I don’t think you can find a single person out there who enjoys paying taxes, but I encountered an interesting article on CNN this morning that said nearly half of all U.S. households will not owe any federal income tax for 2009. At first I thought I was reading it wrong or that they were using a provocative headline to grab attention, but after reading the story it seems as if it’s true.
While it doesn’t come as a surprise that lower income households make up the bulk of the households that don’t pay taxes, it was a bit shocking to see that over 25% of those who don’t pay taxes earned more than $50,000 a year, and even 7% came from the $100,000 a year or more group. That means there is a lot of money being left on the table in terms of tax revenue. To be more specific, that’s over 70 million households.
Obviously, we have a progressive tax system that ensures those with lower incomes pay fewer taxes and may even get some tax credits back, but it also looks like there is a lot of money out there that isn’t getting taxed even by some with higher incomes. Now, I’m not suggesting we need to tax people more to make up the lost revenue, because frankly, I hate paying taxes and feel I pay way more than I should. But, as we continue to operate at such a deficit and people want to spend even more money and expand government programs I have to wonder where this money is going to come from.
Is it fair that roughly half of all households earning an income are getting away without paying Uncle Sam? I’m just curious to see where you guys stand on this issue. Has the tax system become too progressive and it’s leaving a wider tax gap between the rich and the poor? Or are things not progressive enough and we should tax those who earn more money at an even higher rate to recover tax revenue?
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
That would utterly destroy the economy. No modern industrialized country has ever existed that I'm aware of. I don't think any modern industrialized country has even prospered with a flat tax *rate* for that matter.
In my opinion, everyone paying their "fair share" would be for everyone to pay the same dollar amount. Call it regressive if you will, but equality demands nothing less.
Also... It's easy for you to drive your car to your cushy job, sip your starbucks, and then complain how half the country doesn't pay INCOME taxes, how lazy they must be and they aren't nearly as successful or as smart as you.
The poor still pay a very high percentage of their income in sales and payroll taxes, and still have barely enough to cover the necessities - if they have enough at all. If anything, this misleading study shows us how imbalanced our incomes have become. The rich pay overall, much less in payroll taxes, sales taxes - and capital gains and dividends (a majority of their income) is taxed at lower % - meaning that very often, the "effective tax rate" for the very rich is much lower than a middle or working class individual.
Please note: I understand that capital gains are taxed at a lower percentage in order to avoid excessive double taxation of corporate income - By reducing the corporate income tax and increasing the dividend or capital gain tax this could break even while still not supporting the very rich quite as much.
Also, I am not in support of higher taxes, but saying everyone needs to pay their "fair share" by levying income tax against the very poor (who already pay a high enough % in taxes) is missing the overall flaws in our tax system.
What I wonder is... do the people who do these "studies" have any idea how taxation works? Do any of you who are leaving comments?
How exactly did they define "Income"? They are obviously not basing this off of "taxable income" - otherwise these folks would have paid taxes!
If "income" is defined as what is on your W-2, 1099's, 1099-B - then that doesn't take into account ANYTHING. What about business income/losses, capital gains/losses, asset basis, normal deductions and exemptions?
Just taking someone's W-2 number and getting upset when they don't pay taxes is ridiculous. That's like looking at a company's gross revenue and completely ignoring that they may have different cost structures (and maybe even have losses!). There is a reason you aren't taxed on your "top-line" of income - because it makes no sense.
But yet we still seem to get these populists who have absolutely no idea how taxation works calling for a "flat-tax" as if that's going to make it simpler.
News Flash: Taxation is complicated not because of the rate at which income is taxed, but because finding out what income is ACTUALLY taxable. If I make $100 but it costs me $90 to make that revenue, should I pay as much tax as someone who made $100 with only $10 of costs?
Please don't post misleading studies performed by morons.
I'm 100% fine with paying taxes as long as the money is put to good use. What I don't like is paying a higher percentage than those who make more than me and can afford a good accountant. Tax reform needs to cut down on deductions and clean up this mess.
Paying taxes is not a bad thing. Your taxes pay for everything from education to law enforcement to defense. Taxes are what enables a civilized modern society. Frankly, you don't have to agree with every program your taxes get used for - that's why we have a system of representative democracy. Everyone gets a say, but no one is 100% happy with the result.
If you want to be mad at something, be mad at the fact that income from different sources is treated differently. A dollar is a dollar is a dollar, and it should be taxed the same whether it is earned from work, from capital gains or from dividends. That is the inherent unfairness built into the system.
Wait. Does this mean that they don't pay any taxes at all or that they overpaid so much during the year that they won't owe any at the end of the year.
I think that it's only fair if you're one of those that don't pay at all - and definitely unfair for those that are.
John, this is not really anything new. Taxes didn't go up or down, theres just a large % of people with no tax liability due to low income or high deductions.
Konrad : "Does that mean I am one of the $100k+ income people with zero tax liability?"
You are one of the people they are counting in the 47%. The report is about any household with no federal income tax liability. So that would include your situation even though you had $100k wages.
"I paid about $130,000 in taxes when I was just 27 years old. Why put that on any 27 year old?"
You paid that much taxes because you had a VERY high income. Congratulations on being very successful. Your age of 27 at the time has no relevance to the tax rate or its fairness. You were a full grown adult making lots of money.
"Progressive taxes make people NOT want to work!"
If I offered you a $500,000 raise tomorrow would you say 'no' because of the tax bill? That would be very irrational.
If marginal taxes were in the >70%-90% range then I do agree some people would stop working harder at some point considering it to not be worth the extra effort. But as long as you're still taking home 50-75% of your money after taxes theres no good reason to earn less.
@ Financial Samurai
Unbridled capitalism without effective wealth redistribution hurts everyone. You wouldn't be making the income you are now if the lower classes didn't have enough money to purchase the goods and/or services you are producing or your employers, clients, and the companies you invest in were producing. Part of what caused the Great Depression was a high concentration of wealth in the upper classes, among other reasons. There is merit to arguments about the principles of it on a moral level for both sides, but macroeconomically speaking, a flat tax will not work unless wealth is redistributed effectively though other means. I'd rather all of us prosper than be morally justified in principle, but the economy be hindered for everyone.
There's very little debate about if we should have a progressive tax system. The proverbial million dollar question is how progressive should it be to preserve motivation to maintain higher levels of productivity, maintain social justice, and preserve the economy's health. There's plenty of room for debate there.
@Jim - Good example. I suppose I was actually fairly close to that point a number of years ago. However, my house is getting much closer to being paid off, my kids are grown and moved away, so I don't have the same deductions any more, and our household income has grown, as well. I guess there's no magical formula to pay zero taxes, just, for most, a stage one passes through in life.
I have a couple of opposing viewpoints on the topic: First, I wonder what they are using as the definition of income. If you asked me how much I earned last year, I would tell you $125k - but my Adjusted Gross Income for tax purposes was negative due to real estate rental and business deductions and one apartment building in particular that went horribly wrong. Does that mean I am one of the $100k+ income people with zero tax liability? Either way, I feel that I shouldn't have any tax liability since I earned a net loss for the year even if my W2 says I earned over $100k.
@Financial Samurai: "What is not fair about everybody paying an equal % of income in taxes???"
Answer: A flat tax is actually regressive. Say the flat tax rate was 15%. 15% of $30,000 is $4500 that would otherwise go to basic housing, food, health, and other mostly necessary expenses. 15% of the $400k that I assume you are making (or were when you were 27 anyway) is $60,000 that would otherwise be spent on discretionary expenses since you probably have managed to meet your basic necessities with the remaining $340k. The $4500 that the $30k earner pays actually hurts a lot more than the $60k that you would pay.
Now whether the govt should be taking in as much money as it does in general is an entirely different topic...
Why do people think it's fair there is a progressive tax system, I don't get it. I paid about $130,000 in taxes when I was just 27 years old. Why put that on any 27 year old? Progressive taxes make people NOT want to work!
It's all about a FLAT TAX people. What is not fair about everybody paying an equal % of income in taxes????
Ahhh, I LOVE this topic! Hence why I wrote "Do Higher Taxes Lead To Socialism In America?"
I think we're entering an era where it is important to kick back and free ride. It's all about letting the government to take care of us!
I'm doing my best to defer all income above $200,000 so when I retire in Nevada, I won't have to pay the 10% state tax/yr.
I wonder if the data includes people on social security. SS is usually untaxed unless you have substantial amount of other income. About 10 million seniors have nothing but SS for income.
I think one way to solve this discrepancy would be to get rid of the home interest tax credit, or at least limit it. All I think this does is encourage people to buy more home than they need as well as discourages people from paying off their homes early.
"I wanna be one of the 5.7M in the 50K-100K range who pay no taxes."
How about this: Married couple with 3 kinds making $55k. Home mortgage interest & property tax write off of $15k, exemptions of $3500 x 5, state taxes of $2500k. That gets your taxable income down to $20k. The tax on that is about $2000. But you have 3 kids so you get child tax credits of $3k and you get a $1,000 refund paying $0 in fed taxes.
Unless you look at the data closer I find this kind of statistic to be pretty misleading.
WHY do these people not pay taxes?
About 10% of filers make less than $10k. Almost all of those people don't pay taxes. 2/3 of the people who don't pay taxes make under $30k.
You also have to consider legitimate tax deductions such as tax exempt bonds, tax free dividends, net losses on stock sale, net losses on business operations, tax free pensions, large itemized expenses, etc.
Keep in mind as others have pointed out anyone with salary/wages has to pay the payroll taxes which is regressive in nature.
Whats the solution?? Raise taxes on poor people? How is that "fair"? Remove all deductions? So if I have excessive medical expenses or my business loses money then I shouldn't get to write that off? How is that "fair"?
I just want an introduction to their accountant(s). I wanna be one of the 5.7M in the 50K-100K range who pay no taxes.
The fraction of people who pay no taxes are, basically, the people who don't have any money. The government doesn't tax them because there's no money there (once they pay their payroll taxes, sales taxes, fuel taxes, property taxes, license fees, utility taxes, etc.).
I think Rick brings up a good point. Most people don't see a problem with a progressive system, but it's flawed in its current state. Lots of loopholes mean lost tax revenue. And people on the lower end who don't pay anything at all means billions of dollars going uncollected.
And it doesn't even have to be a lot, but just look at the sheer number of people here. We're talking about over 70 million taxpayers who don't pay any federal tax. What if instead of zero they ended up paying just $250 a year? Guess what, that's almost 18 BILLION dollars compared to zero dollars. Even in the lower income levels a couple hundred dollars that's probably spread out over the course of a year isn't going to be felt much.
Sure, there are still situations as mentioned above with medical issues and such where people shouldn't be burdened by taxes, but there are many others who just happen to get off without having to pay Uncle Sam thanks to all of the loopholes, credits, and tax breaks available.
We could find a way to inject billions of dollars into our coffers if we just found a way to "smooth out the curve" as Rick put it. Just a small amount of money spread out over tens of millions of people could create a lot of money without putting an unnecessary burden on most people.
I think most people can agree that a progressive tax system is a good thing. The problem is that we have:
- An *extremely* progressive tax system. As stated in this article, nearly half of the people don't even pay any tax at all, while the majority of the tax burden is borne by those at the near top.
- Many tax loopholes for those at the very top. This is to say that those in the top 1% pay a lower percentage than those in the top 5%.
When so many people don't pay any tax at all, no wonder so many people support things like socialized health care. They get all the benefits without having to pay for them.
We need to smooth out the curve, so that those at the bottom still at least pay *some* taxes (yes, I'm aware they pay SS taxes, but these are more like saving for retirement rather than true taxes), and those at the top pay a consistent amount.
Not surprisingly it would appear, at leasT at this point that your readers are half on the side of the middle class and half on the side of fair share taxation. I don't mind that I pay more in taxes then other people. I do mind that there are people actually not paying taxes at all or even worse making money off the IRS.
I didn't see an option that fit my opinion...I do think higher tax brackets should pay more, but that's not because I don't think lower and middle income people shouldn't have to pay at all.
I do think there are lots of loopholes in the law that could/should be changed, so people are paying what they should, anyway.
The article does briefly bring up payroll taxes, which everyone who has a job pays, but that is a good point. Ultimately, payroll taxes only pay for a few specific things and aren't really general tax revenues that can be used to help balance the budget, which is something we seriously need to start looking for ways to accomplish that.
Some of this needs to be taken with a grain of salt. For example, I fall in the 50-100K bracket, and I do have a tax liability. However, my wife has had some medical issues that eat a significant portion of my income. We're nowhere near the point where we get any tax brakes beyond my employer's medical flex spending account benefit, and rarely have been. You have to have a very large percentage of your income paid to hit that mark. I can't imagine how we'd make it financially if my wife's medical expenses were that high all the time, but it definitely could happen. For those people who get large deductions in those situations, I have absolutely no problem whatsoever that they not pay taxes, and I think it's the least that could be done to help those people. Consider that expenses for medical procedures, treatments, and radically change depending on your insurance coverage. It is often next to impossible to adequately plan for a major medical condition that could strike sometimes without any warning. It takes no time flat for those types of unexpected medical expenses to chew up even the most prudent of emergency funds and long term savings. For those people, I'll gladly pay a bit more taxes so they don't have to, and certainly the rich can.
This survey misses the point. Everyone pays the "Payroll" tax. To say that 47% don't pay any federal income tax may be technically true (though, the survey does not pass the "smell test") it implies that 1/2 the population is getting something for nothing while the rest of us (regular working folk) keep getting socked for their free ride. I would like to see a survey of the percentage of gross income is paid in all taxes and then break that out by income group. My hunch is that would give a very different result.