Thursday, March 11, 2010

Number and Percent of Nonpayers At Record High; More Tax Filers Now See IRS as a Source of Income

Maximum Income a Married Couple with Two Children Can Earn and Pay NO Federal Income Tax
From The Tax Foundation:

"A nonpaying tax return is one filed by an individual or couple who, thanks to legal credits and deductions, owes nothing. Nonpaying status used to be a sure sign of poverty or near-poverty, but Congress and the President have changed the tax laws to pull much of the middle class into the growing pool of nonpayers. The income level at which a typical family of four will owe no income taxes has risen rapidly, now topping $51,000 (see chart above)."


As a result, recently released IRS data for the 2008 tax year show that a record 51.6 million filers had no income tax obligation (see chart, click to enlarge). That means more than 36% of all Americans who filed a tax return for 2008 were nonpayers, raising serious doubts about the ability of the income tax system to continue funding the federal government's ballooning expenditures.

Bottom Line: Over the past two decades, Washington lawmakers have increasingly turned to the tax code to deliver social benefits, incentivize behaviors, and funnel money to targeted groups, which they always refer to as "helping the middle class." These measures have not only added complexity to an already Byzantine tax system, they have also eliminated the income tax obligation for millions of tax filers and their families. As a result, a record 51.6 million tax filers—36 percent of all filers—had little or no connection with the basic costs of government in 2008.

Tax years 2009 and 2010 are likely to produce a number of nonpayers equal to or greater than in 2008 because of Obama's new tax credits targeted at lower- and middle-income taxpayers. As the number of refundable tax credits continues to grow, more and more tax filers are seeing the IRS as a source of income, not something to which taxes are paid. The consequences of these trends deserve a broader national discussion than either party in Washington seems willing to engage in."

28 Comments:

At 3/11/2010 9:52 PM, Anonymous SuhrMesa said...

Beware, those that have the ability to pay, also have the ability to leave. More now than ever contemplating leaving the country for retirement.

 
At 3/11/2010 11:01 PM, Anonymous draconian mechanic said...

"
ability to leave. More now than ever contemplating leaving the country
"
~~SuhrMesa~

Paying little Federal but gobs of State Tax I have often thought of moving to Texas. Lot of people buy tax free Muni bonds instead of moving. If governments could economize until they get public debt paid off, nation would be more efficient with less allocation of resource distortions from taxes. Lobbyists could then move to another country. Why should we move when lobbyists deserve dislocation much more than we?

They started it
!

 
At 3/11/2010 11:23 PM, Blogger OA said...

So how will this work if the health care bill is passed?

The IRS would be the one levying fines for those without health insurance. So I guess anyone, even if they have no income would have to file. Of course they would qualify for handouts, but they'd still have to file, put their zeros in there and staple that insurance proof.

 
At 3/11/2010 11:30 PM, Anonymous Anonymous said...

No representation without taxation.

 
At 3/12/2010 12:21 AM, Blogger Benjamin said...

Well, except most wage earners pay Social Security and Medicare taxes, which are shirked by those who collect non-wage income.

 
At 3/12/2010 12:32 AM, Anonymous Lyle said...

On the federal level you pay taxes unless you renounce your citizenship. In addition the day you file your renunciation of citizenship you are deemed to have sold everything and have to pay capital gains on it. Also I believe you are also permanently barred from entering the US.
The US has a unique system where citizens and permanent residents pay taxes on worldwide income no matter where they may live. Yes one can get around state taxes without to much trouble, but the IRS is much harder to play with.

 
At 3/12/2010 4:25 AM, Blogger sethstorm said...


Beware, those that have the ability to pay, also have the ability to leave. More now than ever contemplating leaving the country for retirement.

The problem with that is that if you're a large enough thorn in the government's side, you will get pursued.

If you don't make a huge issue out of it, they won't go looking for a legal reason to pursue you.

 
At 3/12/2010 7:58 AM, Anonymous Stuhlmann said...

Most, if not all, of these non-tax paying people have social security and Medicare contributions withheld from their pay checks. Should these payments be counted as Federal income taxes, and if so, what does that do to your chart?

 
At 3/12/2010 7:58 AM, Blogger juandos said...

"If you don't make a huge issue out of it, they won't go looking for a legal reason to pursue you"...

Hmmm, words of wisdom, words to live by...

Excellent sethstorm!

This has been the mindset of many people I know who've retired to Costa Rica and Mexico...

 
At 3/12/2010 7:58 AM, Blogger juandos said...

This comment has been removed by the author.

 
At 3/12/2010 8:02 AM, Anonymous geoih said...

Quote from sethstorm: "The problem with that is that if you're a large enough thorn in the government's side, you will get pursued."

Yes, the US Government is truly a global thug, both to its citizens and non-citizens.

 
At 3/12/2010 9:13 AM, Blogger Frozen in the North said...

This is a huge problem in many jurisdictions. It creates a class of citizens who see minimal or not costs to additional government benefits.

Up here in Canada the number of citizens who do not pay any income taxes is far higher. In a sense that's why sales taxes were introduced (and raised) through the 80s and 90s. Ensuring that every citizen shares some form of tax burden.

Sales taxes are tremendously regressive, but they balance the tax burden between the upper and lower income brackets creating some level of fairness (if such a thing exists).

 
At 3/12/2010 9:19 AM, Anonymous m said...

the scariest word in the US right now are "i pay no taxes and i vote".

small wonder government spending is out of hand. the more people who realize that they can vote for stuff they get and that someone else pays for, the worse it gets.

i know there are issues with a flat tax, but can they really be worse that what we are currently dealing with?

 
At 3/12/2010 9:19 AM, Anonymous morganovich said...

the scariest word in the US right now are "i pay no taxes and i vote".

small wonder government spending is out of hand. the more people who realize that they can vote for stuff they get and that someone else pays for, the worse it gets.

i know there are issues with a flat tax, but can they really be worse that what we are currently dealing with?

 
At 3/12/2010 10:06 AM, Anonymous gettingrational said...

Prof. Perry, this is one of your best posts I have read, thank you. I know that part of the stimulus for 2009 was rebates of taxes for millions of non taxpayers. This is obviously a sham that grows until the creditors pull the plug.

 
At 3/12/2010 10:19 AM, Anonymous Anonymous said...

Most, if not all, of these non-tax paying people have social security and Medicare contributions withheld from their pay checks.

These are not the same as federal income taxes since these taxes are supposed to fund a future benefit to the payer. Of course, both Social Security and Medicare were designed as Ponzi schemes, by the Democrats , so soon they too will be funded, at least in part, by income tax revenue.

 
At 3/12/2010 10:33 AM, Blogger Methinks said...

On the federal level you pay taxes unless you renounce your citizenship. In addition the day you file your renunciation of citizenship you are deemed to have sold everything and have to pay capital gains on it. Also I believe you are also permanently barred from entering the US.
The US has a unique system where citizens and permanent residents pay taxes on worldwide income no matter where they may live. Yes one can get around state taxes without to much trouble, but the IRS is much harder to play with.


Very true. It didn't used to be this way and there is no law on the books that banishes you from the United States forever. But, the U.S. does that anyway. Let's not forget that you are also required to have citizenship in another country and renounce in another country (not on U.S. soil) before the United States even considers allowing your renunciation.

And just because you renounce, doesn't mean the United States will accept your renunciation even if you pay your fines and do everything it requires. The U.S. can drag out it's decisions for as long a as a decade - all the while, you pay taxes and you're at its mercy.

Didn't always used to be that way. Reminds me of our immigration out of the Soviet Union in the 70's, minus the threat of prison.

 
At 3/12/2010 10:37 AM, Blogger Methinks said...

Besides leaving the country, the people on whom the rest rely to live, can just simply trade more work time for leisure time. We're all entitled to a pretty high minimum standard of living at the expense of somebody else, right? That'll work.

"The state is the great fiction by which everyone tries to live at the expense of everyone else" - Fredric Bastiat

 
At 3/12/2010 11:53 AM, Anonymous Benny The Man said...

Morganiovish:

A flat tax?
Okay, does that mean Socil Security and Medicare taxes, now limited to first 100k or so of wage income, are extended to all income levels, and all income types?

And we eliinate the homeowner mortgage interest tax deduction?

Usually, flat taxers change their minds after realizing this.

 
At 3/12/2010 12:04 PM, Anonymous Suhr Mesa said...

NYCity is a good example of how to create revenue risk through excessive taxation on a small group. About 40,000 tax returns account for 50% of tax revenue in the city. Now imagine 20,000 of those returns flee to Florida or Texas. The city loses 25% of it's revenue.... a disaster in the making. Government has to remove choice in order to stay in control. Beware.

http://online.wsj.com/article/SB123500384765617949.html#printMode

 
At 3/12/2010 12:43 PM, Anonymous gettingrationbal said...

Will U.S. creditors demand the sale of U.S. icons such as the Grand Canyon or Statue of Liberty. Maybe this could raise funds to pay tax rebates to non taxpayers. German government MPs suggest Greece sell Acropolis and Greek Isles to pay creditors.

 
At 3/12/2010 1:37 PM, Blogger Ron H. said...

Bennie,

I can't speak for Morganovich, but I would like to respond to your comment.

I believe those who advocate a flat tax are well aware of exceptions like the mortgage interest deduction, and yes, this along with every other special exception should be eliminated. Thus the term "flat tax". You can appreciate how meaningless this deduction has become, since there is also a corresponding renter's credit to provide this same deduction to those who rent. In effect, everyone who pays taxes, gets this credit.

Social Security and Medicare are usually considered seperately from general tax on income, as they supposedly are not taxes, but retirement plan contributions and an insurance premium. By the way there is no upper limit on Medicare contributions. If these Ponzi Schemes...I mean programs are to be paid from the general fund, then all pretense is gone, and we can see them for the welfare entitlement programs they really are.

If upper limits on Social Security contributions are eliminated, should limits on maximum benefits also be removed? They currently exist so that the appearance of a retirement fund can be preserved. Otherwise it becomes pure welfare. Would it bother you if Bill Gates could draw $50k/mo in SS benefits when he retires?

 
At 3/12/2010 1:51 PM, Anonymous uBig fatPig said...

"
gettingrationbal said...

Will U.S. creditors demand the sale of U.S. icons such as the Grand Canyon or Statue of Liberty.
"

Grand Canyon? Nobody goes there anymore. It's too crowded.
~~Yogi~

 
At 3/12/2010 2:02 PM, Blogger bob wright said...

Social Security is a pension plan. It was initially sold as a stand alone pension plan - it's assets wouldn't be commingled with other tax revenues. Your SS benefits are based on your pay - actually, your highest 35 years of earnings. Benefits are limited though; hence your contributions are limited. Income taxes aren't used to pay S.S. pension benefits.

If you want to raise the income cap for SS taxation, you have to increase the pension benefit the participant receives.

If you raise the income limit for SS taxation and do raise the participant's retirement benefit, you turn SS into a welfare program. If you do this, at least be honest and admit that you want to change a retirement plan into a welfare plan.

SS taxes pay for SS retirement plan benefits. Everyone gets what they pay for.

Medicare taxes pay for Medicare health insurance benefits. Everyone gets what they pay for.

Income taxes pay for the operation of the U.S. government. With income taxes, 4 out of ten people are paying nothing for the services they receive.

 
At 3/12/2010 2:33 PM, Blogger Ron H. said...

bob wright said,

"Income taxes aren't used to pay S.S. pension benefits."

That's about to change soon, though, as current contributions fall short of current benefit payments. The government bonds that must be redeemed to pay this shortfall will be paid from the general fund, in other words taxes, borrowing, or creating money out of thin air.

 
At 3/12/2010 5:27 PM, Anonymous Anonymous said...

51.6 million people don't pay any income tax whatsoever? Doesn't seem fair to me.

With the numerous credits, is it possible that some people could receive more money back than what they actually paid in total income taxes initially?

Seems like it would help if everyone at least paid something. A flat tax for anyone below the 15% tax bracket? How about 5%?

Of course, then our frugal politicians would have to decide what to do with the money. They wouldn't choose to spend it would they?

Paul

 
At 3/13/2010 9:31 AM, Anonymous Lyle said...

The question of course if you just leave and never re-enter the us (or have any assets in the US) is what can the US do about not paying taxes, if you can get it Switzerland or the like? Note that the rules on expatriation only apply if your assets exceed 2 mill or your income exceeds 139k. If your small potatoes the government won't bother to go after you if your abroad unless they decide to go on the warpath against the whole group.

 
At 3/15/2010 9:56 AM, Blogger Methinks said...

That's true, Lyle. But the incentive to leave is greater for people who are high earners.

The government can and does go after people for taxes and because of treaties with other developed countries, it succeeds.

Of course, the incentive is to leave the United States before you accumulate a lot of assets (brain drain of bright young people) or to not bother creating wealth in the first place. Either way, this bodes poorly for the future of the United States.

 

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