America’s Great Divide: Tax Payers vs. Non-Payers

"So I've been a little amused over the last couple of days where people have been having these rallies about taxes. You would think they would be saying thank you."—President Barack Obama, April 15, 2010

Mr. President, with all due respect, you don’t get it. The Tax Day Tea Parties weren’t about taxes alone, they were also about spending.

And the tax cuts the President often talks about are, by and large, one-time checks that will do nothing to protect the taxpayer from future tax hikes. And he is concealing many tax increases in his budget right now.

One of the cornerstones of the Tea Party movement is that our tax system is broken and patently unfair. About as many people are exempted from paying federal income taxes as pay them. We’ve created a system where the Americans can’t sit across the kitchen table and talk about the problems with their tax burden because no one’s taxes are figured the same way. I believe that is by design. Our lawmakers like the chaos it creates.

I support the Fair Tax, but one thing is sure, our system is “so 20th Century” by taxing production and not consumption. In 2001, President Bush told us to live our lives after 9/11. He wanted Americans to get back into the economy and spend. We are an economy based on consumption and we ought to have a tax code reflecting that.

Ironically, the Bush tax cuts made the divide between the income-tax payers and the non payers wider by exempting from federal income taxes a large number of low-income earners. What happens to a society where as many people pay into the system as take out of it? It becomes divided, permanently.

We have a system where 50% of the people pay payroll taxes and very little income tax and the other 50% pay payroll taxes and most of the income tax. It’s insidious because lower-income people think they are paying their payroll taxes to fund Medicare and Social Security. In theory that’s correct, but we haven’t used Medicare and Social Security taxes solely for that purpose since LBJ was President. How bad it the divide? Cluster Stock’s “Chart of the Day” from Tax Day shows this divide in bold colors.

“Another Tax Day is another reminder for millions of working Americans how much of their hard-earned money flows to Washington each year. What’s more is the Democrats in charge are only getting started,” Rep. Lynn Westmoreland (R-Ga.) said. “In just over one year, President Barack Obama and the Democratic majority in Congress have enacted 14 tax hikes, amounting to more than $670 billion in gross tax increases. Simply put, that’s more than $2,100 for every man, woman and child living in the United States.”

Westmoreland knows we can’t afford it. You know we can’t afford it. If we continue down this road, we can’t come back from it. If you have a large number of people thinking they don’t pay taxes, they are going to vote to keep these policies in place. The truth is that the folks who think they don’t pay (federal income) taxes are really carrying the heaviest burden in relation to their income. They pay most of their tax burden in less progressive payroll taxes.

Rep. Paul Broun (R.-Ga.) takes it further, “As Americans file their income taxes; many are forced to face a painful reality. The average income has decreased 3.2% and business owners continue to reduce their payroll because they can’t afford to pay their employees and the federal government. There is no doubt that our tax code is unfair, inefficient, and lacks provisions to promote real, economic growth.”

Congress continues to abuse their power and continues to seize any new opportunity to tax and spend. Take a look at the states who are weathering this recession the best. States like Texas enjoy lower taxes and that creates more incentives and opportunities for economic growth. States like California, Michigan, and New York, which have large state governments and high taxes, are currently facing big unemployment numbers and even bigger debts.

We’ve got to have a flatter, fairer tax code that is based on consumption. Repeal the 16th and 17th Amendment to the Constitution which would abolish the income tax and return the selection of senators to the states. Sunset the current code and pass the Fair Tax.

While that seems impossible now, did anyone think 16 months into an Obama presidency that Rep. Ron Paul (R.-Tex.) would be polling dead even with President Obama in a 2012 match up? Anything can happen in this environment.

This is a time of great change. Change on the level we saw in the early 1900s and the 1960s. What kind of change will it be? We cannot sustain a system where the people cannot discuss and debate their tax burden with their government. November will be the watershed for this movement. If we shake things up enough in November, we can right the Titanic of tax policy and spending and get Americans back at the kitchen table debating tax policy.

Let me end where I started with the President and his “musings” about the Tea Party movement. It’s not just about taxes, it’s the whole package. Spending needs to be cut by one third and the tax code needs to be replaced. If we don’t balance this burden, the country will remain divided and we’ll have turmoil for generations to come. Stop being “amused” Mr. President and listen to your constituents, you might learn something.

Your logic eludes me. You seem to be all over the map with your questions and comments.

Everyone now pays and is reimbursed to a certain level. It even brings the wealthy into paying, since they didn’t pay income tax under the current system (capital gains remember and at a lower rate that the workers).

Additionally the wealthy don not pay payroll taxes since they do not have a ‘wage’ subject to these taxes (living off their investments).

>>>Your logic eludes me. You seem to be all over the map with your questions and comments.

Let me review:
1. The author cited an issue with the large number of households who pay no income tax or even receive back more than they pay in.
2. The author proposed a consumption tax to make it so that more households participate in paying taxes.
3. I noted that since 47% of households currently pay no net income tax, then a consumption tax would likely result in some of those households, paying higher taxes, otherwise the author's reason for going to a consumption tax does not resolve the problem cited in point 1.
4. You presented an example of the effects of consumption tax on a middle class family, and I pointed out that the example would result in an additional family getting a net gain from the government that had been a net payor before.
5. I further noted that this would only enhance the problems cited by the author in point 1.
6. You noted that wealthy housholds not previously paying taxes will be added to the tax rolls.
7. So in summary, you are saying that a consumption tax will move more wealthy households onto the tax rolls than it removes middle class households.
Is that correct?

Definitely. Since some (wealthy) do not pay tax, in the same way the rest of the country does, they will now be on the same level. Big plus is that social security and medicare can now be funded.

I guess I proved your point but I wonder why I needed to prove it for you. Why couldn’t you have done the same as I did.

Remember the FairTax is 23%. Current the the Income Tax varies (on a graduated stair stepping scale with the various brackets - http://www.moneychimp.com/features/tax_brackets.htm). Then add the Social Security Tax of 12.4% (6.2% paid by employee and 6.2% matching by employer). On top of that add 2.9% (1.45% paid by employee and 1.45% matching by employer). That is a grand total of 15.3% in payroll tax.

23% minus 15.3% is 7.7% left for the general fund. Using today’s method as Social Security and Medicare are expenditures of the General Fund. Something called the unified budget which has been used since Johnson’s time. No Social Security Trust fund, but now there could be.

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