Posts Tagged taxes

30% Pay No Taxes, Oh No!

I’ve often heard the complaint that more than 30% of lower income earners pay no taxes. This is often used to express concern that eventually enough people will not be paying taxes that politicians will have carte blanche to raise taxes as much as they want on the other people.

I decided to do a little more research into this and I found the raw IRS data from 2005 and built the following chart that shows the number of tax returns at each range of income, along with the number of tax returns with no tax due. Notably, 61% of those paying no tax have incomes of less than $15,000. What I found surprising is that while the percentage of no tax returns decrease as the income level rises, it doesn’t drop below 1% until the income group over $100,000.

My guess is that a large part of these no tax returns above $5,000 are attributable to medical expense deductions or similar. While I guess I am still concerned about the relatively high percentage of returns where no tax is due (32.58% for this data, and that completely excludes those where no return was filed at all), the fact that they are spread over a wider income range than I had expected make it much less significant an issue in my opinion.

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Our Stealth Tax

There’s been a lot of talk during the election about tax policy. I covered this before, but now I wanted to highlight another tax — one that is probably the most regressive tax we have. This tax is inflation. It is highly regressive for a couple of reasons. First, the higher your income the more able you are to adjust your spending habits to lessen the impact of inflation. Second, there is a general relationship between the cost of an item and its profit margin, and the larger the profit margin the less sensitive to inflation pressure the item is likely to be.

As most people are aware, inflation has been accelerating for the last several years (see the included graph). While the current economic crisis is very likely to stave off more inflation in the short term, most of the governments recent actions are highly inflationary. When the economy starts to recover, it is quite likely that we will experience a prolonged period of higher inflation than we have seem in over a decade.

One of the key points that I think should be understood is that when the government spends more than it collects, it invariably contributes to inflation. Keeping tax receipts lower than spending is just an illusion to make it seem like we are paying lower taxes when we are really just paying higher (regressive) stealth taxes to make up the difference.

The moral of the story is that there’s no such thing as a free lunch. All government spending is paid for by the people. Debt spending has the increased cost of the interest that the government pays (which is a whole other topic — the government has no need to pay interest as it could simply add money to the economy directly via spending).

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Comparing Obama and McCain Tax Plans: A Different View

It seems that there has been quite a bit of publicity for the tax proposal comparison graph done by the Washington Post based on the analysis done by Tax Policy Center.

I thought it would be useful to see the data with a bit more context. It’s the same data, though the numbers might vary slightly because this graph is based on the September 12 update to the Tax Policy Center analysis, but presented as actual rates rather than changes in rates.

I didn’t include the income break-downs, but they are the same as for the other versions of this chart.

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