Federal income tax: Who's paying and who isn't?

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About half of the households in the United States pay no federal income tax, thanks in part to tax credits, deductions, and exemptions.

The Tax Policy Center estimates that 47 percent of households owed no federal income tax for the 2009 tax year. Half of those earn too little income, while the rest take advantage of various tax breaks, such as the earned income credit, child and childcare credits, the American Opportunity and Lifetime Learning credits, and others.

But even though some people – mostly low-income elderly or very poor families – pay no federal income tax, the vast majority of Americans, more than 75 percent, pay federal tax – just in other forms. There are Social Security and Medicare taxes at work, for example.

Research also shows that a small minority of very rich Americans avoid federal income tax altogether, but 99.7 percent of earners making more than $1 million will hand over 27 percent of their earnings to the government, according to the Tax Policy Center’s “Five Myths About Your Taxes.”

The Tax Policy Center is a Washington, D.C.-based joint venture of the Urban Institute and the Brookings Institution that provides analyses on various tax issues. Its most-requested publication is “Who Pays No Income Tax?”

The Associated Press reported that approximately 73 percent of the income taxes collected by the federal government comes from the top 10 percent of earners, or those making an average of $366,400 in 2006.

It’s clear that, in general, high-income people pay more of their income in taxes. Filers with $35,000 in taxable income paid approximately 10 percent of that income in taxes, on average, according to The Christian Science Monitor, citing data from the Internal Revenue Service. Filers with $200,000 in taxable income paid 24 percent of their income to the IRS in 2007.

Aside from income taxes, there are plenty of others: sales taxes at the department store, property taxes on your home, gasoline taxes for drivers, and excise taxes for drinkers and smokers.

Some observers are questioning the fairness of the tax system as the country undergoes a shift from the policies of former President Bush, who advocated tax cuts for all, to those of President Obama, who has instituted new tax credits to boost the economy while increasing taxes on the rich.

Kevin Leininger, columnist for The News-Sentinel in Fort Wayne, Indiana, wrote that too few are carrying the weight of too much federal spending. “When 47 percent of Americans pay no federal income tax, and the top 10 percent of earners pay 73 percent, any hope of sane political and financial checks and balances goes out the window.”

And Derek Thompson of Atlantic Business noted, “Is it wrong that half of Americans pay no federal income tax? It is a difficult question. There is an interesting hazard involved with exempting half the country from paying for the discretionary programs it votes for. But that hazard exists partly because politicians have run spending programs through the tax system to shield themselves from critics of big government.”

Kurt Brouwer, in a blog for MarketWatch, pointed out that a Gallup poll last year at this time said that that 48 percent of Americans said the amount of federal income taxes they pay is “about right.” He wrote, “Hmm. 47 percent pay no income taxes. Gallup says that 48 percent thought that what they paid is about right…You don’t think that’s pretty much the same group do you? Nah. Couldn’t be.”

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