The April income tax deadline has come and gone, and there’s some startling information about who paid what to the federal government this year. The data was uncovered by Scott Hodge, the president of the Tax Foundation, a research organization on taxation issues based in Washington D.C.
First, the not-so surprising news: The overwhelming majority of Americans are very dissatisfied when it comes to paying taxes, claiming their taxes are too high. There’s a faction that buys into the theory that their taxes are too low, but the percentage is miniscule, less than 10 percent. Most Americans share a common frustration with a highly complex tax code that keeps them guessing about how much they’ll owe in taxes year to year and makes them even less certain where or how their tax dollars are spent.
Taxpayers not only feel they’re being over-taxed, they believe they’re being taxed unfairly. A Harris Interactive poll commissioned by the Tax Foundation shows that 59 percent of Americans believe they pay more federal income tax as a percentage of income than billionaire Donald Trump. They contend the poor pay little and the wealthy have enough clout to get around the system and avoid paying what they should.
So what’s the real answer? Do cynical taxpayers have a point? Who pays what every mid-April?
According to the Tax Foundation, the vast majority of federal income taxes are paid by people with high-incomes. Using the most recent IRS data available, the Tax Foundation concluded that the top 10 percent of households, with incomes about $100,000 or more, pay about 70 percent of all federal income taxes. The percentage is up from just below 50 percent in 1980. When the top quarter of all taxpayers is taken into account, the share inflates to 85 percent.
IRS figures show the top one percent of income earners pays 36.9 percent of federal income taxes, the top 10 percent pays 68.2 percent, and the bottom 50 percent pays 3.3 percent. So much for the myth that the wealthy don’t pay taxes.
What’s causing the spike in the taxes paid by wealthier individuals? For the answer, you have to go back 40 years when the definition of the middle class was the stereotypical married couple with children, with a sole income earner, usually the husband. That was 1967. In 2007, the middle class from a statistical standpoint is a young, single individual with an income between $25,000 and $45,000. Today’s middle class marries later and divorces earlier. Scott Hodge of the Tax Foundation says the middle class household has gone from resembling “Ozzie and Harriet” to the cast of “Friends.”
Now add in this demographic: the era of the one-income family is long gone. Dual-income families are the norm, and the higher incomes have pole-vaulted households into higher income groups.
So are these new middle-class families rich? Not really. The Tax Foundation’s Hodge points out that if both husband and wife make about $37,000, they’re each considered to be middle-class by the number crunchers. But their combined income puts them in the top 20 percent according to the IRS.
What’s really astounding according to Hodge is the trend that has resulted in a decreasing number of Americans that now “overwhelmingly bear the national tax burden.” Policies aimed at helping the middle-class did lower their tax burden, but also wiped millions of Americans of the tax rolls completely. They file tax forms, but pay nothing, a phenomenon Hodge calls, “remarkable.”
Hodge notes that, “In 2004, some 42.5 million Americans filed a tax return but had no tax liability after taking advantage of their credits and deductions – up from 32 million just four years earlier. In addition to these non-paying filers, roughly 15 million individuals and families earned some income in 2004 but not enough to be required to file a tax return. One tax return often represents several people. When all of the dependents of these income-producing households are counted, roughly 120 million Americans – 40 percent of the U.S. population – are outside of the federal income tax system.”
Another Tax Foundation study is sure to make taxpayers even more upset. An amazing 60 percent of American households receive some form of government spending. In other words, a significant majority now get more in government spending than they pay to the government in taxes. In all, over $1 trillion is redistributed from the top 40 percent to the bottom 60 percent.
The Tax Foundation’s Hodge sees a backlash. Given a scenario of such a large number of Americans disconnected from the costs of government and being net consumers of government services, Hodge says the conditions are ripe for social conflict. He envisions these non-taxpaying voters demanding more government benefits since they fully realize others are picking up the tab.
Hodge’s dire prediction is that as baby boomers retire, they too will ask for more, creating what Hodge calls a “fiscal tsunami of entitlement spending.” How do we pay for it all? The alternatives are few: make dramatic cuts, or huge tax increases. The check you send to Uncle Sam could get very ugly.
