MONEY

Taxes Not Your Cup of Tea?

A spoonful of sugar might help it go down
I had no idea that my post about the “Tea Parties” last week would throw me into the middle of a civil war. Well, a not-so-civil war, I guess, given the number of people calling me “dipstick” and worse in the 143 (and counting) comments on the piece. (Just for the record: I’m a contributing writer for Money magazine who contributes, from time to time, to this blog, which is on a site run jointly by Money and CNN).

Nothing angered the commenters more than the notion that other people were paying less taxes than them. A number of them noted with some outrage that, as reported in a piece by my colleague Jeanne Sahadi, 43% of Americans pay no income tax.

Well, actually, that’s not quite what she reported. Like everything related to taxes, it’s complicated. It’s 43 percent of “tax units,” actually — that is, households. What percentage of people is this? It’s not clear. I called up Bob Williams at the Tax Policy Center, which provided Sahadi with the data, to get a fuller explanation of what’s going on.

So who exactly are these happy folks who pay no income taxes? Well, Williams says, they basically break into three large groups.

Some are elderly living largely off of Social Security, many of them living in or near poverty; some are workers who are just starting out at (or are otherwise stuck at) lower paying jobs; the rest are people earning modest middle-class incomes who have kids and other factors that allow them to take a deductions and tax credits that reduce their taxable income to nothing.

And yet, as Sahadi pointed out as well, the vast majority of those who pay no income taxes are paying payroll taxes (like Social Security and Medicare). Only about 12% of tax units — not 43% — escape paying both income and payroll taxes.

Why can so many escape the income tax? As Williams notes, it’s because in this country we tend to deliver social services through the tax code. This isn’t a notion invented by liberals or “socialists.” Indeed, it was conservative free-market economist Milton Friedman who was the most famous American proponent of the “Negative Income Tax” — the idea that the lowest income Americans should not only pay no taxes but should actually get payments from the government. Some of these ideas have indeed made it into the tax code in the form of the Earned Income Tax Credit.

So does the current system put an intolerable burden on the rest of us? As Sahadi also pointed out, once you add in all the deductions and tax credits we have available to us, only about one in 10 filers pays more than 15% of their income in federal income tax, according to Center for Tax Policy figures.

That, while hardly trivial, is less than what people pay in all other developed nations, and seems to me like a reasonable amount to pay for a more-or-less-functioning government. You don’t want to pay for a functioning government? You could always move to Somalia.

Yeah, the rich pay more in taxes than the rest of us. That’s because, well, they’ve got more money. As one famous radical once put it: “taxes should be proportioned to what may be annually spared by the individual.”

Who said that? Karl Marx? Hugo Chavez? Nancy Pelosi? Nope. Thomas Jefferson.

–David Futrelle

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