Taxation & Estate Planning

47% American Households Pay No Taxes - Something is Wrong with this Picture

By Deirdre Wheatley-Liss

 A lead story in my Yahoo news today is "Nearly half of US households escape fed income tax".  "This can't be right" I am thinking as I open the link, but boy was I wrong.

According to the Tax Policy Center "About 47 percent [of American Households] will pay no federal income taxes at all for 2009. Either their incomes were too low, or they qualified for enough credits, deductions and exemptions to eliminate their liability."

And if a person has enough tax credits so that they equal more than their tax liability, they get a check from the government for the difference.

Now, I am a proponent of a progressive tax system - those who earn less have less ability to pay because more of  their dollars go to necessities, but this is ridiculous.  (A progressive tax system is one where the more you earn the more you pay).  However, half of American households make no contribution whatsoever to the operation of our country?!?  A progressive tax system doesn't mean un-aggressive - it is supposed to recognize a fair share based on total earnings.  Why are 53% of American households paying 100% of personal income tax? Something is clearly wrong with this picture.

And a tax refund for tax credits being greater than taxable income?  That just doesn't make sense. Under a progressive tax system, if you don't earn as much you pay less or no taxes.  That should the sole benefit - you pay no taxes and don't have to share anything with the government.  To issue a refund is nonsensical - just the administrative cost of calculating and issuing refunds for money you didn't earn really doesn't make sense.  Tax credits should be available only to reduce tax to zero, and if there is excess, it can be carried forward to be used against other income, or the benefit lost.

Note everybody is every going to agree on the best tax policy, but we need the throw in some common sense.

Full post as published by New Jersey Estate & Elder Planning Blog on April 07, 2010 (boomark / email).