47% Don’t Pay Income Taxes – Who Pays Them?

by Papa Boomer on April 26, 2010

THE 47% CONTROVERSY. About Half of Americans aren’t paying federal income taxes.  Can that be that right?  First of all let me clarify that we are only talking about “Income” tax.  But it is true!

Cut Taxes Not Deals
Creative Commons License photo credit: NObamaNoMas

A provocative statistic.  Last July, the nonpartisan Tax Policy Center (a joint venture of the Urban Institute and the Brookings Institution) estimated that 47% of Americans would not owe a penny to the IRS for tax year 2009.   The White House has projected the federal deficit at $1.6 trillion for 2010 – that’s about 10.6% of our GDP, a percentage unseen since the 1940s.   Is it fair to the nation that so many Americans are legally avoiding federal income taxes?  How does this happen?  

How it happens

A major reason?  Refundable tax credits.  The Making Work Pay credit and other tax cuts accompanying the federal stimulus gave millions more of us a refund this time around.  If these credits hadn’t appeared, the TPC says 38% of us still wouldn’t have owed federal income tax for 2009, thanks to assorted variables – astute tax planning, low taxable income, and other factors.

People who assume the rich are dodging taxes are misinformed.

  1. The TPC found that only about 1.5% of those with taxable incomes of $1 million or more owed no federal income tax for 2009.
  2. For those with taxable incomes from $500,000-$1,000,000, the estimate rises to just 2%.
  3. If you made between $75,000-100,000 in taxable income in 2009, you may have been in the lucky 9.2% who the TPC says didn’t owe anything to the IRS.
  4. In contrast, it figured that 61.8% of taxpayers who earned $20,000-30,000 last year and 47.5% of those with taxable incomes from $30,000-40,000 had no federal tax liability.

For another perspective and more information also see:  Guess Who really Pays the Taxes

  1. The wealthiest 1% of the people pay 37% of the taxes
  2. The top 10% pay 68% of the tax bill
  3. The bottom 50% pay only 3% of the tax bill

Can you bring the deficit down without new or excessive taxes?

At first glance, it may seem impossible.  The Treasury, however, has a plan to do it, and it looks like this:

  1. Cut war spending by $250 billion.
  2. Save another $252 billion by letting tax cuts sunset for couples making more than $250,000 yearly.
  3. Collect $331 billion in bank fees.
  4. Save $105 billion from a selective federal spending freeze.

This could shrink the deficit to around 3% of GDP, which the Treasury feels is bearable.  That all sounds good except it doesn’t take into consideration that all of the new spending packages, including health care “reform“, “stimulus” pay offs, and “jobs” bills far exceed the saving provided above, even if they all came true.

A federal spending freeze might have worked about $2.5 trillion ago.  The only way out now is to cut, not freeze, spending and also raise taxes which is what we are about to see.

Higher federal income taxes and many new kinds of taxes seem to be looming in the future.  As for legislators figuring out a way to spare us from them, that would seem a long shot.  Hopefully, bipartisan politics will get in the way.  Watch out for the VAT tax.  It could be the single most inflationary type of tax I can think of!

The good news is 100% of the people will help pay for it!

The bad news is 100% of the people will pay for it by paying more for 100% of the products they buy!

Check out more info on the Value Added Tax.

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{ 12 comments… read them below or add one }

Ted April 26, 2010 at 9:51 am

Great article.

I wonder what would happen if everyone had to pay some amount every year. Say everyone who made 20,000+ had to pay $100.00 min tax. Instead of paying $0.00 they pay $100.00. I am all for a minimum tax of some kind so that nobody pays zero taxes. Especially when we have an unbalanced budget. I want the government to become much more efficient and to increase taxes some to get out of debt. This makes sense to me at least.
.-= Ted´s last blog ..Conservatively Liberal and Liberally Conservative =-.

Baffled Boomer April 26, 2010 at 11:15 am

I earn minimum wage and I paid federal and state income taxes. What am I doing wrong (besides working for minimum wage)?

Roshawn @ Watson Inc April 29, 2010 at 12:09 pm

Those are some striking statistics about how the rich are not dodging taxes. I still believe the rich are taxed differently than the non-wealthy in many cases (b/c they earn different types of income).
.-= Roshawn @ Watson Inc´s last blog ..A Secret Weapon To Your Financial Plan =-.

Allie May 3, 2010 at 7:32 pm

When people paid taxes wages were higher. Minimum wage was enough for a family of 3 to be at the poverty level, plus those jobs had benefits. I worked part-time 50 years ago in a grocery store and had retirement and healthcare. NOT ANY MORE.

Matt May 5, 2010 at 9:31 pm

Baffled Boomer April 26, 2010 at 11:15 am

I earn minimum wage and I paid federal and state income taxes. What am I doing wrong (besides working for minimum wage)?
—————————————————–

You have social security and medicare tax withheld from your paycheck. That is not federal income tax. You probably pay a small amount of federal income tax. You would pay around $573, assuming you are single with no dependants, have no itemized deductions, and do not qualify for the many various deductions and credits that are tailored to low income individuals. For example, if you’re a student with more than $4,000 in qualified tuition payments, the American Opportunity Credit would give you $2,500 (meaning you could have withholdings of $500, but get a refund of $3,000).

However, if you are over 25 years old with 1+ dependents, then you would actually pay a negative tax (perhaps you would have $600 Fed’l Income Tax withheld, but receive a refund of $4,000). This is the Earned Income Credit, a true form of welfare.

Baffled Boomer May 9, 2010 at 12:15 pm

Matt -

Please explain “the many various deductions and credits that are tailored to low income individuals.”

I can’t afford to go to school or to have dependents, so I don’t get any of the tax credits you mentioned.

Perversely, a childless adult (at any age) working full time at minimum wage earns too much to qualify for Earned Income Tax Credit, but a slacker working half time maxes out his EITC.

Is this a great country or what?

Aury (Thunderdrake) May 21, 2010 at 2:34 pm

The rich don’t pay as much taxes as we like to think they do. Especially if they have their own corporation. The difference that stops most poor people from even having any financial impact at all is because they’re taxed on everything they earn and live off of what’s left. In other words, they’re taxed first. The personally rich I’m sure pay a huge chunk in personal income tax, but if their profit structures are incorporated, they get so many different ways to legally evade and reduce taxes that it’s absolutely staggering.

I think percentages of the amount of total earnings taxed by all would be a more conclusive statistic than the percentage of tax paid based on social class.

I can definitely say that the rich don’t dodge taxes though. It would burn their wallets to do it. Instead, they find all kinds of amazing ways to legally the taxes they have to pay.
.-= Aury (Thunderdrake)´s last blog ..Hoarding Dragon Basics – Savings Bonds =-.

Financial Bondage July 25, 2010 at 5:51 pm

Amazing. Our governments are struggling to pay bills and 47% of Americans (many of whom) use government services don’t have to pay for them. What a deal!

Now more than ever we need the fair tax.

Allie August 9, 2010 at 9:07 am

You have to have income to pay taxes. Even the top 1% paid only 19% in taxes and the top 5% paid 18%. If you make $35,000 and both parents work and have kids how can you afford any in fed income taxes. Remember they each pay 7.65% or 15.3 in Social security and Fica taxes.

Allie August 9, 2010 at 9:08 am

Also your above were ESTIMATES. My 19% and 18% were documented figures by actual tax returns.

Steve Ziemba May 3, 2011 at 3:02 am

When the TOP ONE % takes 90% of the country’s total income (THEY DO!)
And leaves NINETY PERCENT of Americans (the ones who do all the work plus the ones who can’t anymore) with ONLY FIVE% (THEY DO!!!)
Then the RICH better PAY ONE HUNDRED PERCENT of the DAMN TAXES, and THEN SOME and REPUBLICANS and everyone else who can’t do enough math to understand our actual current state and the OBSCENE GREED OF FASCIST CAPITALISTS CAN SIT ON THE SHORT BUS AND LICK THE FRIGGING WINDOWS!!!!!!!!!!

Jeff August 6, 2011 at 11:37 am

The quoted article, “Guess who really pays the taxes” is a partisan fluff piece. For a more unbiased perspective, see:

http://sociology.ucsc.edu/whorulesamerica/power/wealth.html

Percent of income earned and total taxes paid by group:
%tile | Income | Tax
0-20% | 3.5% | 1.9%
20-40% | 7.1% | 5%
40-60% | 11.6% | 10.2%
60-80% | 18.9% | 18.9%
80-100% | 59.1% | 64.3%

This is not nearly as progressive as the article claims. The article deliberately ignores inconvenient details that don’t support it’s point of view because the author is on the payroll of the Cato Institute.

Unfortunately things are even worse than that. The fundamental law of economics is that every purchase involves both a buyer and a seller. The Great Depression was fundamentally caused by Sellers outnumbering buyers by too great a margin (people willing and able to sell vs people willing and able to buy). This was set into motion by Warren Harding’s “return to laissez faire” and perpetuated via a rapid replacement of a savings’ based economy with a borrow and spend economy. This is not to say that borrow and spend didn’t exist before Harding, but after he damaged the middle class, it was the only way to keep the party going. Combine that with an increasing percentage of the 1920′s economy based on the asset bubbles, and you can see the exact same issues with the exact same cause are being repeated today. The first step in this is to get opinion pieces like this one out there to keep the tax rates low, the restrictions on business minimal, and to prevent collective bargaining for better pay except among CEO’s and board members where it is encouraged.

Unfortunately, we can’t afford to discover the hard way that you can’t grow an economy without a middle class. We are at our 1930 moment and we need to choose between Hoover-style or FDR-style democracy.

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