Americans Skip Out on Taxes
Published: Sunday, October 23, 2011
Updated: Monday, November 21, 2011 18:11
Although it has been a few months since it first got brought up, there is a prevalent myth that is still echoing in the news. In a speech on the Senate floor, Senator John Cornyn of Texas stated that 51 percent of Americans paid no income tax to the Federal government in 2009. A fact like this certainly deserves the attention of the government and the people. However, to ensure fairness, all the circumstantial information should be taken into account.
This statistic originated from a document produced by the Joint Committee on Taxation. The document stated that about 22 percent of tax units had no tax liability while 30 percent got some money back from the government through tax credits. These tax credits include the Earned Income Tax Credit introduced by President Ford in 1975 and expanded by three Republican and one Democratic president. It allows for the credit of income for low-income workers, especially those who have children. In 2010, this tax credit is estimated to have cost the government $55 billion in lost taxes. However these tax credits, which benefit the poorer section of society, are not the only ones that exist.
The Mortgage Interest Deduction provides large benefits to those who earn over $200,000 a year. In 2010, this credit cost the government $103 billion, nearly twice as much as the Earned Income Tax Credit. While these tax credits do wipe out some the tax liability of some Americans, the lost revenue from the working poor is insignificant when compared to those considered the extremely wealthy.
On average, the bottom 20 percent of income earners receive around $1,000 in credits while the top 1 percent of income earners receives around $275,000 in credits. In 2009, the Joint Committee on Taxation stated that there were about 164 million tax units with the bottom 20 percent equaling 32.9 million units while the top 1 percent equaling 1.6 million units. If these groups received no tax credits it would bring the government an additional $32.9 billion and $452.1 billion respectively in taxes. Clearly, the top 1 percent is costing the government far much more in credits than the bottom 20 percent.
As it can be seen, the reason 51 percent of Americans paid no federal income tax was because the amount of taxes they owed was wiped out by that minute $1000 or so. However, just because they pay no income tax due to their low income does not mean that they do not contribute to the government.
According to the Heritage Foundation, the Federal income tax brings the Federal government 41.6 percent of its revenue, while Payroll taxes bring in 40 percent of its revenue. Payroll taxes are specifically set up to fund Social Security and Medicare, which are the government's first and fourth largest expenditures, respectively. Payroll taxes are paid by every taxpayer, not just the wealthy. This is where the poor and middle incomes pay a far greater share of taxes.
In 2009, the Social Security tax rate was at 12.4 percent shared equally by the employee and the employer. However, the payroll is only taxed up to $106,800. This means that the poor and middle class pay the full 12.4 percent on their incomes and those who earn more than the stated amount do not.
For example, an individual who makes ten times the threshold, approximately $1.1 million, only has to pay that tax on the first $106,800 and not the rest. This effectively gives them a Social Security tax rate of 1.2 percent. This gives them an effective tax rate that is 10 times less than those who earn 10 times less than them.
Those who are upset that 51 percent of Americans paid no Federal income tax in 2009 really have no reason to be upset. That 51 percent is losing as well. Not only do they get less back through income tax credits but they also pay a higher tax rate for payroll taxes.