When I first heard this statistic, I was surprised at the magnitude of the percentage. However, one only needs to check a few sources such as the Tax Foundation or the Heartland Institute to confirm the numbers. It is worth noting that these people still pay taxes, even if they don't pay federal income tax. Non-payers of federal income tax still contribute to payroll taxes (social security and medicare), sales tax, and excise taxes.
While I realized that the majority of federal income taxes was paid by a minority of taxpayers (e.g in 2004 10% of taxpayers paid 68.2% of the federal income tax), I didn't realize that such a large proportion (i.e. over 40%) paid no federal income taxes at all. Somehow, that doesn't feel right. I don't believe a tax system that allows 40% to opt out is sustainable, especially if that segment requires signficant services from the government. To me, this would similar to 40% of a company doing no work and the other 60% carrying the load so that the company can make money. I don't believe such a disparity in contribution can work for very long.
With the upcoming Presidential elections, I will be very interested in how federal income tax code issues are addressed. Based on my limited exposure to the candidates so far, I expect I won't be very impressed with any of the proposals. It would be great if I were pleasantly surprised in the next few months :-)
For more on Reflections and Musings, check back every Saturday for a new segment.
Photo Credit: IRS.gov
This is not financial or tax advice. Please consult a professional advisor.
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