As someone interested in the future of the United States (who just happens to be a tax professional), I find it particularly interesting to listen to tax-related news commentary and examine related tax statistics.
Because this is an election year, obviously many more people are tuned into tax issues.
Here’s a particularly interesting video clip I found via the Tax Foundation blog this week. It’s a FOX News segment on people who don’t pay anything toward federal income taxes and what that could mean for the future of income taxes.
Here are two important points I noted in this presentation:
- Nearly 1/2 of all Americans don’t pay any federal income taxes.
- Top 10% of earners pay 71% of all income tax.
According to Scott Hodge, President of the Tax Foundation, a recent survey revealed that 2/3 of Americans think believe everyone should pay at least something towards the basic cost of government (15 % were unsure and 19% thought it was fair).
Why do so many people not pay taxes? In part, the Bush Tax Cuts are responsible for millions of people dropping off the taxpayer list. Those who would have otherwise paid a little bit in taxes received more Child Tax Credit benefits and enjoyed lower overall tax rates pursuant to the Bush Tax Cuts.
As you all know, I am a tax accountant (although I only work from home part-time in a non-tax capacity other than this blog). My husband is an engineer. How much federal income tax did we pay last year? I won’t tell you an exact amount or percentage, but I will say that our effective federal income tax rate was substantially lower than the lowest tax rate of 10%. Do you think that’s fair?
I’ll be the first to say that I think our tax rate is ridiculously low, considering how many government services are at our disposal. We have a roof over our heads, food in the fridge, extra money to spend on the little things, we save for the future and we donate to charity, so I don’t think it would be out of line to expect to have to pay even just a little bit more in federal income taxes.
What do you think? Should a household like ours be expected to contribute more? I’m interested to hear what you have to say!
Other questions this segment brought to my mind:
- Is income tax a wealth tax? Should it be?
- Do you believe in redistribution of income?
- Should Bush Tax Cuts be extended? What’s best for the future of our country?
- Is the United States a culture of growing dependency? If so, what will happen when the majority runs out of “other people’s money” to pay the bills?
- Is major tax reform inevitable? What will it look like?
If you are so inclined, feel free to address one or more of the points above.
{ 23 comments… read them below or add one }
Great post. An expectation for someone else to pay more because of how much money they have is pure selfishness and is routed in a small minded, fixed pie mentality. I suspect people stuck in that “yeah, tax the rich more!” mentality will always be poor, selfish, and unhappy. They play the victim very well. Everyone should pay fewer taxes. Taxes aren’t the problem. Spending is. No matter what you tax people, the govt will always spend it, and in current times, they’ll spend more.
Well said! I’ve been thinking about my original comments above, and what I should have said is “I think we should pay a little bit more in a perfect world where spending is under control and everyone was happy putting a little more into the pot.” Of course, that reality doesn’t exist. I have a big heart and am all for helping others. But I am also a stickler for fairness. As my husband calls it, my “scale of justice” is sensitive and easily tipped.
Would you believe I received a Facebook comment that read, “There’s nothing stopping you from sending in a check to the Treasury department paying what you think is your fair share of taxes. Apparently, they have a special fund for those checks.”
Missing. The. Point.
The video is incredibly skewed. In 2007 the top 1% of earners owned 34% of the wealth. The bottom 80% of earners owned 15% of the wealth. The top 30% have 85% of the wealth. In this case, you would expect things like the top 10% of earners pay 70% of the taxes because most of the wealth is concentrated in their hands. Policies over th past decades that contributed to the rich getting richer and the poor and middle class declining or staying stagnant necessarilly results in the wealthy paying more of the taxes. It seems to me a weird twist of logic to conclude then, that the solution is to tax the bottom earners more. What is that, like a punishment for them not earning enough money?
Also, since medicare and medicaid are a huge portion of the budget, skyrocketing medical costs have a lot to do with the increasing federal budget and deficit.
I would think that the rising cost of the federal debt has much more to do with rising health care costs than it does with people “letting” government pass more entitlement spending because they are not paying taxes. .
I just read some of the comments…
To all the people who think we don’t pay enough taxes… please tell me how much is enough. The government will never have enough money. You are being fooled by the media. Right now we are being taxed by inflation…and that tax will be much higher soon. And, that’s just because the politicians don’t have the bollocks to raise the tax rate to something that would cover a reasonable portion their drunken spending spree.
Those dinkwads in government will NEVER have enough money to cover all the creative ways they will come up with to buy votes. It’s like asking your 2-year-old how many cookies he wants.
The only solution is for EVERYONE to pay 15% or 20% flat tax. No credits. No tinkering. And, that will get rid of all the freakin’ loopholes and get rid of most lobbyists! … It will make everyone stop and think before they vote for more entitlements … cuz EVERYONE will be paying for them. Also, we need a Balanced Budget Amendment with consequences / with teeth. Keynesian economics is hogwash…. I would love to use the word I’m actually thinking of…but this is G-rated.
No matter how much we give the govt in taxes, they will want MORE. Hell…why not? It’s not their money. They are like teenagers with daddy’s credit card… and daddy doesn’t have any way to find out how much his kids have charged… and daddy doesn’t have any way to stop his kids from going to Vegas and taking all their friends…every weekend for the rest of their lives. Hey… party hardy!
A Balanced Budget Amendment with NO book-cooking is the only way to go. And, even if you go up to a 90% tax rate….the politicians would spend it all and then some.
Why do you think Social Security is bankrupt? Baby boomers have been paying into that puppy for 50 years… the money was spent like it was part of the general fund. Baby boomers paid in. Why is the Social Security Fund empty? After you think that one through, let me know how much of OUR money should go to DC… How much IS ENOUGH?
I’ve always been a fan of this 15-20% flat tax.
Agreed. Get rid of the convoluted, lobby laden, enablling tax code and make it a simple flat tax rate that anyone with income pays.
Everyone enjoys the benefits of living in the country, we should all get to share in supporting those.
If we had a flat tax where EVERYONE had to pay the same percentage, we wouldn’t be bankrupting our country with entitlements.
A couple of points that I heard on the issue are that “47%” are primarily 1)retirees who have already paid taxes for years and are now living on tax-advantaged retirement accounts, 2)soldiers who have been given tax free income in exchange for defending our country, and 3)people receiving the EIC.
For 1) I believe it would be highly unfair to promise tax incentives and then withdraw them when people have made decades of financial decisions based on the idea that the incentives would stay.
2)I’d like to see a politician try to recomend dropping this, especially while claiming they support the troops.
3)The EIC has been expanded over the decades by bi-partisan support. Regan expanded it. Clinton expanded it. Bush expanded it. As far as I understand, Obama hasn’t expanded the coverage of the EIC, but the recession has expanded the number of people who made so little as to qualify for getting more EIC than the owed in taxes. Before the recession, the number of non-taxpayers was considerably lower than 47% (I think I heard somewhere closer to 35%) and once the economy has fully recovered it will be much lower again.
Great points, Edward. I’m not familiar with the specific stats you mention, but I will look into those soon.
It’s true that the number of Americans thrown back into tax paying status might increase when the economy turns back around, but will that be enough? Those who never lost their jobs won’t be jumping up the tax bracket band, so that still begs the question…does everyone pay their fair share?
I won’t pretend I’m remotely qualified to measure the impact of different tax policies, but my gut reaction is that progressive income tax structure IS fair, but much of the rest of the income tax structure favors the upper middle class and the wealthy disproportionately. Capital gains taxed at 15% is a great example of that. It’s a HUGE tax break for people like Buffet and Romney because they pay a fraction of the tax they would otherwise, but discourages people in the lowest tax brackets from investing because it is a HIGHER tax rate.
Interesting way of looking at capital gains rates! I would have never considered 15% as a disincentive for lower income taxpayers to invest, but it could be. Seems to me most people are caught up in paying for everyday expenses or tackling credit card debt, not thinking about the potential tax rate on investments.
I agree a progressive tax structure is a fair concept. Still doesn’t mean I think everyone pays enough overall. I think tax rates of 10% / 15% / 25% / 28% / 33% / 35% seem fair, and they are especially so when you consider that income is taxed in brackets. But who’s really paying those percentages once you figure in credits and deductions?
As I’m writing this, I am beginning to see the beauty of a flat tax. But what would I do for a job? ;=)
Great article. I think the key for us to continue to succeed as a nation is to find common ground as Americans. Our tax structure is just one more thing that divides us and makes us weaker. We all have to contribute for the system to function.
The biggest way of tax evasions is by creating an offshore account (for investment funds) or establishing your headquarters elsewhere even if you do business in the U.S. I think this is fair, because if America is so welcoming to “global business”, it’s gotta play by global business rules, which is that company’s and people can do anythuing to avoid taxes.
Good points, Tony. I found an interesting, related news story: http://www.usnews.com/opinion/blogs/economic-intelligence/2012/04/02/worlds-highest-corporate-tax-rate-hurts-us-economically
This story throws around the term “territorial tax system,” which, until recently, I didn’t know meant a tax system that taxes domestic income but not foreign income.
Global competitiveness is a real issue. Companies need an incentive to bring foreign profits into the U.S.
Thought you might be interested in this op ed as well from the NY Times. http://www.nytimes.com/2011/09/19/opinion/bring-american-companies-foreign-profits-back-home.html
The author offers a three-part process for encouraging companies to invest foreign profits in the United States. His idea is for the profits to be used to reward shareholders, build factories or create jobs in the United States.
I think, as a whole, taxes are historically low. I don’t understand why Republicans (and I am one most days…) don’t understand that. We need to raise taxes across the board, but still maintain many of the progressive tax breaks to not impact the poor. We could stand to raise taxes on dividends and capital gains, and eliminate some of the breaks like deferred compensation plans and the like. These plans are used exclusively by the wealthy to skirt taxes.
We sound a lot alike, Robert. As far as deferred comp plans go, isn’t that just a mechanism for moving tax into different tax periods, not necessarily tax avoidance? I suppose if you experience fluctuating tax rates from year to year, that could be an issue, but the truly wealthy likely won’t have that issue.
It is tax avoidance because you use the plan as follows –
Lower taxable income enough to qualify for tax deferred compensation plans offered through employer. Postpone the deferred compensation until you hit a lower tax bracket (i.e. retirement) and also you can take a lot of the gains out of the plan at a capital gains tax rate, not an income tax rate.
Thanks for explaining, Robert!
Or blame the Earned Income Tax Credit, which grew out of the Negative Income Tax… an idea I think makes great sense (as in, I believe in a negative income tax over our current byzantine system or welfare. It would save a ton of cash too, and clean out a lot of disincentives to work). That was a conservative idea.
Anyway, onto your questions:
1) I’d call it a ‘barrier to wealth’. Bill Gates and Warren Buffett won’t be hurt by a bigger income tax, although a capital gain tax increase will mean fancier tax maneuvers are coming from people with wealth (world, meet the tax gain harvesters!)
2) Not in particular, and certainly not the way we do it now. If we as a society want to do it, do it through one apparatus, not through 20 different systems (progressive income tax, means testing benefits, etc.)
3) I’m going to go with ‘no’, let’s aim higher for a flat tax. More accurately, a triangle tax with some carve out for a standard deduction. If I was dictator, I’d also tack on the negative income tax.
4) Yes, absolutely. In the words of Herbet Stein: “Things that can’t continue, won’t”. Something will happen, and I can’t predict when – but if you want me to guess I’m going to go with ‘large amounts of inflation.’
5) Yes. It will look similar to either the Reagan cuts in scope – (flatten and broaden), or it will look like Europe – when the Government can’t extract enough money from the ‘rich’, they’ll turn to a national sales tax (9-9-9 and all that). Yes – I think either we flatten and broaden or we’re stuck with a VAT.
I’ve attended several tax trainings over the years that all end in the same conclusion – we are eventually going to see a VAT enacted, it’s just a matter of when. According to an instructor in my most recent seminar, politicians around the world avoid it until absolutely necessary because it’s almost always political suicide.
Wanna know how much we’d pay under a Value Added Tax? I found a calculator on the Tax Foundation’s website: http://interactive.taxfoundation.org/VAT/
A major tax reform is needed as over the years too many special interest tax breaks have been built into the tax code as favors for big donators. Fact in point the Democrat Senator from Illinois
put in a clause in the tax code treating small mom & pop cigarette retailers as cigarette manufactures as a favor to big tobacco. Results most will have to close down and the winner is Big Tobacco.
Ever wonder why GE pays no taxes ? Same as above they receive special tax deductions.
The entire tax code should be thrown out and replaced by a flat tax with no one paying zero taxes.
Businesses should pay a 10% tax. Why ? Becauses businesses pay actualy pay zero tax they just pass it on to the consumer “YOU”.
Ray, as a small business owner, I can tell you that I pay way more than 10%. From my 2012 tax return, I paid 25% federal income tax, 10% state income tax, and then I had to pay a self-employment tax of roughly 12% (even though I deduct half of it – thanks government), for a whopping total of 47% of my self-employment income.
Do you know why GE paid no taxes? Well, first, you have to be profitable to pay taxes, and GE lost money the last 2 years. You only pay taxes on profits from your business, not revenue.
Over the last 10 years, GE made a profit of roughly $72.5 billion, and paid roughly $3 billion in taxes, or 4%, which is low. However, their taxes are so low because of politicians and tax breaks. So I do agree with you there on lobbying and muddled tax codes. But remember, GE also paid half of all it’s employees Social Security and Medicare taxes, which self employed individuals have to pay 100% themselves, not just 50%.