If you stayed up late last night finishing your 2009 income tax returns, you’re in good company. Today is the filing deadline for most of us. April 9 was another key date. That’s Tax Freedom Day as calculated by the Tax Foundation. It took 99 days this year for the labor of the average American to finally cover his federal income tax bill. The above-average American is still paying. The below-average American pays no income tax.
That’s right: After standard deductions, exemptions and credits, a family of four making $52,000 in 2009 paid zero federal income tax. Forty-seven percent of U.S. households also paid nothing.
You’ve heard the cliche that “the rich don’t pay their fair share of taxes.” Really? Let’s define “rich” as the top 10 percent. What would their fair share be? Thirty percent? Forty? In fact, the top 10 percent pays more than 70 percent of all individual federal income taxes, 1 1/2 times their share of individual income. What’s fair? One hundred percent?
You’ve heard that income tax rates have been cut for the rich. This is true, just as income tax rates have been cut for the middle class and the poor. But tax rate cuts for the rich don’t equate to tax dollar cuts. In 1981, before the Reagan tax-rate cuts, the top marginal rate was 70 percent. And the top 1 percent paid 17 percent of all individual income taxes. Today’s top marginal rate is considerably lower, at 35 percent, but the top 1 percent now pays 40 percent of the total. The lesson is: Incentives matter, and the prospect of keeping a greater, rather than a lesser, share of your income after taxes is motivating. Hence, reductions in tax rates can actually produce greater tax collections, especially in the upper brackets.
While lower- and even many middle-income Americans pay little or no federal income taxes, they are subject to payroll taxes for Social Security and Medicare, as they should be. Income taxes are for the general expenses of the federal government, for everything from defense to highways to welfare to interest on the national debt.
Social Security and Medicare are specific social programs to which those who will benefit have always been expected to contribute in order to qualify. If we were to excuse all but the so-called rich (that’s anyone who makes more than you do) from these taxes as well, we’d be creating a mass population of net tax-receivers, hooked on limitless government handouts and wholly insensitive to the pain of taxation on a dwindling pool of net tax-payers. This is a sure-fire formula for political and economic ruin.
Multibillionaire capitalist Warren Buffet muddied the waters on this topic when he theatrically claimed that his secretary paid a higher federal tax rate than he did. Buffet, a financial whiz who obviously knows better, played to populist passions and the ignorance of those who don’t understand the justifiable reasons as to why dividends and capital gains are taxed at lower rates than ordinary income. Even worse, he finessed the nature of Social Security payroll taxes, which are capped at an income limit, precisely because Social Security benefits are also capped. Without this cap, Social Security would just be another welfare program. Of course his secretary pays a greater percentage of her income in Social Security taxes than he does. She’s paid much less and Buffet’s salary goes well beyond the tax cap.
Buffet also favors bringing back the death tax on the rest of us. That’s no skin off his nose, since he’s decided to give most of his wealth away rather than leaving it to his family. Those of us with a lot less might prefer to leave it to our kids.
Mike Rosen’s radio show airs weekdays from 9 a.m. to noon on 850-KOA.
