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Tuesday, June 28, 2011

NY Times: Who Doesn't Pay Federal Income Taxes (Legally)?

New York Times op-ed, Who Doesn’t Pay Federal Income Taxes (Legally), by Bruce Bartlett:

According to new data from the Tax Policy Center, this year 46.4% of tax filers will have no federal income tax liability. The following table presents the data.

As one can see, almost all of those in the bottom income quintile — those with incomes below $16,812 — will have no federal income tax liability this year. About three-fifths of those in the second income quintile will also have no liability, 30% of those in the middle quintile, and 7.3% of those in the fourth quintile. It is not only the poor who are exempt from federal income taxation; substantial numbers of households in the middle class are also exempted.

Surprisingly, a not insignificant number of those who are clearly well off are also among the “lucky duckies.” There are 78,000 tax filers with incomes of $211,000 to $533,000 who will pay no federal income taxes this year. Even more amazingly, there are 24,000 households with incomes of $533,000 to $2.2 million with zero income tax liability, and 3,000 tax filers with incomes above $2.2 million with the same federal income tax liability as most of those with incomes barely above the poverty level. ...

The phenomenon of large numbers of non-federal income tax payers has long been a subject of debate. Those on the left emphasize that other taxes, such as payroll taxes, are paid by those with no income tax liability, a point I discussed last week. Those on the right often complain that it is fundamentally undemocratic for such a large percentage of the population to pay nothing to offset the federal government’s general operations. After all, everyone benefits from national military spending and other federal programs.

Perhaps the right and left can at least agree that it is unseemly for those in the top 1 percent of income distribution, with incomes at least 10 times the median income, to pay no federal income taxes. It’s not socialism to ask them to pay something.

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Not surprising that an article in the NY Times would choose to focus on the the relatively small number of "high income earners" who pay nothing. In the lowest two 20% tiers, there are over 62 million US citizens who benefit from government services and pay nothing in federal income tax. 62 million citizens and the Times focuses their criticism on the 108,000 people in the upper tiers who pay nothing in federal income tax; everyone should pay something in federal income tax, that includes people making $8,000 and people making $800,000.

We could raise over $4 billion in revenue if we asked people in the lowest 20% to pay $50 and people in the second 20% to pay $100. We could raise another $4 billion if we asked the 108,000 in the upper tiers that aren't paying to pay $40,000 each.

Posted by: Tyler | Jun 28, 2011 1:34:37 PM

This article is typical of tax articles written by unsophisticated tax ignoramuses and is the sort of tripe you expect from a news industry that is more interested in sensationalism than complicated facts.

I have no clue what the data mean by "income tax". Does this include social security contributions or not. Is it net of EITC and other refundable tax expenditures?

Does "income" refer to taxable income, AGI, or some other figure?

If "income" refers to taxable income then there needs to be an addendum to this article to explain the effect of "tax credits" - refundable and otherwise - on ultimate tax liability. For example, I have several clients whose taxable income is in the 300-500K range but whose US tax liability is near zero because they have paid an even greater amount of taxes to foreign governments for which they are entitled to a tax credit. They paid a bundle in taxes; only not to the US - evidently the only country in the limited universe inhabited by the author and his local-yokel readership.

The author of this article appears to be exceptionally unsophisticated and/or has forgotten - if he ever knew - that there are other countries in the world to whom Americans are obliged to pay taxes and that the US is the only country - besides Eritrea, Vietnam and North Korea - that taxes on the basis of citizenship.

Posted by: John | Jun 29, 2011 1:01:21 AM

Great idea, Tyler. Lets bleed the poor, who already can't afford basic necessities like healthcare.

We have a progressive income tax structure for a reason. That $50 has a lot more marginal utility to someone below the poverty line than it does to someone else.

Posted by: Marketplace | Jun 29, 2011 7:17:57 AM

Everyone needs to pay Marketplace. Everyone benefits from the programs and services provided by funds from the federal income tax; chances are, if you're in one of those two brackets, you benefit pretty substantially. $50 isn't bleeding the poor, that's a very reasonable amount. I understand marginal utility and it doesn't need to be pointed out to me, but that doesn't change the fact that we have a system in which 76 million out of about 150 million "taxpayers" don't pay any federal income tax. That's ridiculous and it has to change if we ever expect to reduce America's debt level. I understand that we have a progressive income tax structure, we should and could continue to have that if we asked everyone to pay something and to pay more.

I have no problem with asking people with wealthy to pay more, but we need to ask everyone else to contribute more as well. If you think we can just tax the wealthy and solve our budget and debt issues, you're a bit delusional.

Posted by: Tyler | Jun 29, 2011 11:35:49 AM

has anybody thought about the fact that the constitution says that we are all created equal, and we have the priveledge of life liberty and the persuit of hapiness.So isnt it unconstitutional to make a person pay more percentage of income tax than someone else.

Posted by: robert | Jun 29, 2011 3:18:23 PM

Do you have any studies that show that placing such a nominal burden on the poor will have a substantial effect on America's debt level, other than the meaningless symbolism of "everyone needing to pay?" There is an inherent tension between the ideas that (1) the burden won't really be that bad and (2) such taxes could have much of a meaningful effect on the deficit.

Lots of people don't pay income tax because of widening wealth disparity. Even the poor have to shoulder a disproportionate burden from other taxes, like payroll and sales taxes.

How convenient that the people who seem to have escaped the worst consequences of the crash are paying historically low rates, while the poor and middle class have to pay sums that mean a lot more to them in real dollars than Clinton-era top marginal rates could possibly mean to the top 1%. Apparently taxes are terrible and interfere with economic growth in all economic situations *except* when applied to the poor.

Posted by: Marketplace | Jun 30, 2011 8:37:01 AM

Well, lets see; if we increase revenue, which we could do by raising taxes, I'd assume you agree, then we'd have less of a deficit. Revenue less spending equals surplus or deficit. I never argued we should raises taxes on the lower income people alone, I think tax increases need to be across the board to have any chance of being effective at solving our deficit and debt problem. Also, its hardly meaningless symbolism, solving the debt problem will take significant contributions from everyone and eliminating deficit spending should be a top priority. I entirely agree that the wealthy have more to contribute than less well off people and that they should contribute more, however, that doesn't mean people of lower means should contribute $0 via federal income tax.

Great idea, I also think that we should remove the cap on payroll taxes. Problem solved and we increase revenue. Sales tax is a tougher fix and I understand its regressiveness when compared to income.

While I appreciate the rhetoric, I never said anything regarding taxes being meaningless or terrible, I said that I feel everyone should pay federal income tax. I've also mentioned that I feel the wealthy should pay more, so if you were trying to apply the assertion that "taxes are terrible...except when applied to the poor" to me, you're out of line. I also never mentioned economic growth, though I don't believe that even Keynes himself would argue that increasing taxes to fund spending we're already engaged in or to pay off debts would lead directly to economic growth.

Posted by: Tyler | Jun 30, 2011 10:58:01 AM