Thursday, April 8, 2010

Almost 50 Percent of US Households Will Pay No Taxes for 2009

According to estimates by the Tax Policy Center, 47 percent of US households will escape federal income tax liability for 2009.  Tax cuts implemented by President Bush and expanded by President Obama have lessened the income tax exposure for nearly 1/2 of American families:
In recent years, credits for low- and middle-income families have grown so much that a family of four making as much as $50,000 will owe no federal income tax for 2009, as long as there are two children younger than 17, according to a separate analysis by the consulting firm Deloitte Tax.
Households that have no income tax liability, however, often pay other taxes, including state and local sales and property taxes, cigarette and gas taxes, and payroll taxes that fund social security. Nevertheless, many of these households end up earning a "profit" from the federal government because they get more in tax credits than they pay in taxes.

Despite this reality, many people are convinced that the federal government is gobbling up their income.  Even the most passionate tax critics are deeply mistaken about the rate of taxation. Earlier this year, Bruce Bartlett published an article in Forbes that surveyed participants in a Tea Party rally regarding their views of federal income taxes. The respondents had grossly unrealistic perceptions about the rate of taxation in the United States. In particular, most of them believed that the federal income tax rate was 3 times its actual level.  And 2/3 of them believed that the Obama administration had increased their taxes -- when the opposite is true.


Josh Dowlut said...

Don't overlook the fact that if you are a W-2ed employee you pay about a 20% regressive payroll tax starting with your first dollar which does not allow the standard deduction, the mortgage interest deduction and any other deductions.


6.2% Social Security x2(employer and employee)=12.4%. Figure FALLS to ZERO% after 106k of earnings

1.45% Medicare x 2(employer+employee pay that figure)=2.9% no cap

.8% Federal Unemployment Tax your employer pays on the first 7k of income

2-3% state unemployment insurance (caps very state by state but are ~10%)

~1% worker's comp insurance

Total: 19.1-20.1%

Remember the concept of tax incidence. Just because the employer pays about half of these doesn't mean the employee escapes the ultimate tax burden.

Granted, these policies go far deeper than Presidents Bush and Obama, but it is a regressive component of our tax system few people are aware of. The biggest by far is SS which falls from 12.4 to ZERO after you make 6 figures.

Josh Dowlut said...

Whoops meant to say caps are roughly 10k for state unemployment insurance.

Darren Lenard Hutchinson said...

Yes - even though the federal scheme has become less regressive recently, there are still some aspects that remain so.....Thanks for pointing this out.

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