Posts Tagged ‘47%’

How much can a family with 2 kids earn and still pay zero Federal income taxes?

September 25, 2012

The  answer is about $45,000

Reminder: Median household income is just a tad over $50,000

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Here’s an analytical walk-through from the non-partisan Tax Foundation

Start with the answer: assume  a family of four making $45,000 in adjusted gross income.

Subtract a standard deduction of $11,600 and personal exemptions of $14,800 (four times $3,700) and the family’s taxable income is reduced to $18,600.

The family is taxed at 10 percent on their first $17,000 of income and at 15 percent for their remaining $1,600 of income, giving them a total tax liability of $1,940.

But, they allowed to deduct two tax credits of $1,000 for each of their two children.

And, they’re allowed to deduct an additional $214 due to the Earned Income Tax Credit, which is a credit designed to financially assist low to
moderate income working families.

Subtracting these tax credits from the family’s tax liability brings their $1,940 liability below zero.

However, since the child credits and Earned Income Tax Credit are so-called refundable tax credits, the family ends up receiving a check for $274 from the IRS for the remaining value of their tax credits.

For families who are eligible for other credits such as the child care credit, education credit, or the tax credit for purchasing a hybrid vehicle….. AGI can go higher than $45,000 with no tax liability.

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Ironic Twist

The same George Bush that the left demonizes is the President who signed the 10% marginal tax bracket, boosted the child credits, and introduced the refunable tax credits.

The irony: liberals should be praising him and conservatives should be dissing him.

If it weren’t for the evil Bush tax cuts, we wouldn’t be at the now famous 47% level of folks not paying Federal income taxes.

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Tomorrow: Who pays taxes and who gets the benefits?

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Flashback: About those 47% who don’t pay income taxes …

September 24, 2012

Romney sure caused a stir with his remark that 47% don’t pay Federal income taxes.

Well, the Homa Files was on this case over 4 years ago !

This analysis was originally posted on July 31, 2008 during the run-up to the election. It proves the point (ahead of its time) that less than half of all voters pay any income taxes now that “Make Work Pay” has been enacted (as part of the stimulus program). Think about it: the majority gets to demand more government programs that they don’t pay a cent towards. I think that’s scary. Very scary..

It’s the HFs post that continues to get the most hits, and the topic is ‘hot’ this week because of Mitt’s smokin’ gun video.

So, here’s a flashback …complete with numbers and sources.

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Despite the drumbeat of warnings from various sources, the prospects that a minority of voting age Americans will be paying Federal income taxes under the Obama tax plan doesn’t seem to arouse much visible public anxiety.

Why?

First, for those in the emerging majority that won’t pay any income taxes – or may even be getting government checks for tax credits due – the deal is almost too good to be true. To them, Obama’s plan must make perfect sense. So, why rock the boat?

Second, some people argue that low-earning people who don’t pay income taxes shoulder a regressive payroll tax burden to cover Medicare and Social Security. Yeah, but these programs – which are most akin to insurance or forced savings plans — offer specific individual benefits that are directly linked to each wage earner’s contributions.and the benefits phase down quickly as qualifying income increases. That is, they’re not as regressive as many people argue.

Third, most of the energetic criticism of Obama’s plan has centered on its redistribution intent — taking over $130 billion of “excess” income from undeserving rich people, and giving it directly to those who earn less and need it more.

Fourth, most folks just don’t believe that the numbers will really shift enough to create a voting majority of citizens who don’t pay income taxes. They’re wrong. Very wrong.

Here are the numbers … and why they should bother you.

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Today, 41% of voting age adults don’t pay Federal income taxes

Based on the most recent IRS data, slightly more than 200 million out of 225 million voting age Americans filed tax returns. That means that 25 million adults – presumably low income ones – didn’t file returns and, of course, didn’t pay any income taxes. See notes [1] to [4] below

Of the 200 million voting age filers, approximately 68 million (33% of total filers) owed zero income taxes or qualified for refundable tax credits (i.e. paid negative income taxes). [5]

Add those 68 million to the 25 million non-filers, and non-payers already total 93 million – 41% of voting age adults.

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Obama’s Estimates – Make that 49%
Not Paying Federal Income Taxes

Obama says (on his web site) that he will give tax credits up of $1,000 per family ($500 per individual) that will “completely eliminate income taxes for 10 million Americans”. And, he says that he will “eliminate income taxes for 7 million seniors making less than $50,000 per year.” [6]

Taking Obama’s estimates at face value, the incremental 17 million that he intends to take off the income tax rolls will push the percentage of non-payers close to 49% of voting age Americans — within rounding distance to a majority. [7]

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And, Obama’s estimates are probably low,
so make the number 55% (or higher)

Since Obama’s basic proposal is for tax credits ($500 per person or $1,000 per family) – not simply deductions from Adjusted Gross Income (AGI) — they will have a multiplier impact on the amount of AGI that tax filers can report and still owe no taxes.

For example, a childless married couple that files a joint return can currently report about $17,500 in Adjusted Gross Income (AGI) and owe no income taxes. [8]

Under the Obama Plan, that couple’s zero-tax AGI is bumped up to $27,500 since their new $1,000 tax credit covers the 10% tax liability on an additional $10,000 of AGI. And, married couples filing jointly can keep adding about $10,000 to their zero-tax AGI for each qualifying dependent child that they claim. [9]

click table to make it bigger

click table to make it bigger

Based on the 2006 IRS data, approximately 25 million tax returns were filed that reported AGI less than $27,500 (the post-Obama zero-tax AGI) and required that some income taxes be paid. [10]

Assuming that 45% of those were for couples filing jointly, they represent over 22 million adults. For sure, these 22 million will come off the tax rolls – and they alone will be enough to create a non-taxpayer majority (51% of voting age adults),

click to make table bigger

And, there are more folks being pushed off the tax rolls. About 4.7 million childless individuals earn less than $13,750 (the post-Obama zero-tax AGI for childless individuals), and currently pay some Federal income taxes. This group will shift to non-payer status.

So would several million joint filers who can take advantage of the Child Tax Credit to report more than $27,500 and not pay Federal income taxes.

And, some portion of the 7 million Seniors that Obama says will have their taxes eliminated — that is the Seniors couples earning more than $27,500 (but less than $50,000) — and Senior individuals earning more than $13,750 (but less than $50,000).

So, post-Obama, the percentage of non-taxpayers will easily exceed 55% of voting age adults — a solid majority. It won’t even be close.

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The Bottom Line – Why You Should Worry

An income tax paying minority of voting age adults isn’t just a possibility. Under Obama’s plan, it’s a virtual certainty. Based on the hard numbers, Obama’s plan will create a new majority — a powerful voting block: non-tax payers. UH-OH.

Again, for those in the emerging majority that won’t pay any income taxes – or may even be getting government checks for tax credits due – the deal is almost too good to be true. To them, Obama’s plan must make perfect sense. Count on their perpetual support for the plan.

But for those in the new minority, watch out if the new majority decides that more government services are needed, or that $131 billion in income redistribution isn’t enough to balance the scales.

The Tax Foundation — a nonpartisan tax research group – has repeatedly warned that “While some may applaud the fact that millions of low- and middle-income families pay no income taxes, there is a threat to the fabric of our democracy when so many Americans are not only disconnected from the costs of government but are net consumers of government benefits. The conditions are ripe for social conflict if these voters begin to demand more government benefits because they know others will bear the costs.” http://www.taxfoundation.org/research/show/1111.html

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Sources & Notes

[1] The Census Bureau reported 217.8 million people age 18 and over; as of July 1, 2003.
http://www.census.gov/Press-Release/www/releases/archives/population/001703.html

http://www.census.gov/popest/national/files/NST-EST2007-alldata.csv

[2] The IRS reported 138.4 million personal tax returns filed in 2006.
http://www.irs.gov/pub/irs-soi/06in11si.xls

[3] The IRS reported that in 2006, approximately 45% of filed returns were by married couples filing jointly (i.e. 2 adults per return); 55% for individual filers (including ‘married filing separately’ and ‘head of household’). http://www.irs.gov/pub/irs-soi/06in36tr.xls

[4] Calculation: 138.4 million returns times 1.45 (adults per return) equals 200.7 million adults represented on filed returns

[5] http://www.irs.gov/pub/irs-soi/06in01fg.xls http://ftp.irs.gov/pub/irs-soi/06inplim.pdf

[6] http://www.barackobama.com/issues/economy/#tax-relief

[7] Analytical note: 93 million plus 17 million equals 110 million divided by 225 million equals 49%.

[8] Analytical note: $17,500 less a $10,700 standard deduction, less 2 exemptions at $3,400 each, equals taxable income of zero – so no federal income taxes are due.

[9] Analytical note: $27,500 less a $10,700 standard deduction, less 2 exemptions at $3,400 each, equals taxable income of $10,000, which at a 10% rate is a $1,000 tax liability that gets offset by the $1,000 Obama credit, reducing the tax liability to zero.

[10] http://www.irs.gov/pub/irs-soi/06in11si.xls

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