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 recently posted on the fact that 47% of Americans pay no Federal income taxes. A few readers got exercised because some of those folks that pay no income tax actually do pay payroll taxes for Social Security and Medicare. That, of course, is true, but it is not exactly relevant when the topic is income taxes and April 15.
Another issue is that payroll taxes (SS and Medicare) actually are contributions to government retirement income and health insurance programs. Those who pay in also get a payoff down the road when they retire.
So, if payroll taxes go to fund retirement, where do the revenues come from to pay for other government operations? Individual income taxes are a very large contributor to the revenues that fund the Federal government.
Who pays the freight for the Feds
Nonetheless, in my desire to give you information that matters â?? and that you have almost certainly not seen elsewhere â?? here is a chart using data from the Congressional Budget Office to show the percentage of all Federal taxes (individual income taxes, payroll taxes, excise taxes, corporate income taxes) being paid by different income groups. It shows that higher income folks, many of them far from being rich, have been paying a greater and greater share of all Federal taxes over the past 30 years.
Source: Clusterstock
The top 40% of income earners are paying about 86% of all Federal taxes and that percentage is going up, not down. If you want to peruse the Congressional Budget Office data on which this chart is based, you can go here to the liberal Tax Policy Center table that shows all the CBOâ??s data. The latest data is from 2006.
From the Tax Policy Center, we can also see the breakdown of the top 40% of income earners (income quintiles 4 and 5) for year 2006. As you can see, these are not exactly confined to the ultra rich:
As I read this table, to get into the 4th quintile required income of over $60,000 in 2006. The minimum for the 5th quintile (top 20%) was to earn more than $97,032. The mean income for the top 20% was just over $168,000.
In closing, Iâ??d like to point out that we are increasingly relying upon a smaller and smaller segment of our citizens to fund Federal government operations. This is also true at the state level. Whether you think that is good or just or fair or not, I submit that it is not sustainable. Eventually, something has to give.
In case you missed it, the following is the original post that 47% of Americans do not pay Federal income taxes:
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. Thatâ??s a result of our income tax policy and Iâ??m fine with that.
Bob Williams, from the Tax Policy Center, points out that our income tax code really has two purposes [emphasis added]:
â?¦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 behaviorâ?¦
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 givingâ?¦
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, donâ??t they?
Gallup Poll finds 48% of Americans saying the amount of federal income taxes they pay is â??about right,â? with 46% saying â??too highâ? â?? one of the most positive assessments Gallup has measured since 1956â?¦
Hmm. 47% pay no income taxes. Gallup says that 48% thought that what they paid is about rightâ?¦You donâ??t think thatâ??s pretty much the same group do you? Nah. Couldnâ??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 Gallupâ??s poll results would be if they only asked those that actually pay income taxes? Just sayinâ??
Error message
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.
Copyright © 2009 MarketWatch, Inc. All rights reserved. By using this site, you agree to the Terms of Service and Privacy Policy.
Intraday data provided by Interactive Data Real Time Services, a division of Interactive Data Corp. and subject to terms of use. Historical and current end-of-day data provided by Interactive Data Pricing and Reference Data. More information on NASDAQ traded symbols and their current financial status. Intraday data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. Dow Jones Indexes(SM) from Dow Jones & Company, Inc. SEHK intraday data is provided by Comstock and is at least 60-minutes delayed. All quotes are in local exchange time. Real-time last sale data provided by NASDAQ.
Read Full Article »