A week ago I was talking with a friend who happens to be a Libertarian. He mentioned that 45% or so of the people don’t pay income tax…the perception is that these people are somehow defeating or avoiding the tax code and are freeloading off the 55% that do pay income taxes. These people are pointed at by the right as ‘free loaders’ and lumped together with those who don’t contribute to society.
Of course that position got me thinking and I decided to drill down a bit.
I asked him if that number, the 45%, included all individuals like older folks on fixed incomes, or folks below the poverty line, or folks who commit tax fraud, or high schools students, or households or what? He didn’t know but still felt the 45% were freeloading off the 55%. He felt it was indicative of an ‘entitlement society’ being created by President Obama.
I didn’t know enough about it except to ask questions. He had no answers, only opinions.
So, using Google, I typed in the phrase” 45% of households don’t pay income tax” and found many articles. I started with this one from CNN dated 4/18/2011
I suggest you read this article but I’ll recap it here in the interest of brevity. As it turns out, 45% of households don’t have a tax liability at the end of the year. This represents about 69 million households. Of those 69 million households, 68% have household income of less than $50,000 annually. About 12.5% of those households earn between $50,000 and $100,000 per year. As income goes up, the percentage of households in the upper income groups that don’t owe taxes at the end of the year declines. If you look at the households that make between $100,000 annually and $1,000,000 plus annually, the aggregate percentage declines to 4.7%.
At first glance is appears that my friend may have had a valid point. But I drilled down further and found that “other data from the IRS show that the tax bite on the very highest income taxpayers has fallen as their incomes have risen. In 2007, the top 400 individual tax returns had an average adjusted gross income of $345 million, up from $47 million in 1992. But their average tax rate was just 17%, down from 26% in 1992.”
I was amazed that the top 400 returns had an average adjusted income of $345 million annually per household. That’s what I call ‘real money’. I was further amazed to find that those 400 household paid 26% in income taxes in 1992, but in 2007 their tax rate was down to only 17%.
How did we get here? According to the article there are two main reasons. First is a simple result of the economic downturn. But the second reason is very revealing: The tax code is filled with hundreds of tax breaks to encourage economic activities the government favors, tax experts say. For instance, the law offers credits to supplement the wages of low-income workers, help families pay for college and encourage them to buy homes and have children.
Temporary tax policies, such as the Bush-era tax cuts and the tax breaks passed under President Obama, have also increased the ranks of the non-payers.
If most tax breaks were removed, the Tax Policy Center estimates, the percentage of households with no federal income tax liability would drop from 45% to 27%.
That last sentence indicates that the solution is pretty simple. The easy way to increase the amount of households who pay taxes could be down to 27% if we, as a nation, removed most of the tax breaks.
Let me make it even easier, if we let the Bush tax breaks expire in 2012 we’ll be fine. Even if we moderate the tax breaks for the middle class, we’ll be fine. If we approve the so called “Buffet Rule” we’ll be fine.
What’s most glaring is the decline in tax liability for the top income earners.
Folks on the right call this “the politics of envy” meaning that we in the middle income brackets are just jealous of folks who have fat bank accounts, huge incomes, and low tax liabilities; after all these are the ‘job creators’ according to the right.
Wrong. It’s not that we’re envious of the rich, it’s that we’re tired of the rich manipulating the politicians we elect by plying them with money to modify the tax code in their favor. You and I don’t have this type of access to power and that’s what I find offensive.
That the super rich and powerful have successfully manipulated our government to modify the tax code so they pay an average of only 17% is nearly criminal in my mind. That’s not equality, that’s cash register government.
When I pointed this out to my Libertarian friend he said, “Well, all I want is a fair tax code.” Me too.
We’ll explore this concept in another post.