March 14, 2010 in Business

Millions of filers in U.S. pay no income tax

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Tax Freedom Day will come early again this year.

The Tax Foundation, which every year calculates the day on which wage-earners start to work for themselves instead of government, is still crunching the numbers, but President Scott Dodge says the blessed event could fall on April 13, as it did in 2009. Once as late as May 9, the day has moved down the calendar as the tax codes have changed.

But something else is happening, something that for an increasing number of Americans shifts tax freedom day to Jan. 1. According to a new study by Dodge, more than 36 percent of the 142 million who file a federal income tax return pay no tax. Some who receive the earned income tax credit or any of the other credits introduced the last few years are net beneficiaries of the income tax.

Dodge says a family of four can earn more than $50,000 and pay nothing if they take the standard deduction and child tax credits. Many in Spokane County, where the median household income is $42,000, fit that profile. More than 33,000 county residents, for example, received Earned Income Tax Credits worth up to $5,600 for a family of five earning $43,000.

The credits, Dodge says, were intended to offset other taxes — sales, excise, property, etc. — paid by the poor, but amounts now often exceed the bite from those levies.

Many need that relief.

But the 23.5 million in the United States who qualified for EITC are less than half the 51 million nonpayers in 2008, the most recent year Dodge could analyze. In 2000, only 32.6 million finished the year tax-neutral, or better. That yields a 59 percent jump in nonpayers in less than a decade, thanks first to the 2003 and 2004 Bush administration tax cuts, then the 2008 stimulus that rebated $1,200 to a four-member household.

“Politically, it’s going to be very difficult to put these people back on the rolls,” Dodge says.

And not yet baked into the trend line are Obama administration incentives for energy efficient cars, windows and other purchases that are moving credits further up the income scale, adding to nonpayer totals.

Dodge does not know if the result of all this subtraction is a net reduction in the number of those who do pay taxes. But the IRS says it received 124.9 million returns in 2000, and 137.8 million in 2008. If nonpayers increase by 19 million, and filers increase by 12.9 million, the math says fewer people are paying the federal government’s escalating bills.

And if you do not pay for something, why should you care what it costs? Dodge calls it “having skin in the game,” and at least 51 million who file returns, and millions more who do not file, have their hides intact.

His solution is a no-deduction, two-tier or flat tax system that brings millions back into the “game” at every income level. It’s an old idea, one that raises deep suspicions among lower- and middle-income taxpayers that the wealthy will pay less, and terror among the millions of accountants, lawyers and others for whom the present system’s complexity is their paycheck.

But a separate foundation study released last week suggests the absurdity of relying on our present tax structure to cover federal government expenditures. To eliminate the fiscal 2010 budget deficit, tax rates would have to start at 24.3 percent instead of 10 percent, and the rate would top out at 84.9 percent, not 35 percent.

Of course, this year’s budget is way beyond balancing, as is the next and the next and the next. The conservative-leaning foundation is making a point. Dismiss it if you will, but their conclusion regarding nonpayers is well taken.

For too many, income tax freedom day is every day.

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