The Truth About Taxes
Published on - August 31st, 2009 (Modified on - January 15th, 2012) (by J.D. Roth) Note: Although I try to keep GRS a politics-free zone, today’s topic is inherently political. I’ve stayed as neutral as possible in the article, but I know that there’ll be some political discussion in the comments. Please keep conversation civil, as always.
Because I was frustrated with my own ignorance about the U.S. federal budget and our tax system, I recently spent twelve hours researching a variety of tax topics. From my research came two articles: last week’s short guide to the federal budget and today’s post, which answers some of my personal questions about taxes.
Last week, we tried to take a few small steps toward understanding the federal budget. We looked at where the U.S. government spends its money. But where does it actually find the cash to spend?
Of the $2.333 Trillion dollars in U.S. government receipts:
- $1050 Billion (45.0%) comes from Individual Income Taxes
- $939 Billion (40.2%) comes from Social Insurance/Retirement Receipts
- $221 Billion (9.5%) comes from Corporate Income Taxes
- $76 Billion (3.3%) comes from Excise Taxes
- $20 Billion (0.9%) comes from Estate and Gift Taxes
- $28 Billion (1.2%) comes from Federal Reserve Deposits
- $16 Billion (0.7%) comes from other miscellaneous sources
As you can see, nearly half of government receipts come from individual
income taxes. Naturally, taxes are a hot-button issue. They have been since this nation was founded. (To be fair, though, the driving force then was “taxation without representation”. Modern complaints are against taxes in principle, I think.)
During my research, several questions about taxes occurred to me. In today’s article, I’ll do my best to share the answers I found.
Is it true that X% of Americans pay no federal income tax?
In a recent discussion about taxes at The Simple Dollar, Kevin wrote:
Roughly half of all Americans don’t pay any income tax at all. I’m sure those folks feel the current tax levels are just fine and dandy, no complaints. Those of us who DO pay taxes, however, are buckling under the weight.
Kevin’s comment left me wondering: Are there really that many Americans who don’t pay income tax? And are those of us who do pay income tax really “buckling under the weight”?
I was unable to locate government data on people who don’t pay taxes. Instead, I found a March 2006 article from the Tax Foundation, a nonpartisan tax research group based in Washington, D.C., which calculated that 43.4 million tax returns resulted in zero (or negative) tax liability. Another 15 million households file no tax return at all. Based on these numbers, the article concludes:
Roughly 121 million Americans — or 41 percent of the U.S. population — will be completely outside the federal income tax system in 2006. This total includes those who pay no tax, and those who pay some tax upfront and are later refunded the full amount of the tax paid or more.
So, according to this study, 41% of the U.S. population lives outside the federal income tax system, and 32% of U.S. tax returns resulted in zero or negative liability in 2006.
This 32% number is relatively high. Previous peaks were at 28% in 1950 and 26% in 1978. Lows were 16% in 1968 and 18% in 1984. In general, the percentage of tax returns with no tax liability is between 20% and 25%.
The Tax Foundation sees these numbers as a call to “broaden the tax base”, but admit that nonpayers tend to be younger and earn lower incomes. (Here’s a past GRS article about people who live on low incomes in order to avoid paying taxes.)
If there are a large number of non-payers, does that mean the rest of us are “buckling under the burden”? Let’s look at more numbers.
How do current income tax rates compare with those from the past?
In the United States, the federal individual income tax went into effect in 1913. The top marginal rate was 7% — and that’s if you earned over half a million dollars. (According to the Bureau of Labor Statistics inflation calculator, that’s equivalent to an income of nearly $11,000,000 today!)
The Tax Foundation has published a handy viewer that allows users to explore U.S. federal individual income tax rates from 1913 to 2009. (They offer PDF and Excel versions of the data, too.)
Using their data, I created a graph that shows the history of U.S. marginal tax rates. This graph shows the lowest marginal rate in red and the highest marginal rate in blue. At any one time there are many other rates in between. (The tax tables are simple right now, believe it or not.)
Based on this information, it would be easy to conclude that tax rates are low in the United States right now relative to past history. While I believe this is probably true, it’s impossible to know this for sure without copious data regarding average incomes and effective tax rates. Still, the answer to the next question provides a bit of a response.
What tax rate does the average person pay?
Because the United States has a system of progressive taxation, it’s difficult to know exactly how much each person pays for income tax. We all know our marginal tax rates — the rate at which the last dollar of our income is taxed — but our effective tax rates (or average tax rates) fluctuate from year to year.
I don’t know a source for comprehensive data on this question. The IRS does provide some statistics (and may, in fact, provide all the data one needs), and other parties have taken the time to collate some of it. For example, the Tax Foundation has produced several pages of summary tables. From this info, I built the following chart:
This chart shows the average federal income tax rates over time for a variety of income levels. The red line shows the average tax rate from 1980 to 2007 for the top 1% of the population based on Adjusted Gross Income (AGI). The black lines shows the top 10% of earners based on AGI. The blue line shows the overall average federal income tax rate for all U.S. citizens.
In 1980, Americans paid 15.31% of their AGI in income taxes. In 1990, that number was 12.95%. In 2000, it was 15.26%. In 2007 — the last year for which there is data — that number was 12.68%. Based on this, I’d say that the average American has an effective federal income tax rate of 13-15%. (And top earners pay about 22%.)
Note that these numbers don’t exactly match the statistics for effective tax rates that are available from the Congressional Budget Office. (Which show, for example, an effective individual income tax rate of 11.7% in 1980, 10.1% in 1990, 11.8% in 2000, and 9.1% in 2006.) I’m almost certain it’s a matter of methodology, but I don’t have the time to dig in and discover the details. That last link, by the way, contains loads of great data, some of which is analyzed in this piece at The New York Times.
So are Americans “buckling under the burden” of taxes? I’m not convinced. Taxes seem to be moderately low right now based on our past history. But maybe we pay more than the rest of the world? Let’s find out.
How does the U.S. tax burden compare with that of other countries?
Though I was unable to locate comprehensive statistics for every country in the wold, the Organization for Economic Co-operation and Development (OECD) does collect data on its 30 member nations.
In fact, you can view 18 years of OECD tax data all on one page. These numbers represent each country’s tax revenue as a percentage of GDP (gross domestic product). These figures include all taxes: federal, state, and local. (Note that you can export the data from this page in a variety of formats! Fun for statsgeeks and taxgeeks alike.) Here’s a graph of the data from 2006, the most recent year for which complete stats are available:
In 2006, tax revenue in the United States was 28.0% of the gross domestic product. Put another way, the average American paid 28% of her income to taxes (state, federal, and local). Of the 30 OECD member countries, only four had lower taxes (Japan, Korea, Turkey, and Mexico). The highest tax burdens were in Denmark and Sweden, where tax revenue was 49.1% of the GDP. The lowest tax burden (by far!) was in Mexico, where tax revenue was only 20.6% of GDP.
These numbers indicate that relative to other countries, the United States has a low tax burden.
How much is this all costing me?
Social Security, Medicare, Medicaid. Food Stamps, Unemployment Compensation. The Army, the Navy, the Air Force, the Marines. And the interstate highway to grandmother’s house. How much does this all cost you?
Well, Jess Bachman (the Death and Taxes poster guy) has done the calculations for you:
The average U.S. taxpayer has an income of $43,650. For every billion dollars of government spending, this taxpayer is on the hook for five bucks. These numbers scale up or down depending on your income. If you earn $100,000 a year, for example, you pay $15 of taxes for every billion dollars the government spends. Ouch.
Conclusion
Based on my research, U.S. taxes actually seem relatively low, both historically and in relation to other countries. I am not arguing that we should have higher taxes. Nor am I arguing we should have lower taxes. I’m just relaying the facts.
In fact, I don’t really have a purpose behind my research other than education. With all of the recent national discussion about taxes, I felt woefully under-informed on the subject. When listening to people argue about taxes, it’s difficult to know whom to believe. I wanted to do my own research and then share the results with you.
For more exciting information about taxes, check out the following:
- Internal Revenue Service: Tax statistics
- U.S. Treasury: A history of the U.S. tax system
- FedStats provides easy access to tons of statistics collated by the U.S. government.
- Tax Foundation: State and local tax burdens (by year) and State and local tax burdens (by state)
- Congressional Budget Office: Data on the distribution of federal taxes and household income (with thanks to Dan, a commenter at The Simple Dollar, who shared this info with me)
After all that, how would I balance the budget if I were dictator of the United States? Easy. I’d cut all programs across the board by 10% while increasing taxes on everyone by 10%. Yeah, that sucks, and every citizen of the U.S. would be unhappy. But you know what? If I were dictator, I wouldn’t care. I’d be sitting in a cozy room reading comic books while eating chocolate chip cookies with milk.
Update #1: As with last week’s post, I’ll post updates here at the end of the article as readers offer clarifications or important points. For example, although I focused exclusively on federal income tax for individuals in this article, several readers noted that this is not our only federal tax in the United States. Linear Girl provides a succinct summary: “The second largest source of funds for the federal government is payroll tax, aka Social Security and Medicare. All employed people who aren’t paying any income tax do pay payroll tax of 7.65% on all earned income (their employers also pay and additional 7.65%; if you are your own employer you pay both sides). “ So, if you want to include the complete federal tax burden in the above conversation, you need to add 7.65% to all figures — 15.30% if you’re self-employed.
Update #2: For those requesting a second part to this article about how this money is spent…that was actually the first part, last Monday’s short guide to understanding the federal budget.
Graphs courtesy of me. Images courtesy of Jess Bachman, creator of the Death and Taxes poster. Bachman is generously offering a deal for GRS readers. Order two or more posters and get 50% off when you use the code ‘slowly’ at checkout. “It’s basically buy-one, get-one-free,” Bachman says. Thanks, Jess!
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This article is about Economics, Taxes
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@Paul in #35: Yes, you are correct, the social security safety net helps the people in the bottom tiers of income disproportionately. You are correct.
But it still perverts the concept of graduated income tax rates if we say the people in the lowest income brackets have to pay the highest percentage of their disposable income to cover the safety net.
This is getting even more important to discuss as we add a brand new social safety net into the mix. Are we going to add another hidden tax to the laboring class? My guess is, yes, because social security’s hidden tax is so well-hidden that nearly no one notices it. What politician can resist that?
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One problem I have is that I think it’s poorly conceived social engineering, or at least politicking at its worst, that the mechanisms used to lower tax burdens encourage people to adopt certain lifestyles.
This happens across the board but what I’m specifically speaking to are the large number of lower income people I know, who typically make less than 25k a year, who purposefully have 3 or 4 kids just to get the tax relief. I know that sounds asinine but that’s how these people think.
It gets even worse when you realize those kids get government healthcare, schooling, food stamps etc. all provided on the taxpayers’ dime.
That’s the real tragedy of our tax system, the ill effects of the social engineering it creates which compound existing problems.
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My god, it’s absolutely horrifying to me that we could have been so foolish as to have top marginal tax rates in the 90% range in the 40s, 50s and 60s, and STILL have a top bracket in the 70% range in the 70s.
When you have rates that high, there’s no question that you create substantial disincentives to work and to invest. Worse, you scare investment capital away from our economy. Let’s hope we don’t forget the lessons of history and go back to those rates, ever.
Dan
Casual Kitchen
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@ethel..
You’re correct. Perhaps substituting the words “increasing benefits” for “raising taxes” will make my point more clear. Politicians don’t generally tend to talk about “raising taxes” (nor do people tend to vote for those who do) but they DO talk about the benefits they can provide or seek to provide if they are elected.
Ergo, if I’m a state funded teacher/retiree (or any other type of taxpayer funded employee) I would most likely be highly interested in voting for someone who is dedicated to seeing that my benefits increase or are not reduced. (I’m betting dollars to donuts that these politicians are NOT talking about reducing spending to allow me to keep my benefits.) I’m not saying ALL taxpayer funded employees have this attitude, btw.
I’m sorry, but I tend to believe that there IS the “what’s in it for me” attitude out there. I also can’t claim that I never thought this way when Politician X ran on a platform of increasing state benefits or Teacher Union President Y encouraged folks to vote for Politician X because he would do so.
@Adam
This is the argument that I had for years with my husband and I’m sorry that I didn’t make myself more clear with my reference to OPM…
Yes, I worked and got paid a fair wage BUT I got paid that wage with money that I did not CREATE. I got paid with OPM…taxpayer dollars…that comes from people who create and provide products, jobs, and services that people want to buy.
Finally he posited his argument this way, “Since the government can’t create money out of thin air (not SUPPOSED to, anyway) and if nobody created anything that created a profit on which taxes were paid, how would YOU be paid?” It was sort of a lightbulb moment for me.
“…the money you take home at the end of the day used to belong to someone else.” True. The difference is whether someone VOLUNTARILY parted with their money or whether it was taken under threat of going to jail.
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Another aspect to taxation is income mobility. People’s incomes change over time, and they move in and out of the federal income tax system. I’m disabled with a low enough income to not be currently paying federal income taxes, but in the past have been in higher federal income tax brackets, even getting hit by the AMT. (And, as others have already pointed out, there’s also Social Security tax, Medicare tax, sales taxes, property taxes, and so on, some of which are paid even by those at the lowest income levels.)
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This is a very interesting article to me. Thanks JD! And thanks about the link to state and local tax burden too, VA and MD is so close but the tax burden is so different.
About the idea of people who don’t pay income tax pay other taxes – like sales tax: I for the idea that having more money means spending more, thus paying more tax.
I would like to mention that people who “don’t pay income tax” generally are people who don’t generate or have a lot of money – at least enough to reach the tax bracket. As a result of “don’t generate or have a lot of money”, I can’t say that they (who don’t pay income tax) will contribute a lot in the total tax budget – even though they pay sales tax.
Yes, everyone can scream out loud that “Hey, I have to pay tax too, it’s 6% of my income (*)” – but how does that amount of tax compare to what people do really pay income tax and the sales tax at the same time, and they even pay more as they have more money to spend?
(*)In Maryland, our sales tax is 6% at the grocery store. I supposed that we talk about someone who doesn’t pay income tax but the grocery tax only.
I think Kevin was generous when he didn’t count the sales tax in.
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JD, I’m honored that you used my quote in your article, but I was discouraged that you seemed to stray from the main point embedded in my comment. Specifically, I said:
“Those of us who DO pay taxes, however, are buckling under the weight.”
Then you concluded:
“The average American has an effective federal income tax rate of 13-15%. [...] So are Americans ‘buckling under the burden’ of taxes? I’m not convinced. Taxes seem to be moderately low right now based on our past history.”
I think you just pulled a statistical “fast one” on us. My point was that fewer and fewer Americans are shouldering the income tax burden – an assertion that your own research confirmed:
“This 32% number is relatively high. Previous peaks were at 28% in 1950 and 26% in 1978″
Even though the AVERAGE income tax liability is low, it’s heavily weighed down by “zeros” more than ever before. That is, if almost half the population is paying nothing, but the “average” is still reasonable, what does that mean for the half that DO pay income taxes? It means that their burden is actually quite high, historically speaking.
I would’ve really appreciated an analysis that considered the math from that perspective.
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“Naturally, taxes are a hot-button issue. They have been since this nation was founded. (To be fair, though, the driving force then was “taxation without representation”. Modern complaints are against taxes in principle, I think.)”
It’s a common mistake to think that conservatives (or libertarians, like myself) are against taxes in general. While most of us do believe that the Fed. Gov’t could very well survive with MUCH less in tax revenue, it’s not taxes themselves that we don’t like. It’s the fact that the tax system is effectively applied as a punitive measure against those who oftentimes work harder, longer, smarter, etc., for a living, thereby making more money.
And if you really want to dive deep into our objections to the graduated income tax, you need look no further than the US Constitution, Article 1, Section 9 where it’s clear that a disproportional direct tax is NOT allowed.
Furthermore, if you want to get technical, since the income tax is a tax on the earnings of labor, a direct tax on labor is effectively in violation of the 13th Amendment, since it amounts to “involuntary servitude” for how every many days/hours it takes to pay off one’s tax burden each year.
And yes, I’m fully aware that most of these arguments have been deemed “frivolous” by the Supreme Court. But they seem rational to me.
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Welcome to the “tax wars”, by the time we’re finished with you, you too will be a raving loon!
Tactically, you can’t figure out how much “tax” you pay. We need to recognize that ONLY real people pay tax. So, the taxes that companies pay is really a hidden tax on the people who buy their products. BUT you can’t see it. Further, if there are capital goods used by a company, the taxes on that capital good are buried in the product’s price. Also, recognize that “costs”, “user fees”, or any unavoidable expense imposed by or as a result of the gooferment’s actions, laws, regulations, or diktats is a TAX! Try and figure out all of those. Good luck. One quick example, drugs. The FDA has rules, pharmacies have regulations, doctors have laws. Argh! It’s IMPOSSIBLE to figure out exactly what you pay in tax. And, then we can talk about monetary inflation as a gooferment tax. When you sum it all up, it might be greater than your annual income!
Strategically, taxes are NOT “the cost of living in civilized society”; they are THEFT. How does what dead old white guys did 233 years ago obligate me? It’s a principle of contract law that there has to be offer and acceptance to have a contract. Where is the offer? Where is my acceptance? What obligates me to pay? The definition of citizen states there is an exchange for the state’s “protection”, yet the courts have repeatedly held that there is no specific enforceable duty of the government to protect me. So why again do I have to pay for “services” that I don’t want, can’t use, and are horribly overpriced? In the case of Federal Abortion funding, it’s also morally offensive to me; yet, I still must pay.
Welcome to the tax wars. This is theft by deception. IMHO!
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“I think it’s interesting and illuminating to see how little comes in from corporate (9.5%) and estate (0.9%) taxes. Based on stories in places like the Wall Street Journal highlighting these taxes, it sometimes seems as though these must comprise a much larger part of the budget since they get so much coverage.”
Regarding the estate tax, the reason it gets disproportionate coverage is because it’s an egregious example of governmental double-dipping. Case in point: My father died at 50, prior to W’s raising of the estate tax limit. He worked his butt off building his business from the ground up from the age of 22 to provide for our family.
He hired several local employees and provided a valuable service to the community. Being self-employed and having to pay payroll taxes for his employees, he paid a much larger percentage of taxes than your average working Joe who punches in at 9, out at 5.
He had scrimped, saved, and planned wisely so that our family would be taken care of after he died – and had paid every cent Uncle Sam demanded of him while he was alive. Despite all this, the government came around with it’s hand out again to take another pound of flesh due to estate taxes. We’re not talking a vast multi-million dollar fortune here. Enough to put the kids through college and allow my mom to live in relative comfort for the remainder of her life (she was only 50 at the time, and both her parents died over the age of 90 – she still has a long time to go), but at a modest standard of living.
And therein lies the rub – why does the government have the right to demand estate taxes on this money? Was the payroll taxes he paid for his employees, the income and SS/Medicare taxes he paid for himself, the sales tax he paid on his stock, the property taxes he paid for his business, etc. etc. not enough? Now the gov’t has the gall to tax his hard-won earnings one last time simply because he died? How is that in any way “fair”?
Edit: to head off the inevitable “well, your mom won’t have to pay taxes again” comment – she still pays taxes on the income generated by the investments (which is not insignificant), property taxes, sales taxes, etc.
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@mythago (#47):
“It apparently doesn’t occur to him that some Americans do not have income. (Darn those selfish kindergartners, dumping their responsibilities on us hard-working taxpayers! Make the little rugrats pay!)”
Did you even read the article?
“43.4 million tax returns resulted in zero (or negative) tax liability. Another 15 million households file no tax return at all.”
So enlighten me. Do your kindergartners fall under the category of individuals filing tax returns (smart kids!) that result in no tax liability, or are they congregating in households comprised entirely of kindergartners and not filing at all?
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@Nathan Rice: You are correct, income taxes WERE illegal. Then amended the constitution to make them legal. I refer you to the 16th amendment.
http://caselaw.lp.findlaw.com/data/constitution/amendment16/
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@Lesley (#50) and @Kevin (#57)
Given more time and a better knowledge of the resources available, I would absolutely try to find more comprehensive numbers. But as I wrote to Kevin via e-mail, it’s very difficult to find clear, comprehensive information. I was frustrated during this process that sometimes the best data for a subject came from purportedly “non-partisan” organizations that appeared to have axes to grind (on both sides of the political fence). I have trouble trusting their research. The IRS does have a lot of info, and I tried to parse what I could, but one huge problem I have is not knowing where or how to search for what I need.
Anyhow, if I had spent a week writing this instead of 12 hours (which includes last week’s budget post), I may have been able to find more comprehensive data. And maybe that’s a project for the future!
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Kevin @61, I’m referring to this inflammatory quote of yours: “Roughly half of all Americans don’t pay any income tax at all. I’m sure those folks feel the current tax levels are just fine and dandy, no complaints.”
Now, that is not a comment about income distribution, tax brackets or marginal rates. It’s a rhetorical flourish that suggests half of all Americans — not merely income-earning Americans, or tax-return-filing Americans, but all Americans, period — are laughing at us dumb-donkey, working taxpayers who are carrying their end of the tax load. (Perhaps you meant something different by the ‘fine and dandy’ complaint, but I can’t fathom what. Happy to be enlightened.)
Snowballer @52, I don’t know how many these ‘lots’ of people you personally know are, but how much of the general population can they really be? You’re talking about a group of people who are low-income, but who pay taxes such that their tax gain from intentionally having a third or fourth child is so great that it offsets any other costs resulting from having said children. I can’t imagine that being a statistically significant part of the tax base.
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@ oldernwiser
I still can’t really agree that you (and I) aren’t creating something valuable that people would pay for. Parents want their children to be educated, if not, and it was strictly involuntary there wouldn’t be any private schools. If the government didn’t want to control education, some private source would, and you’d still be getting paid for the same reason.
I work for the DoD. That encompasses many things that people may or may not want to pay for even if the government didn’t force them to. Maybe people don’t want to pay for a standing military, but they sure do seem to enjoy the benefits of the technologies people like myself develop for military purposes.
So in both cases we are creating. Creating knowledge (you), and creating technological advances (me).
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Great, very informative article. I think the majority of opposition to US taxation really boils down to the waste involved. I wouldn’t mind paying into a system if I felt like the people responsible for the money were spending it wisely. However, as a contractor dealing with various government entities, I can assure you the majority of that outlay is pure waste. It’s spent on temporary projects that never see light and exist just to justify various political agendas. Given what I’ve seen, I simply don’t trust the federal government to handle money well.
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J.D., I still think you need to edit the line about payroll tax. It really IS the employee paying the entire 15.3%, in the sense that the employer is paying for the employee’s labor into the employee’s account for work the employee did for the employer. It’s a tax, pure and simple, on the employee’s labor.
Respectfully, I think you are doing everyone a disservice to help keep that other 7.65% hidden.
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The complains about people who don’t pay income tax reminds me of an anecdote from working in a museum. A woman drew a tantrum because she couldn’t get the handicapped rate for the museum, since she didn’t have a handicap and was too young for the senior rate.
She finally said in a complaining voice “well, full price for me, since I’m not old or handicapped” and looked shocked when I told her “Well, you’re lucky”.
I mean, seriously, who complains that they’re young and healthy? And for a two buck difference?
I feel the same here. “Oh no! I’m not poor enough to be exempt from income tax!”
Well I’m glad I’m not anymore and I don’t envy the people who are.
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@Daniel
Funny you should say that. I see (defense) contractors blatantly ripping off the Government every day. Talk about waste, it is theft. (nothing personal). The military-industrial complex is a disaster.
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Let’s be rational. I’m not an unreasonable person. I certainly didn’t mean to suggest that kindergarteners are freeloading leeches and should be made to pay their fair share.
The bottom line for me is that there seems to be a long-term, very gradual shift in society, toward widespread “victim” and “entitlement” mentalities. It seems to me that more and more people expect “someone else” (doesn’t really matter who) to take care of them.
It bothers me in two ways. First, the waste. It drives me crazy to see how much pork is flung around like confetti, on projects and programs with dubious or no merit at all. I’m talking about things like funding for all the mortgage modifications, Cash for Clunkers, bridges to nowhere, senseless wars, overpriced science fair projects with NASA, wildly overpriced fighter jets (when the trend is obviously toward unmanned drones and “smart” missiles). When I think of how many MRI machines or rounds of chemo those TRILLIONS of dollars could’ve bought, it just really infuriates me.
The other way it bothers me is that it seems very unfair to me that the ones paying for all these social programs are the least likely to need them. The people who pay the most in income taxes are the ones least likely to ever need to call the police, or occupy an expensive cell in a prison, or take up a judge and juries time, or apply for food stamps month after month, or take advantage of subsidized housing. Now, I’m certainly not arguing that these programs should be cut, and I fully recognize that society is much better off having these things available. I don’t even mind helping out people who sincerely appreciate the help, and are doing the best they can to improve their situation and become independent again. But it frustrates me to see people going through life with a mentality of entitlement, where they feel that they DESERVE an indefinite stream of welfare checks, food stamps, and cheap housing. I would very much like to see those types of people made to contribute something back to the society that has given them so much. Something like a “work for welfare” program, or a requirement to prove a threshold of volunteer hours or something.
Of course, there are plenty of reasonable exemptions (“What if they’re old/disabled/a single parent/etc.”), and again, I’m not a cold, heartless bureaucrat. I just feel that if people are going to have an attitude that they DESERVE all these handouts, then maybe they, you know …. should.
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This is on an adjusted gross income of $162,944, which is certainly more than a lot of people made last year, but also nowhere near enough that we don’t notice that missing $47,374, which turns out to be about 29% of my adjusted gross income. That still doesn’t even include things like sales tax, gasoline tax, car registration fees, and all the other little things we pay taxes on.
The average amount of taxes paid doesn’t mean much to me. The fact that we could have bought a brand new BMW 5-series with my taxes last year, or put down a 20% payment on a $235,000 home does sting a bit though, especially when I don’t own a home or a BMW now, as neither seems affordable.
Are we “buckling under the weight”? No, we’re doing OK. At the same time, I really don’t think we got our $47,000 worth out of the government last year, even including roads and police and firefighters and all the other public services that we helped fund. Our road system and civil protection are certainly worth something, I just doubt that they’re worth $125/day.
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@Kevin: I think there’s another way to look at the frustrating view that the people paying the most taxes are getting the fewest services. You can also look at it and see that the people who are enjoying the most fruits of liberty should pay the most for the maintenance of such. If you aren’t someone being served meals in jail, you are at least someone who lives in a less dangerous society because of the jails. (Arguably, but let’s not at the moment.) The infrastructure in place allows you to enjoy the fruits of commerce. The security endowed by the army secures your assets.
And don’t forget that the safety net supports us all: any one of us could be hit by a bus and become disabled, or blinded, or die and leave orphaned children. We are all incapacitated by infancy and old age. The truth is that nearly every child ever born on the face of the earth through time immemorial was an unplanned pregnancy to people who weren’t secure in their professions. Supporting those people makes it possible for those families – those children – to grow to become productive educated workers that make the society you live in more pleasant.
Those who most enjoy the blessings of our country should pay more than those who are enjoying fewer blessings.
At least, it’s a reasonable way to look at this.
Part of the problem with any conversation about taxes is that are simultaneously quite different ways of looking at things that are ALL TRUE. It takes a very wise person indeed to hold all the differing points of view in mind at the same time and come up with the best course of action.
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@Gwendally: the 16th amendment was never properly ratified, so one could argue that it doesn’t count as “legal”.
@Brenda: Dave from sniggle.net/experiment has a nice “how-to” page. The examples he gives are for individuals with incomes of $20k.
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You know statistics are like bikinis, what they reveal is important, but what they conceal is crucial.
Although the tax system in place seems relatively low to other countries, I would love to see a statistic on the benefit that is received. For example, although I am sick of paying taxes, I would not mind paying more for free healthcare (because I would not have to buy medical insurance). In Sweden for example, even car insurance is not necessary because it comes out of the gov budget. I think that for our return on investment we do not receive nearly enough benefits.
Also, progressive tax idea is not my best option as well. I would love to trade in income tax on a higher sales tax or simply a flat tax. I just don’t see why I need to pay more taxes than someone simply because of my salary. We both drive on the same roads, breathe the same air and use the same government services.
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I can provide you a real life example of a family that not only pays no taxes, but also ends up paying no payroll taxes. The family consists of a married couple with 4 children.
Their gross income is 40k. Part of that income is nontaxable combat pay (National Guard), which is 18k. They have about 3k withheld for Social Security/Medicare taxes (this is held on the gross). When they file their tax return, they get $4100 earned income credit, plus $4000 additional child tax credits. So they get refunded $8100 – meaning that not only do they not pay any income or payroll taxes, they get another $5100 on top of that!
This type of situation has not been at all uncommon for the past few years, given the number of people serving in combat zones. And even for those who don’t, I have many clients who get back much more than they have paid in for both income and payroll taxes due to low income/number of children. I do not begrudge them for the most part, with one notable exception that happened a few years ago. I had a client who got angry with me because she had earned enough money to not get the maximum EIC, and flatly stated that she would just not work as much that year since it “cost me money!”. I could not convince her that she was better off with more earnings in her hand than waiting for the end of the year to get a lesser amount in a tax refund. I was actually grateful that she was mad enough at me to not come back the next year for tax prep.
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I really liked comments #70-72. You three did a fine job of encapsulating different views on taxes and their benefits (real or imagined). This has been an interesting, thoughtful conversation. Thank you.
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@Tyler: did you include the 7.65% of medicare and social security your employer paid into your account on your behalf in return for your labor? I suspect you missed that $8K.
I can tell you that I had a rough time getting up to go to work during my busy season last year. I was applying for financial aid for my oldest child (who was accepted at extremely expensive private colleges) and I knew that every dollar I made was going to be taxed at (28% Fed marginal rate +15.3% SE tax +5.3% MA tax =) 48.6%, but, worse than that, every thousand dollars I earned phased out my child tax credit by $50 (that makes my marginal rate 53.6%) and I also realized that it increased my Expected Family Contribution pretty much dollar for dollar at our over $100K AGI level. That means that I actually LOST money by going to work. Oh, that was a hard and bitter tax season to work.
You know what I did? I work less. I simply choose free time more, since working pays so little. Just as my tax clients are choosing to stay poor to keep subsidized health insurance here in MA, overall I just see us producing less. Work just doesn’t pay enough to be worth the bother, after you’ve reached a certain level where you have enough.
Am I bowing and breaking under the 53.6% marginal tax rate? Oh, absolutely not. But I’m producing less, and I’m hiring fewer staff hours in my business, because, well, I don’t need the money that bad to work at that marginal rate.
Consider the implications in a country where our Gross Domestic Product is our only way out of our deficits.
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Kevin @70, I know you weren’t talking about kindergartners. You were, as the rest of your post makes clear, talking about low-income people. I do agree with you that ‘victim’ and ‘entitlement’ mentality are bad; where I disagree is that it’s characteristic of low-income people – indeed, I believe it is far more characteristic of people with high incomes.
Look at all the entitlements they want: subsidized housing (also known as ‘mortgage-interest deductions’), an abolition on taxes they got through inheritance rather than hard work, the government subsidizing their voluntary charitable contributions, and write-offs for buying high-end “green” cars. It’s particularly vile when they believe they “deserve” these handouts because they are Nice People Who Pay Taxes.
I also strongly disagree that the people paying the least get the most. Do you think that the police respond as promptly to 911 calls in wealthy neighborhoods as in poor ones? That school districts with high property taxes have schools that are worse than those in districts with low property taxes?
You’re attempting to inject Calvinist morality into a discussion of relative tax burdens.
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Last week, Ross Williams argued that the wealthy get disproportionate benefit from the tax system. This week, Kevin has argued that those with lower incomes get the most benefit. I’d like to propose that the truth is in the middle — literally.
I believe that the middle-class get the most benefit from our tax system. They draw the most from its structure and from the services our taxes provide, yet their payments into the system are modest when compared to high-income earners.
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Thanks for your research and time.
Learned some facts.
-Bhargav
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Great article. One thing to keep in mind is that a LOT of people are employed as a result of the US having a convoluted tax code. Think of how many jobs would be lost if the tax-code were simplified (lobbyists, attorneys, accountants, HR-Block part-timers, etc)
I have always liked the idea of not putting a cap on SS taxes that are withdrawn from one’s paycheck. When I worked in corp america, it always amazed me that I stopped having a SS deduction taken out once my income exceeded a certain level.
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@Adam
I really do understand where you’re coming from…again, the exact same argument I had with my DH. (“What I do has value!”) For years we had this discussion.
I’m not trying to demean the work you do, as he was not trying to demean mine. I loved my job and I was good at it, as I’m sure you are. I had to learn to separate my emotional attachment to my job from understanding, really understanding, how I was getting paid.
The fact of the matter remains…there are no government wages unless they are extracted from non government sources by the government, under penalty of law.
And, for the record, I don’t believe in NO taxation because I do want be kept safe and I would like a fair trial, should I need one, among other things.
As for this statement…
“If the government didn’t want to control education, some private source would, and you’d still be getting paid for the same reason.”
If I worked at a private school (or you, a private business developing what you do now) our wages would be provided either by people wanting to invest in your business or from the profits your technological advances in the open marketplace or, for me, because parents felt like my school was the place for their children and voluntarily wanted to spend their money to send them there.
We would both be getting paid “for the same reason” (and here I’m assuming you mean that we do something creative and of value that people want and/or enjoy as a result of our work) but in both cases our pay has not been extracted by the government from a non governmental source, under the penalty of law.
Now let’s see if I can get back to the intent of JD’s original post…understanding the [hot button] issue of taxes (emphasis mine)…and my original post and reaction to Kevin’s comment about “roughly half” of Americans don’t pay federal income tax.
Our federal tax system is hugely complicated and causes many people fear, concern, and anxiety, and by JD’s own statistic, approximately 59% of us are affected this way.
If I work hard and earn 100.00 and 38.00 (actually, more)is taken away and given to somebody else it becomes a problem for me.
It is a problem for me because I fear that 38.00 wont’ be enough and soon there will be enough voters (more than “roughly half”) who are benefitting from my 38.00 who will want more and will be able to vote to take 12.00 or 25.00 more. Or let me re-phrase that…will vote for candidates who promise benefits that will cause the 38.00 to go to 50.00 or 63.00 from my 100.00 So I’m left with 50.00 or 39.00 for my work while the rest has been redistributed.
I really want to redistribute my own money in a way I see fit, thank you very much.
Very respectfully,
onw
P.S. Adam, I love catching shows on tv where they elaborate on things we take for granted in our daily lives that were the result of the type of work you do and do appreciate it very much.
@WritersCoin
I, too, respectfully disagree. Where would this country be if somebody hadn’t whined about a measly 3% tax on tea?????
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An update to your update #1 : You said that payroll taxes apply to all income, when in fact that isn’t the case. From wikipedia:
“For 2009, the employee’s share is 6.2% of gross compensation up to a limit of $106,800 of compensation (resulting in a maximum tax of $6,621.60)…The employee’s share of the Medicare portion is 1.45% of wages with no limit.”
-Ken
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@Gwendally,
Re your post #77…you said what I forgot to say in my last post.
Why in the heck do I want to get up and work at my after retirement career if I’m only going to be left with 39.00 of the 100.00 I earned?
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@Gwendally, you make some very interesting points.
First you say: “You can also look at it and see that the people who are enjoying the most fruits of liberty should pay the most for the maintenance of such.” This statement seems to assume, however, that the fruits of our labor are randomly granted. That some folks just get more, and some are unlucky and left out.
I simply don’t believe that. I work a lot of hours. Why should I subsidize people who are unwilling to work any hours, or only want to do the bare minimum to scrape by?
Also, I’m disturbed by your example of working less because of marginal tax rates. See, that is the main reason our progressive system is flawed and immoral. The government should NEVER discourage people from working hard and getting ahead. How disgusting that we are penalized for our labor – rather than truly enjoying its fruits.
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This comment is mostly directed at Kevin:
Not everyone who has a low federal income tax liability is receiving government services. Our income is around $45K. The AGI is quite a bit lower, because we pay a lot for health insurance and to contribute to a retirement account.
My family doesn’t receive food stamps. My family doesn’t receive subsidized health insurance. My family doesn’t receive welfare or housing assistance.
I’m a big fan of my local library and I use roads to drive on, so the government does help me that way. But not every family paying little in federal income tax is getting taxpayer handouts. That’s a fallacy, IMO.
My AGI will probably be lower next year, because we are going to a different health insurance arrangement and it will be much more out of pocket. Do I consider myself lucky to be avoiding more tax? No, I consider it a challenge to live on this income.
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@ Lesley, a lot of the fruits of your labor are POSSIBLE because of the infrastructure in which you live. The interstate commerce system, the functioning port system, the rule of law, even the markets (loosely) regulated by the SEC. Molly Ivins said of George Bush, that he was born on third base and thinks he hit a triple. Believe me, you benefit from having a neighborhood filled with educated people, having streets emptied of criminals (who need not steal because they can access the safety net.)
It’s not perfect – no system is – but you DO benefit.
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Not all of the people filing zero returns necessarily are teens and college students. With the coming of the Baby Boomers to retirement age there is a growing number of people who are now living on their pensions, IRA’s, Social Security, etc. that could also be living in such a way that they don’t have to pay or pay minimal income taxes.
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J.D., I am bummed out that I can’t view all your cool charts when I log in from work. Something about the hosting is getting blocked.
Mr. Sam and I pay a lot in taxes but we also benefit from a lot of tax breaks (related to our real estate investments) and while I don’t mind paying taxes I get annoyed at how the money is used. I just see so much waste in my local taxing districts (i.e. City, County, Schools, Health Care) and it drives me up the wall.
Regarding tax rates in Denmark, whoo-hoo, that is where my family is from, the rates are high but the benefits in my mind are even higher. In Denmark, health care is paid for by the “State” so is higher education, day-care for kiddos, generous maternity and paternity leave and end of life care is also covered.
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@Oldernwiser: I think the only reason you’d be willing to work at a marginal rate that horrid is if you loved your work and would do it for a hobby.
I like my job well enough, but once my needs are met, I find it difficult to choose to keep earning money when I could be spending time with my children or in my garden or with a good book. I think this is true for just about everybody, which is why it’s a problem when we set the safety nets too high. I’m seeing this in MA right now: people are content to earn $15K if they can get subsidized housing and health care. They’ve fulfilled Maslow’s hierarchy of needs, why work harder?
It’s hard to argue with. Sometimes it’s even hard to see a problem with, like in my case or yours: we have enough, why not leave a job for someone who doesn’t have one? I think it comes down to wondering whether we are actually destroying wealth if we don’t work. If you retiring gives a person without a job a chance to make money, then I can’t say as it’s a bad thing.
But I’m a self-employed business person who creates a good. If I don’t work, well, goods are not created. (And, not to put too fine a point on it, I also employ fewer people.)
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@Gwendally – I’m so confused.
You said: “You benefit from having a neighborhood filled with educated people, having streets emptied of criminals (who need not steal because they can access the safety net.)”
But EVERYONE in society enjoys these benefits. Why should high earners pay a large percentage of their incomes for these benefits, while those of lower incomes pay little, nothing, or even get a rebate?!
That makes no sense, especially since low-income folks also tend to over-consume government services. Meanwhile, I use only roads, cops, firemen, national defense – the bare minimum.
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@Lesley: you have more to lose, so protecting it is of more benefit to you.
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I feel bad for people who make over $250,000. To pay 50% of your income to the government is disheartening. Hence, the new administration will be a boon for Nevada, Washington, Florida and 4 other states with no state income taxes.
Higher taxes simply encourage tax evasion and people not to work as hard.
Don’t know what’s wrong with a FLAT tax. 20% of $1million is $200,000 in taxes. 20% of $50,000 is $10,000 in taxes. Is that not equality?
Socialism is fine in a troubled economy like we have today, but Socialism will be a big handicap during the recovery phase.
For the record, I feel teachers should be paid 5X what they make now. They are the foundation of our children’s future!
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Mainly, it was rote data entry, people would come in with their W-2 and SS ID card and I would punch this data in, ask a few questions then get them to sign a form.
Basically, I was paid $7.50 to run a version of turbo tax and charge people upwards of $60 for 10 minutes of work. My quickest time was one minute 20 seconds to complete a 1040.
The firm made most of its money in short term “refund anticipation loans” to those who would spend up to $300 to receive their EIC check the same day.
The EIC is a negative income tax, a refundable credit, where the recipient would get back more, much much more, than they put in.
Mainly the credit is for poor people with kids, and averages around $2,500 for a family earning less than $20,000 with 3 dependant children.
Thus, 10% of the income for these extremely needy people would come from this one government program.
Which broke my heart because they were paying an interest rate of more than 500% to get now what they could not wait 4 weeks for.
And who knows what they spent this money on, I just issued the checks.
You can tell the clientele based on when in the tax season they walk through the door.
The earliest people to arrive start lining up a day or so before the tax season start date, so eager to get their check. These are people anticipating a big refund.
The middle of tax season is pretty slow, since the people who need the money have already long gotten it. Mostly it would be the retired, or students, those who are required to file and who do not want to do it themselves.
The end of tax season was my favorite part. These were the people who owed money and put it off for as long as possible. These are the people who have more than just a w-2 and a SS id card and some kids.
These are people who pay alimony, who have capital gains, who have their own businesses, who have investment properties with depreciation, farm income, all the interesting things came out on paper.
Two people I will never forget,
One guy recently got a divorce, cashed out his retirement savings, sold his house, his boat, liquidated his entire life to prevent his wife from doing the same thing. The divorce cost him his job and his kids. He had a huge income (on paper) since his retirement savings counted as income, same thing with his boat sale and house sale (which were not owned jointly with the wife).
His tax bill was upwards of 140K, since he had no house, wife or kids to reduce his AGI. He was all alone with his money (and his tax bill), a ruined husk of a man who made all the wrong choices in a very short period of time.
(Never, ever cash out your retirement savings in this way, it will screw you).
The second guy had recently won 200K in Keno (I worked in Las Vegas). Combined with his income, he owed over $30,000 in taxes.
I was a little shy in breaking the news, usually there is a little rush telling people how much I am “making them” by doing their taxes (even though it is their own money, most people don’t think of it that way).
He said something that I will never forget.
“I am at the stage of my life where it is better to pay money, and have money, than to have nothing and get back something.”
He wrote a check for the full amount.
Now I have a job that pays me pretty well for what I do. I have been on both sides of the coin.
I used to work minimum wages jobs and always receive back $100 – $200 bucks, which at the time was all the money in the world since I was only making around $12K a year, so this would be around one months rent.
Last year, I had to write a check to the IRS for $54 dollars. This was in addition to the $5,000 or so they “took” from me.
And you know what, I am much happier now, because I don’t depend on that $100 – $200 to make rent.
Your whole life, year by year, is there on your 1040. And working at that tax chop shop let me see how 100′s of peoples lives were spent and what mattered most to them, their children, their spouse, their house, their job.
While these macro tax events, how the government spends YOUR money, are not very personal, the micro tax events matter a great deal.
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Thank you for writing this article. I found it very informative and useful. I can tell you put a pile of work into it.
I will concur with those who wish for a simpler tax structure. From many years of engineering work, I’ve learned that the more complex you make something, the more prone it is to break down or behave in ways you didn’t expect. With the tax code being so long and cumbersome, it creates an incentive to “game” the system through exploitation of loopholes and “creative accounting”. This can lead to the type of fun we’ve seen with Enron, KPMG, GlobalCrossing/Worldcom, AIG and any other of other businesses who were being creative with their accounting to lessen tax rates. Where this ultimately leads, of course, is the inability to value things properly — and then people get skittish.
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Instead of concentrating on taxes, we should concentrate on the size and scope of government. If government has become too big and wastes money, it should be cut down and made more efficient. If the budget was only $100 billion, there would be no reason for high taxes.
High taxes are the RESULT of lots of government spending. If we can cut down the amount our government spends, we should be able to drastically lower our taxes.
While I do advocate a fairtax, or a flat consumption tax, it would be easier to cut government first. That is why I advocate and will continue to advocate cutting the size of government in half (or more) as soon as possible.
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I think we could easily persuade the half of Americans who do pay taxes to stage a tax revolt in one simple step.
Eliminate federal withholding. Instead, require each person to physically write a check for their taxes each quarter – like self-employed people do.
By the end of Q3, there would be mutiny.
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@ Lesley – methinks you have not spent time in the ghetto. Sorry, that sounds snarky, but as one who used to be a poor grad student living in one, the poverty begets the problems begets the poverty. You could see it every day. Schools funded at a lower rate because of lower property values lead to lack of educational resources, which leads to lower incomes, which leads to crime, which leads to lower property values. I have a hard time with any mindset that thinks poor people have it coming. No kid wants to get free lunch at school. No parent wants food stamps to be the only way to feed their family. No one is resting on their laurels on a minimal government hand out, dreaming about how they have the life. And no one who doesn’t grow up in this environment ever expects to need these services, like disability or food stamps, until tragedy strikes. I would argue if you currently don’t use services like that, you really have to think of them as insurance policies: While my chances of having my apartment wrecked are slim, I still pay renter’s insurance, on the off chance that it is. While I’m sure you never dream that you will become disabled, or lose your income and become impoverished, were such a fate to befall you there is a government program there to help you and your family through the tough time. Besides, libraries, police, fire and roads are some of the most expensive parts of our budget, even more so if you throw national defense in there, as evidenced by JD’s budget post.
But for me, why should I pay higher taxes even though I use equal resources? Because I remember poverty and ramen. Because we live in a society, and part of being a good member is recognizing you are in a better position and able to help those less fortunate than you. If someone’s wallet was stolen, and they needed bus fare to get home, and they asked me for said fair, certainly it would be an embarrassing thing for them to do, and certainly if I had the means I would help them. I think of taxes like that. Yes, people pay less than me or not at all due to their low income, but their low income stems from problems that arise with low income, like poor education and crime in their area. Thus, it is my duty as a member of society to be helpful if I can, because if a quality of life is improved, all our lives are improved a little. The stolen wallet is the impoverished upbringing and my taxes are the bus fare.
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I have to chuckle at some of the comments of the more wealthy readers, like the claims that they pay more in taxes but get less from government. So you make more than $100K and you do it all yourself huh? The government plays no role? Well how many people in Cuba can make that claim? Not many – their government does not permit them to make a lot of money, while ours does. That’s right, if you are making a lot of money, it is because you have the government you have, and by definition, you are getting more from your government than fellow citizens making less than you do. If I’m living in poverty, hell, I can do that anywhere – here, Cuba, the government doesn’t matter. Please feel free to broaden your notion of the benefits you derive from your government, and embrace those extra taxes. Oh yeah, to the fella who thought the court system was for the poor – I’m an attorney, and know from first hand experience – we have a big ole civil court system soaking up lots of resources – and while our tort system does see some poor plaintiff’s, you’d be hard pressed to find a poor person anywhere else. Much of the court activity involves business folks suing each other over contracts etc.
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@Jessica,
You’re absolutely right that charity is a key factor in a civilized society. But you’re wrong in equating taxes and charity. They’re not the same. Forced charity is no charity at all.
You neglect to mention that taxes are TAKEN by FORCE, with the threat of financial ruin and prison. That’s not charity, and it’s not noble. It’s not hard to be charitable with other people’s money.
Did you know that the IRS won’t reject you money if you decide to send more than you need to send? If you enjoy the satisifaction of paying your taxes so much, you’re more than welcome to send extra $ to them.
Me? I’d rather trust my VOLUNTARY charity to places like the Red Cross and my local homeless shelters and food pantries. They do a much better job of getting food, supplies, and shelter to those who need it, while weeding out those who don’t. Government? Not so much.
So by all means, remember the time you lived in poverty. Just remember to be charitable with your own money, not someone else’s.
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