After weeks of rhetoric and posturing, President Obama and folks in Congress appear to be close to extending the Bush tax cuts for two years for everyone at all income levels. Of course, those cuts will be extended to all, including the millionaires and billionaires whom the president wanted to pay more taxes. The compromise, Mr. Obama declared, is an essential step on the road to recovery.
Well, if that is an essential step, then with apologies to Neil Armstrong, here is a giant leap: let’s broaden the tax base to include the millions of Americans who do not pay any federal income tax.
You read it correctly. In 2008, according to the Tax Foundation and the IRS Office of Statistics of Income, there were 51.6 million individual income tax filers with absolutely no federal income tax obligation. That figure means that more than 36% of all Americans filing tax returns paid absolutely nothing into the system.
Now, how is that for fair taxation, when we all utilize the same federal government? And how can we expect our government to ever be fiscally accountable when we have so many tax-takers?
To be sure, for weeks Americans have been inundated with news about the Bush tax cuts, which were set to expire at year’s end. And regardless of their political differences, the crystal clear message coming from both the Left and the Right was that the 2001 and 2003 cuts focused only on the über-rich.
On the contrary, these cuts also assisted many middle and lower income tax filers. Indeed, among other things, they reduced the tax brackets and created a new 10% bracket; raised the child tax credit to $1,000 per child (and made it refundable in more circumstances); increased the number of Americans qualifying for the earned income credit; increased the availability of the dependent care credit; eliminated the phase-out of personal exemptions for certain higher income taxpayers; repealed the overall limitation on itemized deductions, and eliminated the marriage penalty in the 15% bracket and the standard deduction by doubling them to that of a single taxpayer.
The problem with all of this generosity is that the number of Americans paying zero in federal income tax has been increasing substantially over the years. In fact, just between the refundable child tax credit and the earned income credit, the tax-filing season for many in this group actually has meant pay day.
For example, the 2010 the earned income credit is as high as $5,666 for taxpayers with three or more qualifying children. This is in addition to the $1,000 per child tax credit. As a result, not only do many non-payers put nothing into the system, our federal government – meaning us taxpayers – actually pay them through “refundable” tax credits made more lavish and extravagant by the Bush tax cuts.
In short, a typical married couple filing a joint return can now make over $50,000 with two children and pay zero in federal income tax. Yes, this is not a typo – this couple owes nothing in federal income tax and receives back every single penny previously withheld. The same couple does not even need to itemize or own a home.
According to the U.S. Census Bureau the median household income in 2008 was $52,029. We therefore must ask ourselves how a family with two children and making that amount does not pay federal taxes. The answer is simple, thanks to the personal and dependency exemptions of $3,650 each (totaling $14,600), a standard deduction of $11,400, $2,000 of child tax credits ($1,000 per child) and the $800 making work pay credit. With those fantastic results, I would say that for such a family working pays.
Simple math, however, also dictates the more non-paying in numbers, the heavier the line gets for those remaining Americans who do pay federal income tax. So, perhaps President Obama and members of Congress, rather than focusing on extending tax cuts, would be better served by broadening the tax base by creating more “taxpayers,” reducing taxes on those currently subject to taxation and making over $50,000, and preserving the status quo for the über-rich.
Of course, if the non-payers save up all the money they are “making’ through their deductions and credits, they may also benefit from the Bush tax cut extension in a different way, not because they make too little money but because they have too much in the bank.
Rodney P. Mock, J.D., LL.M., is an assistant professor of accounting at the Orfalea College of Business at California Polytechnic State University in San Luis Obispo, California.