jungle

Nearly half of US households escape fed income tax
Recession, new tax credits have nearly half of US households paying no federal income tax



Stephen Ohlemacher, Associated Press Writer, On Wednesday April 7, 2010, 1:34 pm EDT
WASHINGTON (AP) -- Tax Day is a dreaded deadline for millions, but for nearly half of U.S. households it's simply somebody else's problem.

About 47 percent will pay no federal income taxes at all for 2009. Either their incomes were too low, or they qualified for enough credits, deductions and exemptions to eliminate their liability. That's according to projections by the Tax Policy Center, a Washington research organization.

Most people still are required to file returns by the April 15 deadline. The penalty for skipping it is limited to the amount of taxes owed, but it's still almost always better to file: That's the only way to get a refund of all the income taxes withheld by employers.

In recent years, credits for low- and middle-income families have grown so much that a family of four making as much as $50,000 will owe no federal income tax for 2009, as long as there are two children younger than 17, according to a separate analysis by the consulting firm Deloitte Tax.

Tax cuts enacted in the past decade have been generous to wealthy taxpayers, too, making them a target for President Barack Obama and Democrats in Congress. Less noticed were tax cuts for low- and middle-income families, which were expanded when Obama signed the massive economic recovery package last year.

The result is a tax system that exempts almost half the country from paying for programs that benefit everyone, including national defense, public safety, infrastructure and education. It is a system in which the top 10 percent of earners -- households making an average of $366,400 in 2006 -- paid about 73 percent of the income taxes collected by the federal government.

The bottom 40 percent, on average, make a profit from the federal income tax, meaning they get more money in tax credits than they would otherwise owe in taxes. For those people, the government sends them a payment.

"We have 50 percent of people who are getting something for nothing," said Curtis Dubay, senior tax policy analyst at the Heritage Foundation.

The vast majority of people who escape federal income taxes still pay other taxes, including federal payroll taxes that fund Social Security and Medicare, and excise taxes on gasoline, aviation, alcohol and cigarettes. Many also pay state or local taxes on sales, income and property.

That helps explain the country's aversion to taxes, said Clint Stretch, a tax policy expert Deloitte Tax. He said many people simply look at the difference between their gross pay and their take-home pay and blame the government for the disparity.

"It's not uncommon for people to think that their Social Security taxes, their 401(k) contributions, their share of employer health premiums, all of that stuff in their mind gets lumped into income taxes," Stretch said.

The federal income tax is the government's largest source of revenue, raising more than $900 billion -- or a little less than half of all government receipts -- in the budget year that ended last Sept. 30. But with deductions and credits, especially for families with children, there have long been people who don't pay it, mainly lower-income families.

The number of households that don't pay federal income taxes increased substantially in 2008, when the poor economy reduced incomes and Congress cut taxes in an attempt to help recovery.

In 2007, about 38 percent of households paid no federal income tax, a figure that jumped to 49 percent in 2008, according to estimates by the Tax Policy Center.

In 2008, President George W. Bush signed a law providing most families with rebate checks of $300 to $1,200. Last year, Obama signed the economic recovery law that expanded some tax credits and created others. Most targeted low- and middle-income families.

Obama's Making Work Pay credit provides as much as $800 to couples and $400 to individuals. The expanded child tax credit provides $1,000 for each child under 17. The Earned Income Tax Credit provides up to $5,657 to low-income families with at least three children.

There are also tax credits for college expenses, buying a new home and upgrading an existing home with energy-efficient doors, windows, furnaces and other appliances. Many of the credits are refundable, meaning if the credits exceed the amount of income taxes owed, the taxpayer gets a payment from the government for the difference.

"All these things are ways the government says, if you do this, we'll reduce your tax bill by some amount," said Roberton Williams, a senior fellow at the Tax Policy Center.

The government could provide the same benefits through spending programs, with the same effect on the federal budget, Williams said. But it sounds better for politicians to say they cut taxes rather than they started a new spending program, he added.

Obama has pushed tax cuts for low- and middle-income families and tax increases for the wealthy, arguing that wealthier taxpayers fared well in the past decade, so it's time to pay up. The nation's wealthiest taxpayers did get big tax breaks under Bush, with the top marginal tax rate reduced from 39.6 percent to 35 percent, and the second-highest rate reduced from 36 percent to 33 percent.

But income tax rates were lowered at every income level. The changes made it relatively easy for families of four making $50,000 to eliminate their income tax liability.

Here's how they did it, according to Deloitte Tax:

The family was entitled to a standard deduction of $11,400 and four personal exemptions of $3,650 apiece, leaving a taxable income of $24,000. The federal income tax on $24,000 is $2,769.

With two children younger than 17, the family qualified for two $1,000 child tax credits. Its Making Work Pay credit was $800 because the parents were married filing jointly.

The $2,800 in credits exceeds the $2,769 in taxes, so the family makes a $31 profit from the federal income tax. That ought to take the sting out of April 15.

Grumble

As a single guy, making almost 100K/year, I paid less than $500 in income tax last year after all was said and done between deductions and expemtions. It's not fair to the top tier earners to be carrying the load of everyone else, but at the same time the government has made it such a cat and mouse game that everyone is doing everything they can to pay nothing. It's a broken system that needs to go.

We ALL benefit from the freedoms in this country and we all use it's resources. We should all share the burden equally. Be it the Fair Tax Act or a flat rate income tax (which would eliminate billions of dollars wasted trying to navigate the tax code). For those earning less than XX dollars, you either pay nothing or get a refund at the end of the year. However there is absolutely no reason that someone making 250K+ should carry a higher percentage than those earning 50K. By definition a flat tax would tax them more anyway.

The system is out of control, along with gov't spending.

Winged Wheeler

Or did you only pay $500 when you filed? I suspect that you paid considerably more than this over the course of the year as your withholdings disappeared down thier state sponsored ratholes, never to be seen again. At least not by you. It is a sad irony that the great Milton Friedman was the inventor of the withholding technique during (or right before) WW2.

If you did only pay $500, good for you and enjoy it while it lasts. It won't be long before they come back for you too.

WW

Winged Wheeler

All income is taxed at 10%. Income tax is paid each quarter by the taxpayer, there are no payroll withholdings. There are no tax exemptions, deductions, credits, etc. The lowest quintile of wage earners may choose to claim an exemption from paying tax, at the expense of exercising their right to vote. Should they choose to remain as an eligible voter, they pay the same income tax as everyone else.

The corporate tax is abolished, but all net corporate earnings are taxed as income to shareholders, proportional to their ownership interest in the corporation.

There are no other sources of revenue for the federal government. The size of the federal government (budget expenditures) is fixed at 10% of last years GDP.

During times of war, as declared by the US congress, the congress may assess a sales tax to pay for the additional costs to the government. This tax must be voted on each year and will be void at the cessation of hostilities.

All of these must be encoded in a tightly worded amendm,ent to the constitution.

WW

FighterHayabusa

A couple of points:
1. The progressive Federal tax system allows other taxes to be regressive and flat - some state income taxes, sales taxes, fica etc - this is not a coincidence.

2. "Hidden taxes" are regressive - Kraft pays federal taxes, and that is priced into every block of cheese.

3. You too can pay no Federal income tax! All you have to do is make no money! Who in a household that pays federal income tax would like to switch places with a household that pays no federal income tax?

It is right that everything worth doing is worth paying for - and it's better that everyone see exactly what they are paying so government is more accountable; it is wrong to assume that half the country is getting a "free ride" because they didn't pay any federal income tax.

jungle

Roughly 73% of all Federal income tax is collected from about 10 percent of the earners. I can well imagine the outcry if 10% of the population was targeted in a similar manner due to ethnic or geographic reasons. It is discrimanatory, it is wrong and it will one day be viewed as slavery is today.
Taking my money and time is taking my life, cute labels like regressive and progressive are like calling the holocaust the final solution.

We all need to pay taxes, ten percent for everyone would solve two major problems. Government is way too large and has become far too expensive for the average person. How many of us could write a check for around 1.5 million dollars that the gov has obligated every family of four to pay?
Second, they need to stop selling what they don't own, they have no right to spend well beyond what they collect.


A tax on just half of us is just wrong, and there is no possible logical defense. If we don't share the responsibility, how can we possibly share the benefit?
How would you feel about just allowing half of us to vote, the half paying Federal income tax?

Grumble

You would be correct, I actually have the gubment an interest free loan.

Grumble

Please explain... not paying into the system and enjoying the benefits is a free ride if you ask me.

FighterHayabusa

While you may be more on the hook for wars (your time lost), you are getting a pretty good deal for the highway you drove to work on (your time saved). Slavery? I doubt it - it's exactly that kind of ranting that will keep Libertarianism a fringe idea. If you want to actually make a difference start reading someone like Tyler Cowen who doesn't turn off everyone except his circle of whiner friends.

jungle

What if only half of us got to use those roads, the half that paid for them?

The situation is going to resolve itself eventually, we are on an unsustainable path and all the Kings men and all the Kings horses won't be able to mend it.

Ranting, fringe, Libertarian? This means you can't construct a logical argument and you won't step up to the plate and pay your fair share, but you are perfectly willing to let others do it for you. I would be ashamed to act that way, but I tend to take responsibility for my actions.
I find this very revealing.
It is never too late to start thinking for yourself instead of being spoon fed. Spoon feeding has gotten us to this point, are you proud of that?