Who really pays the Income Taxes?

With all the talk of the rich are not paying their fair share of taxes and the tax cuts earlier this decade only went to the rich, here are some facts to contemplate and you as the reader can make up your own opinion.

• The statement above could be true when you look at it from a pure dollar point of view.  Someone who makes $500,000 versus someone who makes $50,000, if they each get a 5% tax cut, the first one pays $25,000 less in taxes, where the second one only pays $2,500 less in taxes.

• I believe if you want to make an argument who pays more in taxes, you should look at a percentage of income paid and not the dollar figure.

Let’s look at some facts here from the latest statistics from the IRS that can be found on their website:

• The top 25 percent of income earners pay 86% of all personal, federal income taxes. That is up from 84 percent in 2002.
• The top 50 percent of income earners pay 97% of all personal, federal income taxes, which also means that the lower half of all income earners in this country pay 3% of all personal, federal income taxes.  The medium in 2006 was just over $48,200.
• What is amazing is that the top 1 percent of income earners pay 39% of all personal, federal income taxes, which is up almost 6 percent since 2002.
• 20 years ago, the top 1% paid a little over 27 percent of all personal, federal income taxes, and the top 50 percent paid about 94 percent.

All the talk about the lower income bracket not getting enough of a tax cut has a mathematical problem.  How can you cut taxes for someone who already pays very little or nothing?  That was actually answered during the tax cuts in 2003 by cutting the lowest bracket from 15% to 10%.  So the people who pay most of their taxes in the lower of two lowest brackets received a 30% tax cut. This obviously is not a large dollar figure, but a nice percentage cut.  In addition tax credits were increased.

 Anyway, the issue we have at hand is that the taxes are paid by a smaller and smaller part of the population. This results in several problems:

• There is a large part of the population that is no longer contributing, even if it is a small amount.  Any tax law changes do not affect them and therefore they don't care. 

• The smaller the pot from where the taxes come from, any changes in the economy or the behavior of people will have a much bigger impact on the amount of money received by the treasury.

The problem is even worse than people not paying any taxes, you can actually get money back even if you don't owe any.  There are two that come to mind, the Child Tax Credit and the Earned Income Credit. I think the second one is a good thing as it is an incentive to work, and the more you work, the more you get and it is capped at a low income and favors people with children.  There is nothing wrong with the Child Tax Credit, but I don't see why someone actually needs to get a refund beyond their overpayment.

The tax laws are also screwed once you make too much money in the government's point of view regarding credits and deductions.  Anyone making more than $100,000 is rich in the government point of view.  I would certainly disagree on that, ask a mom or dad with two or three kids making in the low $100s if they feel rich.  Anyway, once you reach that level, many of the deductions like tuition are being phased out, the child credit disappears just to mention a few.  You will not get a dollar for dollar deduction anymore for your mortgage, charity, state taxes etc.  I could go on and on.  In some circumstances, because of the phase outs, the effective tax rate for a certain income range (like the income from $110K to $115K, which is just an example as it depends on the situation), is in the confiscatory category where literately a huge chunk of extra earned money goes to the government.  This is offset somewhat by not having to pay social security taxes anymore, but that is story for a different day.

I think what we need is a flatter tax with less deductions.  All of us should pay something, because once you have some money invested, you might actually have some interest how it is spend.  We need to be generous to the ones in need and the unfortunate, but that is not almost half the population that pays only 3 percent of the taxes.  We should be more generous with families than with single people, nevertheless they should all pay the same rate, just the dollar figure when you start taxing should be different.