Thursday, August 11, 2011

51% of Americans Pay No Income Tax –Really?

This past week I have been hearing a lot about how 51% of Americans pay no taxes. This figure was thrown out by Neil Cavuto on Fox News repeatedly this past weekend. It was also quoted by several Senators and Congressmen. In most cases it appeared to be a veiled way of blaming our debt crisis on a system which does not hold lower income Americans liable for their fair share of taxes. Something about that bothered me, so I decided to do a little research for myself. What I found was vey revealing.

As I usually do when I begin researching something, I started with a simple Google search. There were dozens of articles on this topic, but most were articles from politically influenced sources and blogs. Very few of these sited their sources or supported their assertions. I then went to government agencies and documented statistics such as the IRS, the CBO, and the Treasury Department. What I found was very interesting.

It is quite true that in 2009 51% of American households paid no Federal Taxes (but it should be noted that they did pay State, County and City taxes), of those 30% actually received tax refunds or credits, even though they paid no tax. Wow. How can that be?

Well, it’s easy. Our Federal Tax Code has literally dozens of tax deductions and loop holes –and the more money you have the more of these you can take advantage of. Those include things like deductions for off shore investments, political contributions, charitable contributions, medical expenses, business and travel expenses, credits for buying hybrid cars and energy efficient appliances, credits for installing solar power systems –you know, all the things a typical family living on under $50,000 a year can afford….

The result is that a great many millionaires in this country can afford to make investments and take deductions to reduce their ‘adjusted gross income’ to a point where they have zero liability (and in many cases are actually entitled to receive money or credits from the Federal Government).

Neil Cavuto and FOX News either need to do better research, or stop being purposefully deceptive. They are supposed to be honest, fair, balanced and reliable –but they have obviously missed the boat on this one.

Another aspect of this was the often quoted line that the wealthiest 10% of Americans are paying far more in taxes than the lower 90%. That statistic is at least close but here is a simple way of explaining most of that. Lets say, for example, you have 2 Americans, one making $250,000 a year and one making $25,000 a year and you set aside the deductions and loop holes completely for a minute. If they were both liable for even a 10% tax the wealthier American would be paying as much in tax as the poorer American is making all year, and the poorer American would be paying just $2,500 a year. But, there is an important difference. While that would leave the poorer American $22,500 to live on, it would leave the wealthier American $225,000 to live on. Pointing to the fact that the wealthier among us pay more total dollars and complaining that this is somehow unfair is being either delusional or deceptive.

What needs to happen before they start raising taxes is that they need to fix the damned tax code so that the wealthier Americans are actually paying closer to the 35% of their tax liability under the law. The revenues generated would be nearly enough for the Democrats to keep most of their runaway spending and still lower the deficit.

The reality, unfortunately, is that this is very unlikely to happen. The tax laws can only be changed by our elected representatives -and those “people” are reliant on political contributions to get and remain in office. Most of those contributions come from corporations and wealthy individuals. The last thing that group wants is to lose their tax deductions and loopholes. They will move aggressively against any attempt to increase their tax liability. Therein lays the true inequity in our system.

The starting place for reducing the debt crisis is fixing our political system so that our elected officials are no longer beholden to special interests. Until that happens, everything coming out of Washington will be ineffectual dog and pony shows.

Live Long and Prosper.....

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