXABLE INCOME. My owed tax is $548.00… That’s 10% of my taxable income and that seems fair to me, everyone should have to pay something. That said, how can 47% of Americans be paying no federal income…given the personal figures I just cited? “Somethings not right in Denmark…”
Geoffrey — As I pointed out in the post, income has an impact, but deductions do too. That is, people who own their own home have an interest rate deduction. People with kids too. Taxpayers with a home and kids — well, you get the idea. You do not have any deductions such as those, so you pay a bit in income taxes.
I’m a small business owner, who has laid off 2 employees in the last year. I cut my salary in half. For 2009, I paid $17,000 in Fed Taxes, plus matched SS and Medicade payments for my employees and myself. My gross was a little over $60,000.00 (28%) to the feds. I also had to pay a % of interest on my savings interest to the State of NH. My girl frend made $30,000 and paid (20%) $6,000.00 to the feds. Further more ,employees that I laid off collect from the State of New Hampshire(which makes my UI tax rate increase every quarter until I pay it off(basicly if I lay someone off i Pray they get another job ASAP to get them off my UI). Small Business is a dying breed, I bearly have my head above water and the feds don’t seem to care.
e UI tax rate) t anotherr
So what you’re saying is one should be penalized financially for not owning a home or having a child/children?
Everyone talks about global warming and carbon footprints. Yet I would argue that eve 50 hummers don’t hold a match to the carbon foot print of having a child. How much does the average American consume (resources) and produce (waste) in a lifetime? But instead of DISCOURAGING breeding like rabbits (and here’s my point), the government REWARDS careless baby making.
After going through all the trouble of calculating my qualifying deductions, my line 38 (AGI) was too high to be able to use the full number. Instead, I had to deduct the total value by about $6k.
Then, when I got to the credit section of the 1040, I had NO qualifying credits. I have no kids. Though I pay interest on medical student loans, my income is too high to receive any credit for it. In the end, despite my withholding being enough to buy a small house, I still had to write a check for even more.
Talk about getting raped. It’s bad enough that this country is running the biggest PONZI scheme ever with the Fed Reserve and Treasury, but I’m being forced (at gunpoint) to invest even more in a government that is circling the drain. Now I find out that half the people (especially the half that really sucks on the government’s mammary gland) are doing so for FREE?
Kurt Brouwer is a fee-only financial advisor with three decades of experience. He is the chairman and co-founder of Brouwer & Janachowski, LLC. Kurt has written books, articles and hundreds of blog posts on mutual funds, ETFs and other investment topics. E-mail: kurt.brouwer *at* gmail.com.
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