Forum Post: The 47% who don’t pay are NOT who you think they are.

We often hear a remarkable claim that almost half of Americans don’t pay federal taxes. But where’s the proof? And who doesn’t pay?

We’ve been tricked into believing that a line separates Americans into two groups according to income. We’ve been deceived into believing that the higher income group pays, while the lower income group doesn’t. It isn’t so.

Using data from the IRS website I conducted research to find the elusive “free loaders” as they are sometimes called. My statistics are from tax year 2009, all personal income tax returns processed and categorized by income level, and specifying the number of returns where the income was non-taxable and the amount owed was zero.

http://www.irs.gov/taxstats/indtaxstats/article/0,,id=96981,00.html#_grp1

58% of all returns resulted in federal tax owed. The income reported was taxable. 42% of all returns resulted in no federal tax owed. The income reported was not taxable.

I examined the returns where no federal taxes were paid. Here are the findings:

• In the $75,000 - $100,000 income group, 4% paid no federal tax. • In the $50,000 - $75,000 income group, 12% paid no federal tax. • In the $40,000 - $50,000 income group, 78% did pay federal tax. • In the $30,000 - $40,000 income group, 67% did pay federal tax. • In the $25,000 - $30,000 income group, 53% did pay federal tax. • In the $20,000 - $25,000 income group, 46% did pay federal tax. • In the $15,000 - $20,000 income group, 42% did pay federal tax. • Even in the under $15,000 income group, 14% did pay federal tax.

Why are the non-payers scattered across a wide spectrum of income categories? There were even 1,470 returns showing income of $1 million and up which was not taxable.

The IRS data provides the answer. Our tax code is based on a complex system of deductions and credits that few understand. Credits are especially valuable because they go straight to the bottom line and directly reduce the amount of federal tax owed. The deductions and credits are only available to those who qualify for them. Who did they favor in 2009?

• Families raising children. Child Tax Credits provided up to $2,000 towards their tax bill. • First time home buyers. In 2009, the First Time Home Buyer Credit was claimed on over a million returns. Among the non-payers, the average $4,660 credit was enough to wipe out most if not all of their federal tax owed. • Home-owners paying mortgage interest. This is America’s most popular deduction.

Does the tax code need to be reformed? Many people like the sound of a flat-tax but beware. Its main feature is that it would reduce taxes for the wealthy and place the burden on those who can least afford it at the bottom of the income scale. That’s a bad idea. People who earn less spend all of it and their dollars go directly back into the economy which is a benefit to everyone. A tax reduction for the wealthy is a windfall that is more likely to be hoarded instead of circulating through the economy.

Are the non-payers getting a free ride? No. Even though they don’t pay federal income tax, they still have to pay 6.2% payroll tax for Social Security and Medicare, as well as sales tax, and possibly state income tax and real estate tax.