This article was last updated on December 6
To answer the first part of the question. The answer is yes you have to pay taxes. In fact despite all the conspiracy theories and constant political threats to shut down the IRS because, taxes are the law of the land. It is known as the Internal Revenue Tax Code, which is Title 26 of the United States Code. But there are in fact a number of legal ways to avoid paying taxes, which come down to reducing your taxable income. Which can be very different from your earned income.
Just when I thought I have seen most statistics, CNN brings us estimates by the nonpartisan Tax Policy Center, that In 2009, roughly 47% of households, or 71 million, will not owe any federal income taxes. What’s more is that, some of these non-tax payers will get additional money from the government because they qualify for refundable tax breaks and credits under President Obama’s economic stimulus program.
There are some clarifications in the article since people pay more than just federal income taxes. If you factor in payroll taxes, which support Social Security and Medicare, the percent of households with a net liability of zero or less is estimated to be 24% this year. Still that is a big number and likely to rise as unemployment and the number of retired workers increase.
The key reason why there is a zero-liability group at all is because the U.S. tax system is progressive. Those who bring in more money pay more than those lower down the income scale to support government functions such as national defense and social safety nets like Medicaid for those in need. That progressively can be dialed up or down.
President Obama falls into the latter camp. He has proposed increasing the income tax burden on families making more than $250,000 and individuals making more than $200,000, while offering new measures to reduce the tax bite for most Americans making less. One of Obama’s budget proposals is to extend the 2001 and 2003 Bush tax cuts for everyone except high-income tax filers, which was the group that derived the most benefit from those cuts. As a result, under Obama’s budget, he would keep the ranks of the non-payers higher than they would otherwise be.
I can understand that taxing the poor is not the best idea for a sustainable economy, but the fact that we have a growing proportion of people who won’t pay taxes is concerning from when I think of the longer term impacts (like the availability of Medicare and Social Security). Further, it will make be think twice before supporting all the government sponsored stimulus programs which future generations and I will have to pay for with higher taxes.
What are your thoughts on this? Is the American tax system fair in taxing the rich or does it provide too much leeway?
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~ Job, Home and Stimulus Tax Breaks and Traps in Difficult Financial Times
~ Can’t afford to pay my taxes! What happens if I file late and can I get an extension