Monday, December 7, 2009

Too many people pay no income tax

To sum up the facts put together by The Tax Foundation and TaxProf Blog:

One third of those filing tax returns in 2007 paid zero income tax, while about half of those received money from the government. Since 15 million workers did not earn enough to be required to file a return, almost 62 million workers paid zero income tax in 2007. In rough terms, almost 45% of the those who worked in 2007 paid zero income tax, and one third of those paying zero tax ended up receiving substantial money from the government (in the form of earned income tax credit and other subsidies).

Here's a chart of the data:



Note the dramatic and unprecedented increase during the Bush II years in the percentage of workers who pay no tax. To make matters worse, consider this comment from The Tax Foundation:

"The number of 'nonpayers' can be expected to soar due to programs such as President Obama's 'Making Work Pay' tax credit," Tax Foundation President Scott Hodge said. "We now have an enormous class of Americans who are disconnected from the cost of government and have no skin in the game, and that is not good for democracy."

Nuni, a very good friend of mine, made a similar comment to me this morning:

If we talk about the unfairness of those making a lot of money and not sharing enough with those who don't make a lot of money, how about the unfairness of those who don't pay any taxes asking to increase taxes on the rich? The fair thing to do would be to say that only those who pay taxes should be able to give an opinion about raising taxes. The rest are just going along for a free ride. And that's definitively unfair.

14 comments:

Colin said...

Amen. Everyone should pay something. It's just not healthy for democracy when this money people are drinking the water while a shrinking number are carrying it.

W.E. Heasley said...

We tax payers need a bail out!

First the Chief Executive of the Federal Government should work for $1 per year, no private jets, no government vehicles, Cadillac health care plan taxed, etc., etc..

Scott Grannis said...

And how about Term Limits? Holding a high office such as Senator or Congressman should not be a ticket to wealth or lifelong power. We need citizen politicians, probably of the type that have already made their fortune in the private sector (and thus have an appreciation for how the real world works) and who therefore have little incentive to line their pockets and a big incentive to leave a legacy of honorable public service.

Make Money Fast said...
This comment has been removed by a blog administrator.
Daniel said...

I think this post is missing an important number. What is the maximum income a person can have and pay no federal income tax?

Another important point is that these people "paying no taxes" are still probably paying taxes. Just not federal income taxes. They probably all pay state income tax (in select states,) sales tax (in other states,) gas tax (most everywhere,) utility tax and many other unique or regional taxes. Very few people pay absolutely no tax. A person would literally have to be homeless to pay no tax at all and even then there is still that pesky liquor tax. (However, not all homeless use alcohol.)

Finally, I would also be curious the "effective" tax rate for "the rich".

For example, I no longer pay traditional "ordinary" income tax. I am a Florida resident (no state income tax) and have little "ordinary" income.

Through a dedicated process, I have shifted most of my income to capital gains and a smaller amount to tax free bonds. (Though I still pay substantial federal income tax and I pay sales taxes, property taxes, gas taxes, utility taxes, and so many other taxes I cannot keep track of them all.)

I think the real disconnect is that taxes are so complicated and spread among so many different types of taxes that people really have no idea how much tax they pay. Even "poor people" do not know how much or if they pay taxes. I often say, "The tax code is thicker than the Bible and harder to interpret." Friends of mine reading this post will know who I am.

I paid accountants over $40,000 last year to help me "divine" the meaning of our various federal, state and local tax codes and help me make sure I am paying my "fair share." This $40K saves me more than that amount in tax overpayment. That is why I hire experts. Nevertheless, I still find it disgusting that I must pay that much just to figure out my correct tax obligation. While I acknowledge I am among a small percentage of the population with this "pleasant problem" keep in mind there are corporations and individuals that pay far, far more than I to figure out how much tax they actually owe. This is nauseating sand in our national economic model.

One final comment and I am done. Did you know that if I wanted to leave the U.S. system, renounce my citizenship and move to Liechtenstein or some other "tax haven" there is also a tax on that? It is true and it is hefty.

That is my rant on taxes. If anyone wants to take a stab at answering my "real tax" questions above I am interested in the answers.

Scott Grannis said...

Daniel, I love your rant. There are so many things wrong with our tax system it is hard to know where to begin. I wonder if anyone will be able to answer your question--the tax code is way too complicated for me to answer it.

DaleW said...

Let us stipulate personal current taxes make up only 29% of government current receipts, according to the NIPA database: http://tinyurl.com/ydolpth

Contributions for government social are 90% as large a contribution to government revenue as personal current tax receipts and this revenue line is pretty regressive, with zero marginal tax past ~$110K on most of this revenue line.

When we also consider excise taxes, property taxes for renters (indirectly levied through landlords), sales tax, and other taxes on personal assets, all of which are regressive, the idea that there are large portions of society not paying their share of the bill starts to fall apart. Our accounting for all of this is marginal at best, but I think the idea there are those that don't pay anything is a little flimsy.

Scott Grannis said...

Dale: you are forgetting that social security contributions are not taxes, since they are equivalent to the payment that one would make in order to receive an annuity or pension upon retirement. Those with incomes over ~110K don't pay more because social security payments are capped.

The top 10% of income earners pay about 70% of all federal income taxes. In 2007 that equated to about $800 billion, or almost 20% of ALL government (federal state and local) tax receipts, and about 25% of all government tax receipts excluding social security. If we added in the consumption taxes paid by the rich, they would account for even more of total tax receipts. The rich are most certainly paying at least their fair share.

When almost half the workforce pays zero (or less than zero) income taxes, I say that is a problem. Their only contribution to paying for the burden of government is via consumption (sales) taxes and corporate taxes (since corporations inevitably pass on their taxes to the consumer).

But what is ultimately very important, since it influences influential people's behavior, is marginal tax rates. That is where we have a highly progressive tax structure, and that is definitely not a good thing in my book, because it penalizes work, investment, and risk-taking.

DaleW said...

you are forgetting that social security contributions are not taxes, since they are equivalent to the payment that one would make in order to receive an annuity or pension upon retirement.

I am not forgetting that. I am looking at the cash flow of the government and you can call it a premium if you'd like, but it's still cash in vs. cash out. In addition, it's never been run like an insurance fund and if it were, that inflow would be called a deferred premium and amortized into revenue over time while the Social Security and other postretirement liabilities were accreted into expenses over time. Since there is no asset and liability, a paygo approach is the way they have accounted for it and in a cash-based system such as that, contributions for social insurance are revenue. We will see how inadequate that is within ten years if benefit payments aren't changed.

The top 10% of income earners pay about 70% of all federal income taxes.

Sure, and income taxes account for 29% of government cash inflows.

When almost half the workforce pays zero (or less than zero) income taxes, I say that is a problem.

Pays zero of the 29%. They pay far more than 30% of the total when you count other categories that count for 71% of government cash flow.

But what is ultimately very important, since it influences influential people's behavior, is marginal tax rates. That is where we have a highly progressive tax structure, and that is definitely not a good thing in my book, because it penalizes work, investment, and risk-taking.

Agreed, but how else would you propose we pay for the profligacy of every generation over the last 70 years? Cutting taxes to stimulate things? As a 41 year-old who grew up under Reagan, I am a believer in many supply side tenets, but we have to reconcile our budget and balance sheet. My generation is in deep trouble unless your generation accepts lower postretirement benefits. Since the Baby Boom hasn't really passed up on any benefits in their lifetimes (they invited government into their lives as young people, wanted them out during their peak earning years, and now want the government back in during their retirement years), I doubt that our situation and that of my child's generation will change too much.

Scott Grannis said...

Dale: The US government is not obligated to make promised social security payments. No one has a right to receive what the government has promised to pay them. I think the obvious solution to the federal government's unfunded liabilities involves some or all of this: the retirement age will be lifted, the benefits promised will be reduced (e.g., by changing the indexing formula), and healthcare will revert to something like a free market and costs will come down. There's no other way it will work. As someone famous said, if a trend can't continue forever, it won't.

DaleW said...

The US government is not obligated to make promised social security payments.

Of course not. The government is obligated to do what the legislature decides and I am not holding my breath on entitlement reform.

No one has a right to receive what the government has promised to pay them.

Yes, they do, as long as those laws are in effect.

I think the obvious solution to the federal government's unfunded liabilities involves some or all of this: the retirement age will be lifted, the benefits promised will be reduced (e.g., by changing the indexing formula), and healthcare will revert to something like a free market and costs will come down.

I don't have a problem with your logic, but I wouldn't make a big book on the scenario you paint.

Scott Grannis said...

Dale: The Supreme Court has ruled that promised social security benefits are not sacrosanct. They are not a legal obligation of the government. The government is free to change the terms of the eventual payout and/or change the retirement age and the indexation formula.

DaleW said...

The Supreme Court has ruled that promised social security benefits are not sacrosanct. They are not a legal obligation of the government. The government is free to change the terms of the eventual payout and/or change the retirement age and the indexation formula.

I concede the legal point, but I am not making a legal point. I am making a political point. The government is an extension of the populace, so you are saying the populace is free to vote in lower benefits for itself. OK, we'll see how that goes. Ex a crisis, I don't think we will see any sort of substantial entitlement reform in the next 5-10 years.

Scott Grannis said...

How difficult could it be to just raise the retirement age? Everyone knows that life expectancies have risen. And it shouldn't be too hard to change the indexing formula for benefits. Instead of using the rise in wages, use the CPI. This would keep purchasing power of benefits steady, whereas they have been rising in real terms. Those two fixes could add decades to the social security system. I think they are inevitable.