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Almost Half of U.S. Households Will Pay No Federal Income Tax in ’09

Tax Avoidance: The Price is Right

According to estimates by the nonpartisan Tax Policy Center, 47% of U.S. households are projected to owe zero federal income tax in 2009. (1) Is this good, bad, or inconsequential?

Vice President Joe Biden would tell you this is very bad, because it is “patriotic” to pay taxes. President Barack Obama has called for a more progressive tax code, suggesting those making above either $200,000, or $250,000 per year, pay more.

Taxation is a touchy subject to be sure. Reasonable people understand that government revenue is necessary to deliver public goods, such as roads, utilities and national defense. Realists understand that if the point of funding national defense is to secure our sovereign nation, we are failing. The U.S. is not secure at the borders or ports, and we’ve left ourselves a steep national defense tab to deliver an unsecured nation.

There is no question that the more an individual is taxed, the less economic freedom they have. But it isn’t unreasonable to say that a moral country provides some safety nets for the less fortunate. Nobody wants the government to pull the plug on grandma, or watch her die slowly at home as she does not have the means to take care of herself through the age of 90.

The question of how much government revenue should be collected from the public, through taxes or fees, is one of extreme subjectivity. If a person believes tax money is being squandered by the government, or consistently spent in areas not representative of their own values or beliefs, what would be their incentive to keep forking money over to the politicians? Why would they not take every legal avenue the government provides to limit their tax burden? 9% of households making between $75,000 and $100,000 have done just that; these homes will have zero or negative federal income tax liability in 2009.

Note that while having zero federal income tax liability, workers still pay state taxes and payroll taxes, which contribute to Social Security and Medicare. A bevy of other taxes come up on everyone’s plate depending on their state of residence, from sales taxes to property taxes to gasoline taxes.

Philosophies have limits in practice. A completely free society, a hardcore libertarian approach, would leave everyone’s freedom in tact, but leave some less fortunate folks in quite a bind. Yes, communities would ban together to provide assistance to those in need, but many would fall through the cracks, or require a level of care unable to be provided at a church soup line.

A society with a heavy government hand has one major problem: it requires said government to allocate resources and run enterprises efficiently, neither of which has been demonstrated on a consistent basis in the United States. The problem, beyond incompetency and the reality that central planners cannot possibly take in all information from the economy to make good decisions, is that government cannot fail. It pulls from a slush fund known as tax revenue, government bonds and a printing press. When free enterprise is ran poorly, it goes bankrupt, and the organization’s debt is liquidated and assets freed to go into other productive areas of the economy. When government programs are ran poorly, they go bankrupt, but never go away. The Social Security and Medicare programs noted above, is nothing more than a Ponzi scheme, and the vast majority of Americans will not see a dime of it, after paying into the system for a working life.

As much as I want to see the elderly taken care of, I know that twenty cents out of every dollar paid to Medicare goes to fraud. (2) I also know that I want to take care of myself when I reach my golden years. Every dollar the government takes from me, is another dollar I can’t save and invest to pay for myself. And life expectancies only continue to grow; how tough will it be to pay for cost of living in inflation nation if I live to be 100 years old?

Households limiting their tax burden is bad if you’re into serious income redistribution, beyond what is already a progressive system, with the government actively seizing control of some of the means of production. Limiting tax burdens is good if you’re into economic freedom and self-reliance. And lastly, limiting tax burdens is inconsequential if you’re a hardcore freedom addict. The most moral thing you can do for a pure libertarian is allow everyone to be free.

The debt is ballooning and it is clear that more tax revenue will have to be generated. To manage the debt over the next two decades, a broader tax base will be formed. As long as the government keeps spending, they must tax. It will be a combination of inflation, an invisible tax, and formal taxes, to cover the tab. And realistically, it will only cover a portion, particularly as health care reform increases entitlements, carbon taxes are enacted, national defense budgets spike, bailouts of private industry bubble up and payments to special interests continue.

Be alert of the tax base debate now, before it really starts to rage. The finger will be pointed at households who do not pay federal income tax; this includes most households with income of $30,000 and less, as well as half of households making between $30,000 and $40,000; it’s not just some of the “rich” households pulling in $75,000 or more with their fancy tax accountant, rental properties and 401(k)’s. (2) Shout from the tree tops and ask the government to stop spending, vote for someone who promises not to run deficits (don’t they all say that, though?), or watch people across all income levels be taxed more. It may not happen this year, or next, or even in the Obama administration. But eventually, politicians will have to manage the debt with something other than new debt and printed money.
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(1) 47% will pay no federal income tax – CNNmoney.com, retrieved October 4, 2009, http://money.cnn.com/2009/09/30/pf/taxes/who_pays_taxes/index.htm?postversion=2009100314

(2) Making the World Safe for Medicaid Fraud – WSJ.com, retrieved October 4, 2009, http://online.wsj.com/article/SB10001424052748704471504574449192073386128.html

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