45% of Americans Paying NO Federal Taxes for 2010

by Darwin on April 18, 2011

Like a bad dream, each year, the headline surfaces from various tax foundations regarding how many Americans paid no federal taxes.  Last year it was 47%.  This year it’s 45%.  Same thing.  Millions of Americans, many of them earning six figures or more, will not pay a dime into the federal tax coffers this year.  Many of these are the same voices (ironically) calling for tax increases on the rich and an end to “corporate welfare”.  How convenient.  Here’s a nifty tax table from the Tax Policy Center showing which income groups got away without a tax bill this past year:

How Could you Possibly Pay No Taxes at $80K, $100K, $500K ???

There are numerous tax credits, deductions and other various dumb stimulus programs basically transferring wealth around which end up with various unintended consequences.  You can’t blame people for rightfully claiming the credits and deductions owed to them.  And while some call for a complete repeal of ALL credits and deductions, that’s a tough pill to swallow also.  It would be like changing the rules mid-game, right?  You go and buy some pricey real estate assuming you’ll get to deduct the mortgage interest and a year later, that deduction is gone?  Not only would this likely result in further declines for the housing market in general (it certainly couldn’t be viewed as a positive!), but changing the rules after the fact is just plain wrong.

Solutions Please?

I don’t know what the solution is.  Perhaps to project some serious changes somewhere down the road to give people time to prepare and react.  Perhaps some credits and deductions remain in place while many go.  Or perhaps even, there’s a mandate that ALL Americans must pay at least a marginal amount of money into the system each year.  But that even becomes increasingly complex.  After all, if you only had $100 in taxes due all other things being equal, and you took a capital loss of $3,000, shouldn’t you be able to write that off?  And invariably, for whatever tax change is eventually enacted, there will be numerous loopholes, special interests and ways around it.  My thinking is we need to at least shift some of the burden, even if it’s more symbolic than impactful, onto all American families as opposed to freeloading on the wealthy while continuously calling for further increases on the wealthy – when we’re ALL responsible for the fiscal mess we’re in.  We democratically elected the morons in Congress, not just the rich.

 

How Would You Change Tax Law Today?

{ 19 comments… read them below or add one }

Ravi Gupta April 18, 2011 at 10:20 pm

In the end we have to abolish this idea of making taxes fair. Either you tax progressively or a flat tax is instituted. The argument is made that the poor will pay a great portion of their income in terms of spending but in the end that’s fair? Why do we get to charge rich people more in terms of a percentage? You can’t have your cake and eat it too.

-Ravi Gupta

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Financial Samurai April 18, 2011 at 10:57 pm

Flat tax, of course! Nice chart. Haven’t seen one from that standpoint.

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Darwin April 19, 2011 at 9:48 pm

Too regressive; will never happen.

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101 Centavos April 19, 2011 at 12:24 am

No taxes.
No income taxes, payroll taxes, property taxes, no excise, use or hidden taxes.
Just a 3-4% tariff on imports, and the rest be damned.
Well, you asked….

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Darwin April 19, 2011 at 9:50 pm

Wow, now that would be unique in the world of taxation. Obama would blow a gasket! “The Rich” would be getting away with murder!

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Ginger April 19, 2011 at 3:28 pm

Most of stimulus programs will end soon, btw. Keep in mind we want to encourage working which some of the refundable tax credits do, not keep people on welfare. Also, lower income people pay more percentage-wise to social security than those paid more than the social security cap. Lets start with removing that cap.
Keep in mind that we are only talking about federal taxes, not state or even property and sales taxes.
The numbers, I assume, are gross income. The person at 50,000 could hypothetical drop $16500 into a 401k and therefore only be taxed on $33500 but that $16,500 will at some point be taxed. Same for any tax bracket.
I don’t think the article or the chart tell the whole story, in regards to taxes.

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Darwin April 19, 2011 at 9:54 pm

Why should the SS cap be removed when a high earner has no chance of ever seeing a meager portion of those payments repaid in retirement? Social Security wasn’t meant to be a national transfer-of-wealth system which is what you’re advocating.

Of course this is federal tax only; was very clear in the article. The federal government is indebted to the turn of $14 Trillion, much of which has been run up by the current generation of Americans that pay nothing for these services.

What part of the story are we missing here?

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JoeTaxpayer April 19, 2011 at 4:06 pm

I recently wrote an article on this. I show that a couple grossing $55,745 (above median income) with a modest bit of savings (6% to their 401(k) ) will pay no Federal Tax at all.
I didn’t comment on fair or not, it was just a observation. This implies that the half that pay taxes are starting by having to foot the bill for themselves as well as the other half (obviously). I don’t know what fair is, but if everyone in the lower 80% expects the top 20 to foot their bill, we are in a world of trouble.

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Darwin April 19, 2011 at 9:56 pm

They do expect that. And we are in trouble. So, we should keep writing about this and demand action. As we’re seeing in this current downturn, when the economy sours, tax revenues from the top decline. We can’t continuously rely on “the rich” to fund our country.

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Justin @ MoneyIsTheRoot April 19, 2011 at 7:11 pm

Are we saying that some of these high wage earners had enough in medical, mortgage deductions, etc…. that they were able to skirt their entire tax bill? This confuses me…it would seem like you’d need to have the perfect storm of deductions for someone making 100k. Id love to get into this further and figure out ways this could be possible. With my deductions this year, I was able to turn my 25% tax burden into about 13%….but 0%, it just seems unheard of to me.

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Darwin April 19, 2011 at 9:57 pm

Certain years, even high earners will have that perfect storm. Investment losses, writeoffs, tax credits and more… I’d love to see how the $1 Million+ households pull it off.

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optionsdude April 19, 2011 at 10:25 pm

It would actually be quite easy for the $1 million+ households to pay zero taxes. Simply invest $20 million in municipal bonds paying 5%. These bonds are free of federal taxes and if purchased for your state of residence, may even be free of state income tax also. Thus a wealthy New Yorker buying New York municipal bonds could collect tax free income.

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retirebyforty April 19, 2011 at 10:35 pm

That is a nice chart. How do people with 6 figures income not pay any tax? They must have a lot of deduction with kids and property tax and such. How about a VAT so everyone will pay at least a little.

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Pitt Cairn April 25, 2011 at 10:25 pm

I haven’t paid personal taxes of my own for the past 3 years (although my wife pays). I guess this is because I was laid off 3 years ago, and at 55 years old, I haven’t been able to find a job that pays anywhere near what I used to make. Come to think of it, I guess I pay something in taxes, but I do get most of that back. Funny, but I wish I paid more in taxes, because it would mean I was earning a living.

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Bret @ Hope to Prosper April 29, 2011 at 1:35 am

I wrote about this last year and I think it’s absurd. The tax system is so convoluted it will probably need to be scrapped completely in order to become remotely fair.

BTW, a flat tax could easily be progressive if it had three brackets. I don’t know why everyone keeps assuming a flat tax can only have one rate.

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Rudy Keller May 8, 2011 at 6:40 pm

Great point!

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Rudy May 8, 2011 at 6:39 pm

Nice post, but I think you mislead readers in your title. Payroll taxes make up nearly half of federal revenue. When all taxes are taken into account (including all federal, state and local taxes), America barely has a progressive tax system. Any broad discussion about the progressivity of our tax system that looks only at the federal income tax really misses the point.

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Darwin May 8, 2011 at 10:38 pm

I don’t think it’s misleading at all. Any reader that knows the difference between federal income tax and FICA knows they all pay FICA and half of the them get enough of a refund that their federal income tax dollars come back come April. To say it’s “barely progressive” is a stretch. The rich are paying virtually all the federal taxes in the country. I know, I know, don’t we all wish we had that problem…but it’s a fact.

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Rudy May 10, 2011 at 10:35 am

“The rich are paying virtually all the federal taxes in the country.” I understand why you think this, but that assessment is unequivocally inaccurate, even though it conveniently ignores state and local levies. Take a quick look at the numbers: http://economix.blogs.nytimes.com/2009/04/13/just-how-progressive-is-the-tax-system/. Your post is spot on in its criticism of the plethora of deductions embedded in our tax code and how that distorts economic behavior and leads to unfair taxation, but you would be doing your readers a great service to reconsider your assessment of how progressive the tax burden is in our country. It definitely feels extremely progressive, especially when we file our federal income taxes, but if you take a closer look at the facts on the issue you will find that despite popular belief, it is simply not the case.

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