Did You Know That 1/3 of Tax Filers Pay No Income Tax, But Still Get Substantial Refunds?
As the 2016 run for the White House heats up, voters should pay careful attention to the tax policies of the various candidates--both Democratic and Republican. The debates are drawing close and many of the candidates are airing their tax policies with a large number talking about rewriting the tax code or proposing a flat tax. Both of these ideas have come up countless times in the past and the result has always been a more complicated tax code.
American families have adjusted their finances and lifestyles around the individual tax structure.
What kind of havoc would a flat tax create?
Would those that count on home interest and tax deduction no longer be able to afford their homes?
Would that end the dream of home ownership for Americans?
Would that trigger another decline in home prices and trigger the resumptions of defaults by borrowers and the accompanying chaos for lenders?
Most politicians espouse a flat tax of 14% to 15%. That would make those making $200,000 or more happy campers since their current average tax rates are generally higher than 20%.
Did you know that in 2010, 33.9% of all taxpayers did not pay any income tax?
You heard me correctly, over 1/3 of American tax return filers don't pay one dime of income tax. If fact, not only do they not pay any tax, they actually receive refunds when they file their returns. How can that be you ask? Well, our tax system long ago turned into a something akin to a welfare system, where about 1/3 of those filing tax returns receive refunds far in excess of any withholding for the year. The IRS even refers to this as a negative tax rate. Look at the net tax rates in the table below for those with incomes under $30,000.
The negative tax brackets are created by a series of refundable tax credits that include education, earned income tax, and child tax credit, just to name a few that applies to lower income taxpayers. Given the right circumstances, some of these individuals--we can't call them taxpayers--can accumulate refunds as much $9,742 in 2015 just from the credits mentioned without paying any income tax.
How would a flat tax work out for these folks? They would be in for substantial tax increase (and are the least able to afford a tax increase), along with the loss of their credits and subsidies that a flat tax would bring.
(1) The data used in this table is taken from the IRS Statistics of income for 2010, the latest compilation available from the government. The data is abbreviated and combines several income categories included in the IRS statistics into one category of $500,000 or more.
(2) Represent the number of returns filed (in the thousands).
(3) Represents the tax after application of refundable tax credits (in millions).
(4) Represents the average tax percentage rate (tax bracket) for that income category. Where shown in brackets <>, the tax rate and credits result in the taxpayer not paying any tax and instead receiving a refund.
(5) Taxable income is negative therefore the tax rate cannot be determined.
Taxes have been political rhetoric for far too long and it is time for clearer heads to prevail. Tax-paying voters need to carefully analyze the tax polices of all the candidates and not cast uneducated votes.