The Big Tax Elephant In The Middle Of The Room

There is a business meeting saying that describes the “elephant in the middle of the room.” The elephant represents an unpleasant task or situation, and even though the elephant is present and taking up a lot of space and oxygen at the meeting, no one wants to talk about the elephant or even acknowledge it exists. Therefore, the elephant gets ignored but the elephant (or the unpleasant task/situation) never goes away or stops smelling. That is the topic of today’s post, the big tax elephants in the room that no one wants to talk about.

 A recent New York Times article by Bruce Bartlett, that was summarized in the July 15, 2011 issue of The Week magazine, lamented that some high earning Americans paid no Federal income taxes last year, “Millionaires who pay no taxes.” According to Mr. Bartlett, 78,000 U.S. households with incomes between $211,000 and $533,000 paid no income taxes this past year, 24,000 tax filers with incomes from $533,000 to $2.2 million paid no Federal income taxes, and 3,000 tax filers with incomes over $2.2 million paid no Federal income taxes. He laments the fact that the tax code has so many credits, tax breaks, and loopholes for the wealthy that some high earners can legally get away without paying in Federal income taxes.

Does not seem fair, does it? High earning Americans not paying their “fair share” of taxes. But let’s see how much this could actually be if all these special treatments were removed:

– Let’s start with the first group of people, the 78,000 households. Let’s assume that their 2010 income was the average of the two ranges that Mr. Bartlett provides or $372,000. Let’s also assume that they had absolutely no deductions and that the $372,000 is their adjusted taxable income, a figure that is probably high.

Under the current tax code rates, each of these tax filers should have paid $107, 657 in Federal income tax if there was no credits, deductions, etc. available to them. Thus, in total they would have paid about $8.4 billion in Federal income taxes. This $8.4 billion is.2% of the Federal government’s 2011 likely spending level, hardly enough to balance the outlandish political class spending.

– Let’s move on to Mr., Bartlett’s second group and do the same calculations and estimation of an average income per tax filer in this group. Their tax bill, if there were no deductions, credits, tax breaks, etc. would be $455,489 per filer or about $11 billion in total. $11 billion comes to.3% of the Federal government’s 2011 likely spending level, hardly enough to balance the outlandish political class spending.

– Let’s now do Mr. Bartlett’s final group, those earning over $2.2 million a year but who paid no income tax. Let’s start with an assumption that the average of those earning over $2.2 million was $3 million. Going through the standard tax calculations and assuming that these people also had no special tax treatment, each one of them should have paid $1,027,314 in Federal income taxes. In total, their tax bill would have come out to about $3.1 billion. $3.1 comes out to.08% of the Federal government’s 2011 likely spending level, hardly enough to balance the outlandish political class spending.

If you assume that those earning over $2.2 million had an average income level of $4 million, not $3 million, then they would have paid about $4.1 billion or about.1% of the Federal government’s 2011 likely spending level, hardly enough to balance the outlandish political class spending. If he average was $5 million, the percentage of 2011 spending would have been.14%, still pretty small.

Should high earners get away without paying taxes? In most cases probably not. They enjoy all the benefits of what the government provides, e.g. national defense, infrastructure, government services, etc., they should pay their fair share. However, the point to take away from Mr.Barlett’s numbers is that even if all of these non-payers started paying according to the current tax rates, their total contribution would be about $37 billion or less than 1% of the 2011 likely Federal government spending, hardly enough to balance the budget or offset the out-of-control political class spending.

Now, let’s finally get around to the elephants. If you buy the assumption that these high earners should not get away with paying no taxes since they enjoy all of the benefits of government without paying anything for it, what should we do with the other 45% of all American workers who also paid no Federal income taxes in 2010 since they also get a whole slew of tax breaks, credits, etc.? What would happen if they also started paying their “fair share:” 

  • There are currently 112.6 million households in the country.

  • Let’s roughly assume that 45% of these households paid no Federal income taxes in 2010 as many independent sources have estimated.

  • That means that 50.7 million households paid no Federal income taxes in 2010.

  • The average household income in the United States is estimated to be $50,221.

  • Under the current IRS tax tables, an average household income should be paying $8,680.50 in Federal income taxes.

If each of these non-payer households were actually accountable to the country and paid their fair share of taxes, the total would come out to about $440 billion a year. $440 billion is over 11% of the 2011 likely spending of the Federal government. This 11% is about 11 times more than what the high earners avoid paying as identified in Mr. Bartlett’s article. 

If it is not fair for the high earners to get the benefit of government without paying for it, then it is also unfair for you next door neighbor not to pay any taxes to get the same government benefits you get even though you pay Federal income taxes. No one in the political class wants to talk about these three elephants in the room:  

  1. Elephant #1 -Taxing the rich, who paid no Federal income taxes last year, will come nowhere close to making a substantial dent in the out-of-control spending of the political class.

  2. Elephant # 2 -If politicians are serious about reducing the annual spending deficit of the political class, they should eliminate tax breaks for ALL Americans, even those that are not making millions, since that would generate eleven times more revenue than just closing Mr. Bartlett’s high earner tax loopholes.

  3. Elephant #3 – Even if the political class killed the second elephant and raised taxes for EVERY American who does not currently pay taxes, it would not come close to closing the spending gap of the political class. That is how out-of-control and dangerous their spending is.

The problem with having one elephant in the room, never mind three, is that they eventually get messy and smelly, the exact same words one could use to describe the horrendous and smelly financial hole that the political class has plopped the nation into the middle of.