The debates on a comprehensive tax reform have taken full gear as the government faces one of the largest tax deficits ever seen in American history. The bipartisan team set by the president that is seeking to get an all-inclusive solution to this deficit is hard pressed for answers as the deadline for a solution draws neigh. However, irrespective of the solution that is arrived at within these talks, one thing has come out clear – the U.S. is in need of comprehensive tax reforms that will address long-term government funding while addressing injustices and loopholes available with the current tax code.
One of the areas being reviewed for reform is income taxes. According to an argument fronted by David Walker, who is a former head of Government Accountability Office (GAO), about 50% of American citizens do not pay income taxes, which may be a reason for the growing government deficit. However, looking at these tax from such a holistic perspective can be misleading. To better understand of these income tax numbers, one needs to have a closer look at the groups of people who do not pay.
Many businesses do not pay income tax because Tax income of the way the tax code is set. Businesses and business people will normally pay payroll, excise duty, corporate, and sales taxes (among other taxes). Therefore, even if they do not pay income tax per se, they do make their rightful contribution to the national treasury.
Low Income Earners
Other groups of people who do not pay taxes on income are some groups of low income earners. Some low income earners earn below the taxable threshold and therefore, their incomes do not qualify for taxation. On the other hand, other low income earners will also not pay income tax because their tax credits and tax deductions will offset the income tax liability that they are due to pay. A taxpayer could claim tax deductions on qualifying medical expenses, qualifying work clothing, donations, retirement contribution deductions, educational related deductions, and other qualifying expense deductions. Or, they could claim tax credits such as the Earned Income Tax Credit, Adoption Credit, Homeowners Credit, energy efficiency credits, and educational credits (among other credits). By claiming these credits and deductions, they could zero off the otherwise payable taxes and therefore, pay no taxes. These tax incentives are important to promote work or to encourage taxpayers to participate in various economic ventures that are overall, beneficial to the country. Furthermore, many of these credits target the low income earners and therefore, work towards equitable taxation.
No Income Earners and Special Groups
Another group of individuals who do not pay taxes are the unemployed. It would be unseemly to expect the unemployed to pay any income taxes as they make no income due to their situation. Other groups of people who do not pay taxes are those who are disabled and have some qualifying tax exemptions.
Another group of people who do not pay income taxes are the elderly. Senior citizens will in most cases, have their Social Security distribution as tax exempt. The cap for taxation of this retirement distribution is usually significantly high and therefore, exempting a majority of senior citizens. There are several arguments against charging income tax on these retirement funds. Taxing Social Security distributions may amount to double taxation, since the beneficiary already paid Social Security taxes while working. Furthermore, many argue that the retired taxpayers should be exempt from paying income taxes, as they have paid taxes throughout their working life and they need the extra money to pay for their health costs among other expenses that they are in need of.