Inequity prompts frustration with tax system

Tax day has come and gone and what have we learned? For one, this tax day was a little different. Taxpayers were a little more contentious as evidenced by tea parties around the country. Perhaps, they had good reason to be frustrated. In an April 14th Gallup poll 48% of Americans thought their taxes were too high, while 45% thought they were about right. An astonishing 3% thought they were too low! I think there is a simple explanation for these statistics. On the same day it was reported that 47% of all Americans pay no, let me say that again, no, federal income tax. Imagine that – 45% of taxpayers thought their tax burden was about right. Do you think it closely aligns to the 47% of taxpayers who pay zero federal income tax?

Nothing evokes the electoral passion like taxes. Just ask the British who lost the American colonies over a simple tax on tea. Just look at the hundreds of modern tea parties where modern Americans express their frustration with today’s tax code and more importantly where the tax structure and rates are headed.

At the heart of the frustration with the tax system is its inherent inequity. On April 7th the Tax Policy Center reported that 47%, almost half, of all Americans will pay no federal income taxes in 2009. This is due to either low incomes or they qualified for enough credits, deductions and exemptions to reduce their liability to zero.

The result is that our primary tax system exempts half of its citizens from paying for programs that benefit everyone, including national defense, public safety, infrastructure and education. Of course everyone pays other forms of federal taxes including social security, Medicare and excise taxes on gasoline, cigarette and alcohol. But at the heart of the federal tax system is the income tax and it is broken and the people know it.

The actual breakdown of who pays federal income tax is startling. The Tax Foundation reported the following data as of 2007. Keep in mind these statistics will be further skewed based on the policies instituted by President Obama. You can see this data at www.taxfoundation.org/taxdata/show/23408.html. This data is not political. It is merely a compilation of all tax returns.

The top 1% of income earners paid 40.4% of the total income taxes. The top 5% paid 60.6% and the top 50% paid 97.1% of all federal income tax. The bottom 50% of income earners paid 2.9% of total federal income taxes. Think about that for a moment. Once you peel away the rhetoric you have to ask yourself is this fair. More importantly, do you really think this group can pay substantially more?

The startling fact of this is not that this group is paying too much in taxes. That is an article for another day. The disturbing fact is that it is it is President Obama’s stated intention to further increase the taxes on this group as well. He believes that it is in the nation’s interest for the top 5% to pay an even larger and even more disproportionate share of taxes.

The federal income tax is the federal government’s largest source of revenue raising a little less than half of the government’s total revenue. It has long held a degree of progressiveness in its rate structure. That means those with higher incomes pay a higher percentage of their income than those with lower income. To a certain degree this is entirely appropriate. However to exclude almost half of the citizenry is dangerous. Keep in mind that in 2007, approximately 38% of households paid no income tax. In 2009 that figures has jumped to 47%. This is a trend that cannot and must not continue. It undermines the very foundation and fairness it tries to seek.

We are about to find out what happens in our democracy (actually a republic) when a voting majority of citizens pay no federal income tax and have the ability to vote increases on the minority (actual tax payers) with impunity. We are at that tipping point right now. This does not bode well in my opinion.

Most Americans understand that this structure is unfair and unsustainable. We have a voluntary tax compliance system. If the people lose confidence in the system this could pose significant problems regarding the integrity of the entire tax system.

Now I want to come back to the opening paragraph. Is it any wonder 48% of Americans think their taxes are too high? I would argue it is no coincidence. That is the percentage of Americans who pay federal income taxes! I would like to know what the 45% of respondents were thinking when they said taxes were just about right. How many of them actually paid federal income taxes. How much above zero taxes would be too much? As for the 3% who thought taxes were too low, these people give a whole new meaning to the statistical phrase – margin of error.


Published in the LaGrange Daily News - April 22, 2010