Who really pays taxes?

For example, in 2010 the federal government collected $2.2 trillion dollars in total revenues: 40% came from payroll taxes, FICA payroll deductions for Social Security and Medicare contributions. Employee and employer both pay 12.4% on compensation up to $106,800 per year: 42 percent came from individual income tax payers; 46 percent of American households paid no personal income taxes in 2011.

Individuals in the highest income brackets (5 percent of taxpayers) paid 40 percent of all income taxes collected in 2011. Nine percent of the total revenues came from corporate income taxes, and three percent came from excise and other non-income taxes paid by businesses.

Why do 46 percent of American households pay no federal income taxes? 28 percent of these households did pay payroll taxes. Taxpayers earning less than $100,000 did pay 21.6 percent of income in state and local taxes. Those with incomes less than $33,000 paid no federal income taxes in 2011. 10 percent of U.S. households, mostly elderly, pay no income or payroll taxes. These citizens live primarily in the South and Far West.

Those paying no taxes are among the lowest earners and with legal deductions do not qualify for federal income taxes, and/or, they are retired or disabled and have no incomes qualifying for federal income tax. You can’t get blood out of a turnip.

Why shouldn’t the rich people pay more, their ‘fair share’? Some claim they already pay too big a share. Those with taxable income over $450,000 paid 29 percent of their income in taxes in 2011, 15.8 percent of income to the federal government, the other nearly half in payroll, state and local taxes. Compare this with those earning $33,000 or less who paid no federal taxes in 2011.

It seems to be a logical argument that political candidates offering to reduce or eliminate federal income taxes have no real incentive message for those who currently pay no federal income taxes and pay slightly over 10 percent in state and local (non-payroll) taxes. Still, when added to payroll deductions for Social Security and Medicare their total tax burden reaches 25 percent to 30 percent of household income. That is a big bite out of a small pie and can really hurt families with children in these economic down times.

One answer is to have federal, state and local governments subsidize the expenses incurred by these lower income families. For example, day care centers, subsidies for school lunches and programs, and any program that provides needed services at no or small cost. This of course, raises the tax burden for those more fortunate in their income earning levels.

There are some ways that deficits could be reduced and net personal incomes increased without singling out any income level group (the 1%). Social Security and Medicare are definitely heading for bankruptcy. So what about increasing the amount of earned income for the personally paid FICA payments? That would ‘sock the rich’ without destroying the equitable treatment provisions of the Federal Income Tax system.

European nations have used the value added tax, applicable evenly to all citizens who spend money on designated items or services. While their social welfare programs are deeply in the red in most countries they have avoided in most cases to keep income taxes on both individuals from rising. Eurozone countries have corporate tax rates lower than ours but European taxpayers, in general are less hostile to corporations than some elements here in the United States.

These varying arguments do not offer many solutions to the much bigger problems facing all of us. No reasonable person can deny the dangers we face or the need for a total restructuring of our personal and corporate income laws and regulations.

Any efforts that would relieve the uncertainty that permeates both businesses and individual households could bring about a much needed enthusiasm for growth and new desperately needed jobs; blue and white collar alike. We do need a national debate on how best to care for the less fortunate. 

We also need a new, open and objective dialogue on where the business enterprise, the profitable business enterprise, fits into the fabric of our nation’s culture.

James is executive director of the Center for Global Governance, Reporting and Regulation at Pace University’s Lubin School of Business in New York City. James is also program director of Pace University’s new Certified Compliance and Regulatory Professional certificate program. He began his management consulting career with Hewitt Associates in Chicago and McKinsey & Co. in New York City.

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