Early tax projections from the Tax Policy Center suggest that 45% of Americans will pay no federal income tax for 2009. Credits, deductions, and tax breaks have whittled down the federal income tax liability for most Americans -- from the poorest to the wealthiest -- such that many Americans will pay no tax or will receive a refund of all taxes paid into the system in 2009.
Shocking, isn't it? Not really.
Despite the headlines all over the press this week blasting this statistic, it's not unexpected. Previously, 2008 had been touted as a record year for non-payers, with one out of every three taxpayers paying no taxes or receiving every dollar back which had been withheld. But now 2009 will rank as having the highest percentage of non-payers ever, thanks in part to the American Recovery and Reinvestment Act of 2009 (ARRA), which pumped additional deductions and credits into the system, including the wildly expensive homebuyer's credit and the Making Work Pay Credit.
In fact, ARRA is a great example of what's happening to tax policy in America. Our Congress has turned into Oprah -- remember when she infamously gave everyone in her audience a new car? That's the sentiment in Washington these days: With each new piece of legislation, everyone gets something.
The bottom 40% of taxpayers now make, on average, a "profit" from filing a federal income tax return. With credits such as the earned income tax credit (EITC), low wage earners statistically get more money in federal income tax credits than they owe in taxes. The result? A refund.
It doesn't stop there. Tax breaks have expanded the definition of what is considered poor in America. While the poverty level for a family of four in the US is calculated as $22,050, the Tax Code allows families making more than twice that to escape taxation. While most would consider a typical family of four earning income of $51,000 to be middle class, that income level would generally result in no tax payments And while a study from the Congressional Budget Office showed that tax rates for middle-income earners edged up in 2004, the current administration has introduced a slew of tax breaks aimed directly at the middle class, including the Making Work Pay Credit, which replaced the paper stimulus checks that taxpayers have come to
And finally, let's not forget tax cuts for the wealthy. While the top earners in America still pay the overwhelming majority of federal income taxes, even they have gotten significant breaks in recent years. In fact, over the last decade, the wealthy saw their tax brackets slashed at higher rates than any other income group. According to a 2006 Congressional study, families earning more than $1 million annually saw their federal tax rates drop more sharply than any group a result of President Bush's tax cuts.
So, let's do the math: If everyone gets a tax cut, where does that leave us? $12,800,074,381,996.65. That's the outstanding public debt as of this morning.
I don't profess to have the answers. But here's what I do know: We can't keep spending federal income tax dollars that don't exist. And while everyone hates paying taxes, we can't keep cutting them for most Americans and expecting those at the top to shoulder the burden. Social policy aside, the numbers don't work.
We all say we want to pay fewer taxes. The real problem seems to be that more and more of us actually do.