47% of people pay no Federal income taxes. But who are these 47%? Are they all fast food workers who earn minimum wage?
Let’s focus on what matters: legal tax evaders come in every shape and size. Here’s some raw data:
Look at the right column, the percentage of people in any given income bracket that pay no federal income taxes. There are a few interesting things here:
- Decent incomes; zero taxes – In my neck of the woods, you can do just fine on an income of $40,000-$50,000 as a single. You’d be doing far better than the median household in my area. Seeing as real estate is cheap here – the most important variable separating starvation and living it up is real estate- you certainly won’t feel broke. And yet 3/10 people who earned $40-50,000 in 2011 paid no federal income taxes. Nearly one out of every six people (or couples) who earned between $50,000 and $75,000 paid nothing in income taxes.
- Muni bonds mess this up – Municipal bond distributions are not taxed as income. As baby boomers retire, they will plow wealth into municipal bonds and other fixed-income products. Naturally, the percentage of people paying taxes will decline even in moderate income brackets. It’s quite possible to make $1 million per year in municipal bonds and pay $0 in Federal income taxes. Of course, you will also earn a below-market pre-tax return on your municipal bond investments, since yields are bid down due to the inherent tax savings.
- So do post-tax savings vehicles – Roth IRA and 401k distributions are not taxed as income. Therefore, changing demographics makes it certain that more people will pay zero dollars in taxes on any level of income.
- FICA matters – FICA taxes are horrendously regressive, attacking those who earn less than $106,800. All too often this tax is forgotten. If we’re being honest with ourselves, it probably should be forgotten – people get way more out of Social Security and Medicare than they ever pay in. Still, we cannot forget that everyone at any income level pays FICA taxes.
- More than 52 million people/households make less than $20,000 in AGI – How is this possible? I know plenty of full time college students who make more than $20,000 in adjusted gross income. Income inequality is worse than I thought.