IBJOpinion

MARCUS: Lies told about people paying income tax

Morton Marcus
May 21, 2011
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Morton Marcus

“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.•

__________

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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  • Keeping it honest
    Without doing the research, I believe Scott is correct.

    I think the greater distortion is often the statement "51% pay no income taxes" is misrepresented as "51% pay no taxes" - which is false.

    That said, I think there is a strong argument that we have gone overboard in giving tax breaks, tax expenditures, credits, etc. across the board including to businesses (GE and Oil Companies, for example)

    Not only is the tax code out of control, but tax revenues as a percent of GDP are as low as they have been since the 1950's. You can't balance the budget while you are doling out tax breaks left and right.
  • True facts on nonpayers
    Iâ??m sorry Mr. Marcus but Andy is correct. Your facts may be correct too, but youâ??ve badly missed the point.

    What Andy was referring to was the recent reports indicating that roughly half of all households don't pay any income taxes because of the plethora of credits and deductions -- not those who write a check on April 15th because not enough tax was withheld from their paychecks.

    Admitedly, the various figures being reported are confusing. Letâ??s first start with the IRS data Mr. Marcus cites (http://www.irs.gov/pub/irs-soi/08in12ms.xls). It shows that in 2008, 142 million Americans filed a tax return but 90 million had a tax liability after credits and deductions. That leaves 52 million filers, or 36%, with no income tax liability after credits and deductions. Meaning, everything that was withheld was returned to them. Many more of these folks got a â??refundableâ?? credit even though they don't have a liability â?? but that is an issue for another day.

    In addition to these families who file tax returns, there are millions of people who have some earnings but less than is required to file a tax return. When Congressâ??s Joint Committee on Taxation added these two groups together, estimated that 51% of all households paid no income taxes in 2010. Another group, the Tax Policy Center, estimated the nonpayers at 47% of households in 2009. Either way, about half of all a households are effectively outside the tax system.

    Here are links to those reports.
    http://finance.senate.gov/newsroom/ranking/release/?id=e7723a9e-ed4a-4e10-af90-a56dfb0ccec5
    http://www.taxpolicycenter.org/taxtopics/federal-taxes-households.cfm

    The tax Foundation has also written on this extensively. We can now safely assume that a family of four earning up to around $52,000 will pay no income taxes. http://www.taxfoundation.org/news/show/25962.html

    Those are the facts Andy.

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