By Joseph Regenstein IV, CMFCHalf of Americans aren’t paying federal income taxes. Is that right?
A provocative statistic. Last July, the nonpartisan Tax Policy Center (a joint venture of the Urban Institute and the Brookings Institution) estimated that 47% of Americans would not owe a penny to the IRS for tax year 2009.1
The White House has projected the federal deficit at $1.6 trillion for 20102 – that’s about 10.6% of our GDP, a percentage unseen since the 1940s. So is it fair to the nation that so many Americans are legally avoiding federal income taxes?
A major reason? Refundable tax credits.
The Making Work Pay credit and other tax cuts accompanying the federal stimulus gave millions more of us a refund this time around. If these credits hadn’t appeared, the TPC says 38% of us still wouldn’t have owed federal income tax for 2009, thanks to assorted variables – astute tax planning, low taxable income, and other factors.1
People who assume the rich are dodging taxes are misinformed. The TPC found that only about 1.5% of those with taxable incomes of $1 million or more owed no federal income tax for 2009. For those with taxable incomes from $500,000-$1,000,000, the estimate rises to just 2%.3
If you made between $75,000-100,000 in taxable income in 2009, you may have been in the lucky 9.2% who the TPC says didn’t owe anything to the IRS. In contrast, it figured that 61.8% of taxpayers who earned $20,000-30,000 last year and 47.5% of those with taxable incomes from $30,000-40,000 had no federal tax liability.3
Can you bring the deficit with a few changes to the tax code? Good question. At first glance, it may seem impossible. It seems the best solution would be to cut spending and shrink the overall size of the federal government. The Treasury, has an alternative plan to do it, and it looks like this: cut war spending by $250 billion, raise another $252 billion in revenue by letting tax cuts sunset for couples making more than $250,000 yearly, collect $331 billion in bank fees, and save $105 billion from a selective federal spending freeze. This could shrink the deficit to around 3% of GDP, which the Treasury feels is bearable.4
Of course, bipartisan politics might get in the way. Higher federal income taxes (and new kinds of taxes) seem to be looming in the future; as for legislators figuring out a way to spare us from them, that would seem a long shot.
Joseph Regenstein IV is a Representative with J.W. Cole Financial and may be reached at www.rainstonefinancial.com, 407-412-7028 or jregenstein@rainstonefinancial.com.
These are the views of Peter Montoya, Inc., not the named Representative or Broker/Dealer, and should not be construed as investment advice. Neither the named Representative or Broker/Dealer give tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.
Citations.
1 taxpolicycenter.org/publications/url.cfm?ID=1001289 [7/2/09]
2 reuters.com/article/idUSTRE63C09I20100413 [4/12/10]
2 usatoday.com/news/opinion/editorials/2010-04-16-editorial16_ST_N.htm [4/16/10]
4 cnbc.com/id/36432254 [4/13/10]
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