The Income Tax System is Broken

43 Percent Of Americans Pay No Federal Income Tax, A Sign That Something's Wrong, Writes Declan McCullagh

(CBS)  On April 15, don't be surprised if the line at your local post office is a bit shorter than usual. That's because your neighbors may not be paying any income taxes this year.

An astonishing 43.4 percent of Americans now pay zero or negative federal income taxes. The number of single or jointly-filing "taxpayers" - the word must be applied sparingly - who pay no taxes or receive government handouts has reached 65.6 million, out of a total of 151 million.

Those numbers come from an analysis published yesterday by the Tax Policy Center, a joint project of the Urban Institute and Brookings Institution. Neither is a low-tax or conservative advocacy group; the Urban Institute was created under the Johnson administration during the Great Society era, and it receives most of its funding from the federal government.

"You've got a larger and larger share of people paying less and less for the services provided by the federal government," says Roberton Williams, a senior fellow at the Tax Policy Center. "The concern is that the majority can say, 'Let's have more benefits, spend more,' if they're not paying for it. It's 'free.' That's not a good thing to have."

By historic standards, today's situation is an aberration. Between 1950 and 1990, the number of owe-no-money federal tax returns averaged 21 percent, dipping to 18 percent in 1986, according to Tax Foundation data. In the 1990s, the owe-no-money percentage hovered around 25 percent of taxpayers.

But then politicians began another round of tinkering with the tax code, adding reams of new pages to an already incomprehensible set of rules that even the guy overseeing the IRS can't seem to figure out.

Democrats wanted to lower taxes on the least affluent, while Republicans wanted to lower taxes on everyone. The result was bipartisan enthusiasm for tax credits aimed at everything from children (1997) and college students (1997) to hybrid cars (2005) and homebuyers (2009). Many of these credits dole out cash to people even if they report no income, making them mere government handouts.

"There's no difference at all in terms of the effects on the federal deficit," says Williams of the Tax Policy Center. "It's perfectly equivalent. It's just easier to say, 'I cut your taxes' as opposed to 'I created a new federal program to send money to people.'"

I'm talking here about federal income taxes, not other taxes like Social Security, Medicare, state income taxes, sales taxes, or car registration taxes, some of which are extracted through payroll deductions. The owe-no-money crowd tends to get hit by at least some of those.

The perils of today's situation should be obvious. The United States is close to a tipping point - where most people can skip the post office run on April 15 to mail a check because they're expecting one from the government instead.

"It is somewhat odd that you have a decreasing number of folks paying into the federal income tax system, a decreasing number of folks who have a stake in what the government pays for," says Matt Moon of the non-partisan Tax Foundation in Washington, D.C.

It then becomes tempting to vote for politicians promising more and more handouts, paid for by money forcibly extracted from an ever-shrinking number of their neighbors. In addition to being immoral, it's poor public policy: people who pay no taxes but nevertheless get benefits are less likely to be careful overseers of their elected representatives.

"At some point people become less and less invested in making sure their government is accountable and frugal," says Peter Sepp, vice president for policy and communications at the National Taxpayers Union, a lower-tax advocacy group. "If you pay very little for getting all kinds of government benefits, you might view those programs as a bargain, even though they may waste tens of billions of dollars a year."

As a candidate, President Obama promised still more tax credits, including ones aimed at child care, "clean cars," and savings accounts. As the Wall Street Journal explained at the time: "You can receive these checks even if you have no income-tax liability. In other words, they are an income transfer - a federal check - from taxpayers to nontaxpayers. Once upon a time we called this 'welfare,' or in George McGovern's 1972 campaign a 'Demogrant.'"

A recession, the stimulus, and innumerable bailouts have placed Mr. Obama's plans on hold. But the expiration of the Bush tax cuts at midnight on December 31, 2010 will renew interest in a tax law rewrite.

That will be an opportunity to gut the current system and replace it with something simpler and fairer. After all, if government is important enough to force most of us to work until April 13 to pay its bills, why shouldn't everyone share the pain?

---

I encourage you to bookmark the home page for my Other People's Money column. An RSS feed is available too. If you have questions, feedback, or suggestions, please feel free to e-mail me at [e-mail].

---

Declan McCullagh is the chief political correspondent for CNET and a CBS News EconWatch contributor. Previously, he was Wired's Washington bureau chief and a reporter for Time.com and Time magazine in Washington, D.C. He has taught journalism, public policy, and First Amendment law. He is an occasional programmer, avid analog and digital photographer, and lives with his wife in the San Francisco Bay area.

[fdx22]

People just don't look at the federal taxes they pay. They add up all the other taxes they are paying too: state taxes, Social Security taxes, Medicare tax, state disability taxes, sales taxes, excise taxes, and property taxes on cars and homes.

[marchopper]

Well tax what a joke how are we supposed to believe in a system that is based on the feudal system from the middle ages ? We vote for people to act as our representatives has no-one the balls to break this outdated outmoded system? Do i have ideas - yes a few - how about the state services being run for profit and paying for them selves - how about abolishing money altogether and giving everyone what they need? How about wiping out all debt globally - a complete amnesty no more debt. The only people who will complain are the companies that cause the problem in the first place - its not like they will miss a bob or two it wont kill anyone and i'm damn sure the world would be a happier place - until we find something else to complain about.

[taxguydave]

It would be interesting to see how those libertarian think tanks cameup with this 43% number.

They must be including children and seniors with no income other than Social Security, and maybe even teabaggers who don't file tax returns. They use this mysterious term "tax units" without ever defining it.

According to the IRS, over 80% of returns filed had some tax due.

http://www.irs.gov/taxstats/index.html

[patriotwhiteowl]

Soon we will have our "3rd world wanna be nation" status. A revolution without a shot fired... welcome to the USSA. Do not be disillusioned, we have been hijacked and there is no turning back... the world banking cartel has taken over and after they finish eliminating the rest of the perceived wealth of this country, they will continue to control the worker bees with worldwide Cap'nTrade.

[S_Maxwell]

"43 Percent Of Americans Pay No Federal Income Tax, A Sign That Something's Wrong, Writes Declan McCullagh"
I am interested in knowing how the 43 percent number was arrived at. Does the number include seniors and disabled folks who are living on Social Security? Does it include students and minors whose income does not reach the taxable level?
If the number was computed based on 2008 filings (for 2007 income), was consideration given to the fact that in order to get the rebate, people who were otherwise not required to file a return, had to file in order to get the rebate?

[ledbalon]

Where is the fair tax when we need it? Those who propose a straight 10% .. cannot run the government.

If the Dems have their way... 90% flat rate across the board might be able to fund the government and wipe out the deficit.. REmember the deficit is now running at 10% of the GDP ...and this is just for the debt service.. eg interest.

If we keep on this tract you can expect that the USA will be no more in 15 years..

[ledbalon]

yada yada yada.. poor poor guys.. have to pay social security.. well they are the only ones to collect. Promise if you are earning over 250K a year the odds of you collecting anything from SSAN go statistically to zero The top 10% of wage earners pay 90% of the taxes..

Think about it..

[American-Infidel]

The tax system is broken? Tell us something we don't already know.

[caldwellptr]

The Income Tax System is Broken - DUH!

[mars7578]

Fair taxation is one of the pillar of this democracy.However, this uneven taxation is destroying the health of AMERICA,and has transformed capitalism into imperilism.By now most legency corporations would have pensions and health accounts that would be turning a profit.Social Security would never run out of money.Business wages, reseserves,and benefits would be based on production rather than wall street projections.Insurance companies would have lowers rates and better service.Having paid off homes and low interest credit cards would be normal.But instead we've created a tax code that is based on loopholes that have reshaped society.Unless this tax system is fixed,America is on course to resemble a third world society.The need of a governmental heath system is a result of our business model which has grown out of our tax code.Extremely high bonuses again is a tax loophole product.High unemployment and layoff are directly related to tax changes.Close all tax breaks and set clear requirements when and how long a businees or individual needs an exception.

[babooph]

This propaganda story left out the rich ,having the bulk of their $ EXEMPT from social security tax & social security tax FULLY charged to the LOWEST earners-same lobbyists likely arranged the "STORY".

[icecreamjunkie]

OK...were ready to replace it with the federal consumption tax....drop the whole "income" tax idea all together.

Tax the things we buy rather than our paychecks, that way those who have money pay more and those that don't have money pay less...O'bama will have his "automatic" increase in tax for the wealthy and those without automatically pay less...wow so simple. And then ALL income gets it's fair share of tax whether someone made it on a payroll check, tips for services, money made overseas which is brought home [currently not taxed], people watching porn on the internet could be paying [currently not taxed], people in illegal activities [drugs, firearms, prostitution...whatever] would still be giving Uncle Sam his share.

And if the government is concerned about taxing homes, cars to get to work in, or food...don't tax that; or have a "very reduced rate" for those items.

[goffredo29]

You know what else is broken? Wikipedia. It started out as an amazing idea and particularly useful for retrieving information very difficult to find anywhere else. Then came the wikinazis, the system administrators who infest and plague the utility. Their characteristic in common is analness. Content is really of no concern to them, they're just a band of obsessive-compulsives poised to ponce arbitrarily on the content and eliminate it. Someone needs to start over and create a similar utility but without an overclass with no other qualification than anality.

[stinger1z]

So now that Obama is president, taxes are suddenly ridiculous and we should not pay them? Where were your balls for the last 8 years??

[rocketjl]

Let everyone pay a flat 10% tax on all income.

[bunnie69]

i thought we came here to be free.... free to pay taxes...free to follow rules from some person that has enough money to be elected.... free to go to jail....free to do as 1 man says.... where is free in america.... where is free at anywhere.... no matter what u do this is just like any other country... some one to make stupid rules some one to enforce those stupid rules and everyone else to pay for it....get off the stupidness and accept this is the way the world is all over... dont like it go back to where u came from.... dont like it do something about it.... dont like it move to another place where u do like it.....
get over it already

[noloyalisti]

Declan is totally correct. We do not tax the rich nearly enough. They made ALL their money off of the commons that we all own and off the backs of working folks.

Our income taxes and sales taxes are unfair and target the poor. The big corporations specifically should be gone after and not allowed to evade taxes.

[Solarrays247]

While we are looking at our tax system we should be looking at our spending system. They go hand in hand.
Posted by WITHINMEANS at 3:29 PM : Apr 16, 2009

Yes, yes, and yes!

[WITHINMEANS]

While we are looking at our tax system we should be looking at our spending system. They go hand in hand.

[Solarrays247]

This is one reason why there needs to be a time limit on those accepting assistance from the government. Need help, then get help, but don't live off of the battered welfare system forever. And, if the churches in this country were doing what they've been called to do, people in need wouldn't have to rely on the government in the first place.
Posted by fiarstar at 11:56 AM : Apr 16, 2009

I couldn't believe what I was advised the other day when I paid a visit to the county seat of where I live. There is current documentation of at least three generations of the same families living off government assistance in this particular county.

Ailments appear to range from "bad nerves" to "bad backs." I have been advised that these people have learned how to "play the system." This government assistance includes help with rent, food stamps, public transportation, health care, and dental services, as well as cash for miscellaneous expenses. Contrary to popular belief, at least in the central Pennsylvania region, the majority of these families are white/caucasian, not hispanic or african-american.

This is just one more example of the ever escalating hemorraging of our country's financial health. Imagine, if you will, this particular situation multiplied literally by millions and millions of families?

If we cannot get a grip on situations like this, we may very well run out of money to be able to help those who are seriously and honestly handicapped, and truly need these services.