Who Should Pay Taxes?

On Friday, I posted that the Tax Foundation reported that, in 2008, nearly one in three taxpayers paid no taxes or received every dollar back which was withheld. It’s the highest percentage of nonpayers ever. Think about that for a second. It’s pretty scary.

For 2008, those numbers mean that there were about 51.6 million filers who had no income tax obligation at all. For the sake of comparison, that same year, the Census estimated that there were 112,362,848 households in the US.

There are a mish-mosh of reasons that have gotten us to this point but chief among them: Congress and the President use the Tax Code as the architect for most of their social welfare programs. Politicians have long figured out that voters don’t like paying taxes. But in recent years, they’ve also figured out that they can manipulate the Tax Code to dole out tax breaks to drive policy. Want people to buy new cars? Give them an extra tax deduction. Want people to buy new houses? Give them an extra tax credit. Want people to buy environmentally friendly products? Give them an extra tax credit.

All of these extras add up. And they’ve been adding up quickly over the past ten years. Since 2000, the number of non-payers has increased by 59% (check out this cool graphic) even though the number of filers has only increased by 10%.

When you see the numbers, you may think that all of these non-payers are lower class filers, grabbing up EITC and other traditional “welfare” breaks. But not so. The EITC cost taxpayers $42.9 billion in 2008. A pretty nice chunk of change. But not so much as to completely outshine other tax breaks targeted to middle and upper class taxpayers. The new housing tax credit? It costs taxpayers one billion dollars per month. And the mortgage interest deduction and real estate tax deductions? Those home-buyer incentives “save” taxpayers an astonishing $130 billion per year.

In other words, in today’s economy, tax breaks aren’t just for lower income filers. Middle class (and in some cases, upper class taxpayers) benefit, too. In fact, in 2008, a “normal” married couple with two children could earn up to $56,715 and pay no taxes.

But at what cost?

Government spending is going up, not down. The deficit is increasing. The need for tax revenue is not going away: it’s merely shifting. Fewer than two-thirds of filers pay taxes. That can only last so long. No wonder that taxpayers are calling for a “revolution” along the lines of a Tea Party – or a Coffee Party.

Taxpayers are angry. I’m just not sure that most taxpayers know what it is that they really want (myself included). Clearly, taxpayers want to pay fewer taxes. But realistically, in today’s economy, that can’t happen: we’re paying for a war, we’re talking about funding universal health care and we’re in the midst of a recession with a record number of unemployed. If a shrinking percentage of taxpayers pays fewer taxes, how do the bills get paid? And if we put the kibosh on existing tax breaks, those taxpayers who are paying now will pay even more.

Let’s face it: we like our tax breaks. And Congress and the President have figured out that we’ll vote for whoever promises us the most breaks (even in cases, like the federal estate tax, when they might not even affect us directly). Around this time each year, we all say we want to pay less – but a striking number of taxpayers already do. So I guess the question is: who should pay taxes?

Comments

  1. Bill

    First, I want to say that I enjoy reading your column and would encourage you to keep at it.

    Who should pay taxes? I think all but the most radical would says that everybody should play taxes both for fairness and for stakeholder reasons. Which, of course, is not the same thing as saying everybody should pay federal income taxes. Those zero-payers are paying sales, property, FICA, and Medicare to name a few of the taxes they pay so I suspect they all feel pretty connected to the cost of government. Collecting more income taxes from people that make more than 50K in AGI in the form of Federal income tax isn’t going to change much.

    The increase in percentage of non-payers from 28% in 1950 to 32% in 2007 (I’ll talk about 2008 in a minute) doesn’t seem like that big a deal to me. It also would appear that the number of returns getting filed is increasing faster than the working population in recent years and my guess is that many of the new filers are people that were too poor to bother to file in the past and only file now because of EITC and stimulus payments. These people should actually feel more connected to the government today than in the past.

    Personally I think that we should gradually phase-out (say 5% per year for the next 20 years) the huge tax breaks created by deductions for mortgage interest, employer-paid health care premiums, state and local taxes, and charitable contributions (much of which enriches all ready wealthy foundations, universities, and hospitals).

    As for 2008, I’ll make two points. First, we decided to deliver stimulus through the tax return rather than just cutting checks so it’s misleading to say that this was relevant to studying the the non-payer percentage. If the government had just sent a check for $800 to everybody that filed a tax return in 2007 and ignored 2008 returns, non-payers might still have been at earlier levels.

    Second, you might want to take a closer look at the Tax Foundation numbers. It’s not clear to me how they calculate the % of non-payers and the 2008 raw numbers look a little odd. For example, 47M returns were filed for less than 50K with an aggregate tax liability of $86B. The Tax Foundation says that there were 52M non-payers which means a surprisingly high number of zero-payers made more than 50K, a small percentage of <50K filers owned surprisingly large amounts of taxes, or there's something hinky in the calculation. Also, the preliminary # of filers for 2008 used by the Tax Foundation was 142M but the actual number was 155M. That's a huge difference. I'm NOT saying they fiddled the numbers but there's clearly something that needs further investigation before accepting the the Tax Foundation estimates for 2008 as accurate.

    http://www.taxfoundation.org/publications/show/25962.html
    http://www.irs.gov/pub/irs-soi/08in01pl.xls
    http://www.irs.gov/newsroom/article/0,,id=188359,00.html

  2. Peter

    Kelley,

    Good points.

    It is anti-democratic to have only a small segment of the population participate in the funding of the government. So, to answer your question, I think everyone should pay taxes.

    To get there, the first thing we should do is eliminate all refundable tax credits. They are thinly disguised welfare payments and invite the same types of fraud the old welfare system used to invite.

  3. highfiredanger

    This is a great post! I love your blog–you make the complications of our taxation system nearly understandable for a layperson like myself! :)

  4. Steve

    Who should pay taxes? Uh, e v e r y o n e. Make a dollar, pay a dime. Make a million, pay 100g. Corporations and individuals, all. No exceptions, no deductions, no tax-breaks, no refunds.

  5. Bobby Huang

    This phrase you wrote outlines it perfectly:

    “There are a mish-mosh of reasons that have gotten us to this point but chief among them: Congress and the President use the Tax Code as the architect for most of their social welfare programs.”

    At the end you ask “who should pay taxes?”

    I’ll answer, everyone should.

    I would love to see if you have data on how a flat tax works in certain places like Hong Kong. Is it more efficient and effective? From what I hear yes.

    People would spent less time maximizing tax returns and more time outputting value into society. Less work would be spent on figuring out tax loopholes and more time on generating revenue.

    Of course these are my own personal opinions and I know not everything is rosey with a flat tax.

    It’s just not fun to be part of the two-thirds supporting the one-third not paying taxes. I have to pay taxes because I make above average? Just because they didn’t make the decision to earn more and to go for tax breaks?

    I’m fine with paying taxes, just not when people “purposely” don’t go out to make more money or provide more value because of the many welfare programs.

    This comes from running a business in California (something I’ll never do again). Too many handouts and too tough on business pushes business out and makes it less effective. This includes taxes and other ways of generating revenue.

    Thanks for all your tax writing Kelly, it is very enlightening.

  6. SimplifiedTaxes

    I do think that it is everyones duty and obligation to pay their taxes. I also agree on having flat tax. At least there’s no need to adjust the tax just because of night differential or holiday pay or additional bonuses. I could always see faces of people complaining whenever they receive they paycheck and how big the their tax deduction. I also think that middle class people/employee are most affected by the aggrevating tax that we have.

  7. JBruce

    The real question is not who should pay taxes, but how much should one pay (and to whom). Because almost everyone pays taxes.
    Anyone who gets a paycheck pays 7.65% in FICA and Medicare taxes off the top — at least on the first $105-110K. In most states anyone who spends money pays sales tax on many, if not all, transactions. Yes, someone who makes only $25,000 a year may pay no Federal income tax (what with exemptions, child credits, and standard deductions). But where I live (Bryant, Arkansas) there is a 5% sales tax on groceries and 9% on almost everything else (except rent). So those 25K earners who live here probably pay (conservatively) 10-12% of income in taxes — more if they smoke, drink, put gasoline in their car, etc.
    Of course it’s OK to bemoan the number of “taxpayers” who don’t pay Federal income taxes. But it’s incorrect to jump to the conclusion (which Kelly did not do) that they pay no taxes at all.

  8. The Biz of Life

    Who should pay taxes? Everyone above the poverty line. I’d like to see a flat income tax, or for those who insist on progressivism a three tiered system 0f say 15, 20, 25% with no deductions. But that would take all the power away from politicians to do their social engineering and dispense money to their favorite constituents, and they would never go for it. Even better would be the elimination of the income tax, and the establishment of a consumption based national sales tax.

    But the real problem is spending and deficits, not tax revenue. These people have no restraint or shame. They will spend as much as they think they think they can get away with and to hell with the consequences, Republican and Democrat alike. Until an enforceable statutory or constitutional limit is placed on spending the gap between government spending and income will never be closed. The politicians only get more brazen over time.

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