As anyone who pays attention knows, for the past good many years now, the top 5% of tax filers have been paying more than the other 95% combined. To make things worse, the latest data show a record number of people with no tax obligation. We also have the highest-earning nontaxpayers ever. With more riding the wagon and fewer pulling, it should soon break down.
A record number of the 142 million tax returns filed in 2008 resulted in no taxes owed, according to the Tax Foundation's analysis of the latest IRS data. About 51.6 million returns, or 36.3%, were filed by those whose deductions, exemptions and tax credits wiped out any federal income-tax obligation.
These aren't people who have overpaid their taxes or had so much withheld from their paychecks that they'll get refunds. Those people owe taxes and merely provided the government with a zero interest loan until accounts are settled. These are people who pay no taxes at all.
There's been a 59% increase in the number of nonpayers since 2000, growing from 32.6 million in 2000 to 51.6 million in 2008. In the same period, the total tax filers grew by only 10%.
Not only are fewer people paying any taxes, but also the income levels for these nonpayers have steadily risen. A family of four earning more than $50,000 can have no income tax liability after taking the standard deduction and the child tax credit.
According to the Tax Foundation, "The major elements of the Economic Stimulus Act of 2008 boosted the maximum income for nonpayers to more than $56,700" — the highest ever.
The government has continually expanded the value of benefits such as the earned income tax credit to the point where you get a check from Uncle Sam even if you paid no taxes during the year. That's what made it so laughable when the administration claimed it was cutting taxes for most Americans when nearly 40% pay no taxes to start with. These are in essence welfare checks.
The tax code was originally intended to raise sufficient revenues to pay for the essential functions of government. It has morphed into a tool for social engineering, to incentivize or even punish certain behavior, and even to redistribute wealth. That's why we call it a "progressive" tax code.
"Nonpaying status used to be a sure sign of poverty," says Tax Foundation President Scott Hodge. "But thanks to increased use of the tax code to deliver social benefits, incentivize behaviors and funnel money to targeted groups, middle-class families have now been pulled into the growing pool of nonpayers. We're now in a situation where a record number of tax filers are completely disconnected from the cost of government."
This is a dangerous trend. The increase in the number of people who pay no taxes mirrors the increase in those receiving benefits from the federal government. This creates a bias toward more spending and against keeping tax rates low, since that burden is increasingly being borne by those at the high end of the income scale.
Unfortunately, these are the entrepreneurs, risk takers and small- business men who create most of the jobs.
When you have more people riding the wagon than pulling it, the wagon tends to break down. No amount of stimulus money extracted from those who do pay taxes will fix the wagon and get it moving again. Balance needs to be restored.