Who Doesn't Pay Taxes

I was struck by these tax numbers in a recent CNN Money piece:

In 2009, roughly 47% of households, or 71 million, will not owe any federal income tax, according to estimates by the nonpartisan Tax Policy Center.

Some in that group will even get additional money from the government because they qualify for refundable tax breaks.

The ranks of those whose major federal tax burdens net out at zero -- or less -- is on the rise. The center's original 2009 estimate was 38%. That was before enactment in February of the $787 billion economic recovery package, which included a host of new or expanded tax breaks.

The vast majority of households making up to $30,000 fall into the category, as do nearly half of all households making between $30,000 and $40,000.

Nearly 22% of those making between $50,000 and $75,000 end up with no federal income tax liability or negative liability as do 9% of households with incomes between $75,000 and $100,000.

Of course, income taxes don't tell the whole story. Workers are also subject to payroll taxes, which support Social Security and Medicare.

When considering federal income taxes in combination with payroll taxes, the percent of households with a net liability of zero or less is estimated to be 24% this year, according to the Tax Policy Center's estimates.

A few thoughts here:

1. Wow. Almost half the people pay nothing to help run our federal government.

2. Yes, there are other taxes besides federal income taxes. Believe me, I know them well.

3. That said, 24% of people in the US pay absolutely nothing in any sort of tax? Really? I understand that these people are at the very lowest of income levels, but talk about a good gig financially -- getting to live in a great country, with all it's benefits, for no cost at all.

4. Are we near the end? Consider this quote by Benjamin Franklin: "When the people find they can vote themselves money, that will herald the end of the republic."

I've always found it interesting that many people pay nothing in federal taxes and yet get the same benefits (including the right to vote) as people that pay the entire tab. It's like being able to use the health club without paying any sort of fee to do so while the other members foot the bill.

I'm guessing that it's even more skewed in other countries like Canada, France, etc. that have more progressive tax systems. Anyone know if this is correct?

Update: Just found this. If 40 (or 47) million people are in poverty, that explains why they don't pay taxes, huh?

Comments

[TheDebtHawk.com]

There is no reason why so many people pay zero taxes. This is killing the middle class as more and more of the tax burden falls on their shoulders.

Don't get me wrong, I want everyone's taxes to be lower. But, we can't have a society where everyone does not share the responsibility for government spending.

[The Biz of Life]

Something is clearly out of kilter here. I'm all for low taxes and reducing the ever inflating government bureaucracy with its wasteful spending and corruption. But I fear we are moving toward a situation where the half the country that benefits from the taxes others pay will not readily give up their subsidies and will keep voting people into office who promise them more of something for nothing.

[david]

In Europe, the % of people actually paying income taxes is probably similar. For instance, France's lowest income tax bracket starts at about $8000 (http://riviera.angloinfo.com/countries/france/intax.asp) However, most European countries use a Value Added Tax (VAT) as a supplement to the income tax (essentially national sales tax). If you look at it this way, everyone pays federal taxes in Europe. However, this is balanced out by significantly higher social spending. So even though everyone pays federal taxes, those on the lower end receive significantly greater social benefits than the poor here.

A VAT is essentially a national sales tax. Each company in the production chain pays a certain % of the value that it added to the product. Assume the rate is 10%. Suppose that Company B paid $5 for the materials for a pair of shoes to Company A, assembles the shoes, and will then sell the shoes for $10 to the retailer B. A would charge 10% of $5, $.50, to B, which is then paid to the government. B would charge 10% of $10, $1 to C. B would then pay the government $.50, the difference between the amount that it charged to C, and that A charged it. http://en.wikipedia.org/wiki/Value_added_tax

[Travis]

I understand the need to keep taxes low and help those in the lower income bracket and don't necessarily have a problem with some under the poverty level not paying taxes but I don't feel they should be getting money back in the form of refundable credits such as the EIC. These people already qualify for other forms of government assistance and I see no need to give them this.

That being said one of the biggest problems w/taxes in this country is the amount of wasted spending. It is amazing what gets approved and passed and money thrown out. I believe we need tax reform in the biggest way but before that happens we need to learn what responsible spending is and how to say no.

[TJ]

I don't appreciate the constant smokescreens of the complicated tax code (which is why I laugh when there is talk of simplifying the tax code, there is a reason it is so complicated). Even the simple division of social security tax into an employer part and an employee part to blur the level of burden it imposes is ridiculous.

It makes sense that those making under some number ($30K?) wouldn't pay any tax, but hiding welfare payments by using negative tax liability is more than a bit dishonest.

The argument first raised when discussing the 47% who don't pay tax is that thats not true b/c of FICA. Looks like half of those still pay no tax. And don't forget that the rest are complaining about the same SS tax that already transfers wealth in its calcuation of benefits (someone making $20K/year gets a benefit of about 60% of past earnings, someone who makes $100K gets something like 30%).

"Nearly 22% of those making between $50,000 and $75,000 end up with no federal income tax liability or negative liability as do 9% of households with incomes between $75,000 and $100,000." - Good grief, I'm supporting people that make more than I do just BECAUSE they choose to mortgage a McMansion to the max, have 8 kids and vacation and eat out every night "for business purposes".

No one ever has to admit to the reality of whats going on as long as there is the IRS smokescreen. It would only become clear by getting rid of the black box of the tax system and government support programs. In such a new streamlined system, someone making a good salary would pay some % to the government for defense and infrastructure spending and then have some low income (and middle income/high tax deduction & tax cheats) families appointed to them as their dependents, to each of whom they mail a check directly. Someone making $80K may get one family to support and someone making $1M get many. Besides clarity, this would be ten times more efficient than the current system (at least the receiveing families would recieve the payments before govt. inefficiency destroys 90% of it through their programs). Can you imagine how much the size of the govt (and its operating budget) would be reduced?

[Jessica]

What is missing from these numbers is if this group of people qualify for tax discounts: being married and/or deducting children. The people probably would not qualify for zero taxes if they were single with no dependents, as this group ALWAYS pays higher taxes.

[Emily]

People make decisions in life. I am running some numbers right now to see if it will be possible for me to be a stay at home mom. If I do that, my federal income tax liablity will be almost zero (if my husband makes $57,000, and puts away $5,000 in a 401K, and we spend aproximately $400 a month on health insurance). We will still pay FICA, property tax, state tax, and sales tax. Now, If I choose to keep my day job, our federal liablity will be more like 7-10K. I feel like as we make more money, we are taxed more, and thats okay. Now, I do have to say that if I do quit, I will be running another business on the side which probably half my income will go to tax, so I guess its all a wash. I just really don't mind the way it works. The bottom line is, my family would need more money to live off of if we were only making $57K, but would have the ablity to pay more taxes if we were making double that ammount.

[Sheri]

A key point is missing from this discussion. The statement is that the people "will not owe any federal income tax", not that they have not PAID federal income tax. My understanding of this statement is that these people will not owe any money to the IRS on April 15th. However that does NOT count all the withholding taxes they paid during the year. And withoolding tax is simply Federal Income tax paid as you go along - instead of being paid all in one lump sum at the end of the year. Take the money someone should owe on their income, subtract what they've already paid in witholding and what remains is what they owe. For people with only wages/salaries (i.e no investment, business, or other income) this number SHOULD be fairly near zero. Therefore, especially taking into account the economy over the last year, seems a lot more reasonable.

[TG]

So here is another thought. It is generally accepted that lower income people pay lower (or no) taxes. However, why are we rewarding people for not earning enough to pull their own weight? In most instances, low income people are that way because of decisions they have made (e.g. not finish education, have kids too early or have too many or have them out of wedlock, or they choose not to work (e.g. "stay at home parent"), substance abuse, etc). I don't mind covering for people that really are low income due to circumstances out of their control, but I am NOT ok with covering for people that are low income due to the choices they have made.

[FMF]

Sheri --

That is not correct. Click through and read the headline of the article highlighted above. It says:

"47% will pay no federal income tax"

[JJ]

I'm a bit confused. The statement, "...roughly 47% of households, or 71 million, will not owe any federal income tax," seems to indicate that 47% of households do not owe MORE taxes than what they have already paid. --Meaning they paid federal income taxes out of each of their paychecks, but when all is said and done in April, they do not owe more than that. They are paid up.

Note also that in this statement, "...the percent of households with a net liability of zero or less is estimated to be 24%..." the key phrase would be "net liability" meaning that with what they have already paid, plus payroll taxes, plus federal income tax, they (again) owe zero, or are possibly getting a refund.

It's not that they aren't paying taxes, it's that they HAVE paid, and aren't required to pay more at the end of the year to make up for an imbalance.

Or am I missing something?

[Jessica]

Having children IS a significant tax break from the government. It does not matter if the parents are married or not. Both single parents and married parents can still be low income, though the married parents benefit from even further reduced tax liability because of a magical wedding ring.

As a single person, I am NOT ok with covering more than my fair share due to other people being married, children or not.

[JJ]

Sorry, two more things: I'm agreeing with Sherri, who already pointed this out. And two, FMF, I think that the headline is purposely misleading, in order to turn heads. The sub-heading states, "An increasing number of households end up owing nothing in major federal taxes, but the situation may not be sustainable over the long run." --Again, the key word there being: "owe". The 47% (24% net, whatever) do not OWE more at the end of the year.

I believe that CNN is trying to be sensational with that headline.

[Greg]

I always shake my head about the argument of how tax cuts only go to the wealthy. For anyone that actually knows how the tax system works (CPA) it's obvious why. Unfortunately most people don't understand and buy the class warfare argument the media spews out. As Sheri's comment above illustrates.

Please educate yourself and understand the issues before voting.

[FMF]

JJ --

I don't think it is saying that at all. Look at the chart -- it says "households with no federal income tax liability in 2009."

[FMF]

JJ --

Also near the end of the piece it talks about how Congress is thinking about this situation and says:

"If asked to vote up or down on whether they are comfortable with such a large group of voters contributing no federal income tax or payroll tax revenue, the majority may well decide it is appropriate given the means of the households involved. Or they may decide that it's not."

Key words:

"large group of voters contributing no federal income tax or payroll tax revenue."

Not "any extra tax revenue" but "NO tax revenue."

[Greg]

JJ--

FMF is correct. The % that don't 'pay' federal income tax either in their paychecks or at the end of the year is 47%. If they did 'pay' it during the year they would get it back when they filed their taxes. The headline is not 'sensationalized' but amazing none the less.

[MonkeyMonk]

I agree that our current tax system and government spending is pretty broken but I'd rather make $200,000 a year and pay a larger percent of taxes then make $20,000 a year and not pay any tax.

[TJ]

Sheri/JJ - no, that makes no sense.

This is talking about having no federal tax liability, not something that comes down to whether you chose the right number of exemptions on your withholding. This would mean that only 9% of those with incomes between 75K and 100K get refunds and the rest have under withheld, which is not correct.

BY DEFINITION, A household with two adults and two children will get at least $11K standardard deduction, $14K of exemptions and $2K of child credits. With $25K of deductions, you have to make about $15K more than that ($40K total) before the $2K of child tax credit doesn't completely offset it. So if you make less than $40K you will have eveerthing withheld (except SS tax) returned as a refund or even more (refundable credit).

[TJ]

BY DEFINITION, A household with two adults and two children will get at least $11K standardard deduction, $14K of exemptions and $2K of child credits. With $25K of deductions, you have to make about $15K more than that ($40K total) before the $2K of child tax credit doesn't completely offset it. So if you make less than $40K you will have eveerthing withheld (except SS tax) returned as a refund or even more (refundable credit).

[Old Limey]

This year I will pay less in taxes than in any year out of the last five since turning 70.

Reasons:--

1) George W Bush enacted a law that eliminated mandatory IRA withdrawals for the year 2009 only.
2) The 6 figure income from CDs in our IRAs is tax deferred.
3) The 6 figure income from muni bonds in our taxable account is tax exempt.

This leaves only our two pensions and maybe a portion of our two social security checks as taxable income.

Sometimes in our system people that don't need help get it and people that need it don't get it.

[TG]

I agree with Jessica that a person's marital (or child) status should not factor into the tax calculation. My husband and I both work and pay far more taxes than two single people who make the same income because our incomes are lumped together and taxed at a much higher rate than two singles would pay (28% vs. 33%). In our case, we pay a significant Marriage Penalty Tax - almost $4K a year just in federal taxes (and more for state taxes too). Also, our combined income makes us subject to a very high AMT (Alternative Minimum Tax) that adds about $4K a year on top of our normal taxes :-( I would be ok with paying all these high taxes if it was appreciated at all. However, instead, we are made to feel that we do not deserve to reap the rewards for our hard work (and good decisions) but instead should pay even more taxes!

[Sean G.]

Historical perspective nullifies your Franklin quote somewhat, various internet sources below:

"Following the Civil War the need for revenue declined and Congress abolished the income tax in 1872. For the next 30 years nearly all revenue was collected from the various excise taxes."

"In 1894, Democrats in Congress passed the Wilson-Gorman tariff, which imposed the first peacetime income tax. The rate was 2% on income over $4000, which meant fewer than 10% of households would pay any."

"[16th Amendment, 1913]
The new income tax law passed by Congress established tax rates of 1% to 7% and included generous exemptions and deductions. As a result, only 1% of the population paid income tax during the first year following the passage of the tax law."

Income tax has historically nailed people with money from income. This is why I think that, while the concept of a flat tax in the United States has some precedence, its antithetical to how the country has 'done' tax for the last 100 years or so.

[wanzman]

TG -

Your comment is completely out in left field. As a married couple, you have the option to elect to file as married filing seperately. So in this case, you would be filing returns just as each of you were single people. The only difference would be the fact that only one of you could claim things such as charitable decuctions or mortgage interest (or you could split these deductions).

And also, tax rates are marginal. Just becuase you are in the 33% bracket does not mean that all of your income is taxed at 33% - only the portion that is above the cutoff of the 28% bracket.

People really need to understand taxes better before making these kind of statements.

[Jessica]

TG -
Your definition of "Marriage Penalty" differs from the government's. The original "Marriage Penalty" was married couple combined income versus single person with same income. Would you be better off filing separately?

Read here about the "Marriage Penalty":
http://www.psychologytoday.com/blog/living-single/200904/marriage-penalty-i-don-t-think-so

[Strick]

"Consider this quote by Benjamin Franklin: "When the people find they can vote themselves money, that will herald the end of the republic.""

Fascinating. I'll try to state the following in as unpolitical way I can, because it really is interesting when you think of it how as many people pay taxes as they do. In a country where there is "one person one vote" and the "rich" by definition is the voting minority, how in 200 years has the tax burden not completely shifted to the top 1%. I mean, I thought using the $250K level by Obama in defining who's taxes would go up was a great move because that could only hurt about 1% of the population, so 99% of the votes out there would, even if not in great support of it, would not exactly be up in arms.

But why is it, practically speaking, that anyone below this level is paying taxes at all? Sense of those making $100K of paying their fair share? Sense of unfairness to those making above $250K? Sure those making between $100K and $250K do pay a good percentage of the total taxes at the moment, but I'd think that could easily be replaced by a huge tax increase to those over $1M. Is it that the majority does not (or has not until this point) feel a sense of entitlement? Or is it just that the rich have the pockets to influence enough of the other 99% in their votes? Or is it that 99% of the people would vote the total tax liability to be assumed by the rich, but nobody gets to vote for that, only congressman who are the rich or in the back pocket of the rich?

[Greg]

Because if you took the entire wealth of the top 1% you couldn't afford to run our government.

[Cindy]

"I've always found it interesting that many people pay nothing in federal taxes and yet get the same benefits (including the right to vote) as people that pay the entire tab."

Actually, they don't get the same benefits. They also get free food, housing, and health care in a lot cases.

[Greg]

"I thought using the $250K level by Obama in defining who's taxes would go up was a great move because that could only hurt about 1% of the population, so 99% of the votes out there would, even if not in great support of it, would not exactly be up in arms."

Because some people knew that wouldn't be the case. Seems you can say anything to get elected.

[Ryan]

It's not like the lowest 24% don't pay anything. It just doesn't go to the government directly. It goes through the hands of more wealthy people, who then pay it to the government, so they don't feel it as much. Those who set prices and rents realize all this, and set them accordingly. No right-thinking business owner would do anything less than to pass the taxes along to the consumer.

I am not saying that living here isn't a good deal--it is. But it's also an awesome deal for those who have the ingenuity and drive to make more money.

[TG]

Hi Wanzman and Jessica - we have calculated our taxes both ways (Married and Married Filing Separately). With the "Married Filing Separately" option, your spouse's earning are still factored in, so it does not help us. Also, I understand about the whole "marginal" tax rate thing. At 28% the federal tax for two singles earning $125K would be $28,720 each (or $56,540 in total). If the same two people got married, their tax rate is now 33% and their federal taxes are $60,321 - almost $4K more.

[Terry]

Jessica: DING DING DING WE HAVE A WINNER!

You got it.. when this issue comes up, I like to ask, " I earn minimum wage and I pay federal income tax...so when I see all these people paying NO federal income tax, I wanna know, what am I doing wrong to pay more tax than tens of millions who earn more than I?"

The answer, of course, is that they have kids (refundable child and/pr child care tax credits) and I don't.

Those NONtaxpaers earning $50K-$75K also enjoy large tax benefits for homeownership.

I've been saying for years that our so-called progressive tax system is really progressive only at very low (near or below poverty) and at fairly high (above approx $100K) incomes. In the broad middle, federal income taxes are effectively close to flat.

FWIW, I believe everyone should pay SOME federal income tax...BUT not necessarily in cash. If I could do some work on say an infrastructure project to satisfy a tax obligation, I'd sign up. That would be a better deal for taxpayers and the country than paying inflated 'prevailing wage' on billions and billions of dollars of projects.

[MC]

It would be very interesting to see how many of those paying no taxes have 1) children, 2) homes that they deduct mortgage interest on.

When years ago I made that little, I paid huge taxes. I didn't have children yet, nor could I afford to buy my own home.

How many people making $50K can afford to buy a house? Not too many, I'd guess.

[Arshes]

I found the article a bit confusing I think someone should contact CNN to get some clarification. I have worked as a Tax accountant and from what I understood, Sherri is correct in her statement. Plus i dont understand how some who make $30,000 can pay no taxes? Are the employers not required by law to take source deductions?

[Strick]

Greg - Why do you think that?

2007 - Top 1% Total AGI - $1.6 Trillion - Total Tax Payments of Top 1% - $368 Billion

All taxpayers Total Tax payments - $934Billion

[Emily]

So, if you don't want to pay taxes than have kids and take a job that pays low? You don't have to take a high paying job, you certainly can take a lower paying job so you will have less taxes. What are people complaining about?

[Emily]

Isn't there a problem that the top 1 percent of america holds such a large portion of the wealth? That is more disturbing than the fact that they make up 30 percent of the tax revenue.

[texashaze]

2 things concern me about these numbers:

-There is something wrong when you pay nothing to live here or get paid to live here. Everyone should pay something even if it's just 1 dollar. It's harder to appreciate something if there is no investment in it.

-There is something definately wrong when half of the country who doesn't pay determines what the other half will pay. This goes back to my first point, everyone should chip in something.

[Jessica]

TG-
If your combined income is $250k, your married tax liability is $60,321 (jointly). If my single income is $250k, my tax liability is $67,643. The single person pays more. You also get double the 401k benefits, both for before-tax contributions and company match.

If you divorced so you could pay the single tax rate, but there are some of the benefits you lose:
* Access to spouse's pension
* Access to spouse's social security
* Access to spouse's employer-sponsored health plan
* Auto Insurance and other marital discounts

I guess most companies don't make the employee pay the full price for the non-employee's dependents (spouse, children). You get that at a discount. Yes, you do pay more than the single rate, but the company pays the remainder. If you opt-out of my company's insurance plan, they give you the money that they would have spent subsidizing your health insurance.

[Strick]

Guess Texashaze Vs. Emily last comments sum it all up. Either you're entitled to what you have or entitled to what others have.

[Jim]

Saying that 47% don't pay income tax doesn't really mean much. Why don't those people pay taxes?

Here's who doesn't pay taxes:

Retired people on social security.
People making less than $10k a year.
People with income from untaxed municipal bonds only.
People with low to moderate income and higher tax deductions / credits.
Self employed people who's businesses lost money.

Is there something above that should be changed? Should retired people on social security be taxed on their SS? Should we tax business owners who lost money?

[Greg]

Jim,

You have a good point but should they also be able to complain about other people not paying enough taxes?

[ryan]

I am 28, and have had no tax liability since 2006, and counting. I will gross about 50K this year from my paycheck.

I have rental properties, and the associated deductions ensure that my adjusted gross is out of taxable territory.

I consistently reinvest at least half of my take home pay into the community and the economy, doing far more benefit than paying the gov't to waste it on some paperwork.

I will continue to do this until I die or they change the laws.

[StL Pastor]

Just to add something to this conversation,
there is a pretty good amount of evidence that everyone pays about the same tax rate, when you incorporate state and local taxes as well-about 40% of income. (see this MSN article)
http://articles.moneycentral.msn.com/Taxes/Advice/YourRealTaxRate40.aspx

It is the progressive income tax that allows the wealthy to at least pay an equal percentage of the tax burden, and the wealthiest of the wealthy, who live on capital gains are only paying 15%, which is ridiculously low, in comparison to the rest of us. After social security and local taxes, the lower middle class has already paid a significant portion of their income in taxes.

Just my 2 cents.

[TG]

Hi Jessica,

You wrote:
If your combined income is $250k, your married tax liability is $60,321 (jointly). If my single income is $250k, my tax liability is $67,643. The single person pays more.

I totally agree, but the couple earning $250K had to work two jobs (80+ hours) a week for the $250K vs. the single person working one job (40+ hours) per week. I am really just trying to make an apples to apples comparison between the taxes two single people who both work and earn $125K would pay vs. the tax the same two people would pay if they got married.

[Apex]

Lots of comments here about how taxes need to be lower overall.

Two thoughts.

1. The federal tax take as a percent of GDP is lower now than it has been at any time since WWII.

2. Due to current budgetary structural issues with debt, financial meltdown, and coming entitlement issues, everyone should look at their current tax bill and rate with a longing sense of nastalgia. It's about to go higher never to return to these levels again for anyone who is currently alive.

[Terry]

Cindy -

As someone who has worked productively at the bottom of the economy, I reject claims that I don't contribute "enough" in taxes.

My workplace has two dozen employees, all earning within a few cents of minimum wage - yet the business enjoys a net annual profit in the neighborhood of $3 million.

So I think the productivity of the employees is not in doubt; our wage is not commensurate with our productivity, and our being underpaid actually results in MORE taxes being paid than if we had been paid wages consonant with our productivity:

Our wages are taxes at the 10 percent marginal tax rate, while the profit is taxed at our employer's top tax rate.

So I believe the employees contribute far far more in taxes than you credit us with.

[Terry]

ryan -

Is this a great country or what? Your tenants' income is redistributed upward to you, AND they pay more tax than you. I aspire to get in on that.

[Dotty dot dot]

I found this post and subsequent comments confusing. Coming from the Canadian perspective, I'm fairly certain that any person that is a resident in Canada is liable to pay Canadian income tax, regardless of income.

[Terry]

p.s. I agree with FMF - a 'tax liability' is the 'TAX' line on an income tax return. THe amount you owe is your tax liability minus your payments (e.g. withholding) and tax credits.