Eye on the Pie and Opinion

MARCUS: Lies told about people paying income tax

May 21, 2011

“Liars!” I want to shout. People who lie deliberately and those who lie innocently afflict our nation with falsehoods. The deliberate liars take a “fact” and misrepresent it to fit their ideological or psychological purposes. The innocent liars repeat these lies because they share the philosophy or psychosis of the deliberate liars.

My friend Andy asked me to check out a “fact” he heard about taxpayers in the United States. The “fact”: Fewer than half the people pay any federal income taxes. The truth: Fewer than half the people who file federal income tax returns owe any taxes at the time of filing—the majority have already paid all their taxes due Uncle Sam.

The latest data I found on the Internet at irs.gov were for 2008. In 2009, 142.5 million tax returns were filed for 2008. Of these, 108.0 million, or 76 percent, had taxable income. Remember, our tax code has all sorts of deductions, exemptions and credits that can reduce taxable income to zero. You get an exemption for just existing. The many people with very low incomes often do not have any taxable income.

The total amount of taxable income for the 108 million returns was $5.6 trillion, which would result in $1.1 trillion in income taxes, according to the Internal Revenue Service. At this point the effective average tax rate would be 19.6 percent ($1.1 trillion divided by $5.6 trillion).

But wait, there’s more. As a matter of public policy, we enjoy a slew of tax credits that reduce our income tax liabilities. Some 6.6 million returns include child care credits of $3.5 billion. We have education tax credits, child tax credits, foreign income tax credits and many more to satisfy aspects of our social policies. 

Such credits are wise—if you use them—but unjustified loopholes for your neighbors. In total, credits reduce our tax liability by $75 billion and bring the effective tax rate down to 18.2 percent.

During the year, most folks have money withheld from their paychecks to help cover their federal income tax liabilities. Taxes withheld showed up on 124.4 million returns, totaling $932.1 billion. Compare that $932.1 billion with the tax liability of $1.1 trillion above. You’ll find that Americans had already paid 84 percent of their taxes through withholding.

In many cases, our withholdings exceed our individual tax liabilities and we are due a refund. For 2008, 114.7 million tax returns showed overpayments of $378.7 billion that were taken either as refunds (the check is in the mail) or as credits against next year’s taxes.

The realistic fact from all this is that few people owe much in taxes when they file their returns. Thus, only 22.7 million tax returns showed $100.3 billion in tax liabilities for 2008. If you don’t have your calculator handy, that’s just 16 percent of all tax returns whose filers owe the federal government taxes at the time of filing.

Now we see how the distortions arise. Most income tax filers do not pay any income tax at the time of filing. The liars leave off those final five words. Are the politicians and pundits who make these pronouncements aware of the falsehood of their “facts”? Surely those who repeat such “facts” have not thought about them and certainly they do not challenge them because they come from “reliable” sources.•

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Marcus taught economics for more than 30 years at Indiana University and is the former director of IU’s Business Research Center. His column appears weekly. He can be reached at mmarcus@ibj.com.

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