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Since Tax Day is tomorrow, it seems like a good time to bust a few myths about taxes. Here are five of the biggest misperceptions about the federal revenue code.
Most of the info comes from two sources: the Tax Policy Center’s Tax Topics (a trove of great information about who pays what) and the IRS2014 Data Book.
The rich don’t pay taxes. You know the trope: The One Percenters all have fancy lawyers and accountants who ferret out loopholes unavailable to the rest of us. While some no doubt do, the tax system is really quite progressive. On average, Americans paid 21.3 percent of their income in federal taxes in 2013 (including federal income, estate, and payroll taxes as well as the corporate income tax). But the highest income 1 percent of households (those making $506,000 or more) paid 35.7 percent. The top 0.1 percent (who made $2.6 million or more) paid 38.2 percent. The rich pay plenty.
The poor don’t pay taxes. Wrong again. The flip side of myth #1 is equally untrue. While about 43 percent of households paid no income tax in 2013, about two-thirds of them paid payroll tax. Those who made less than $20,000 paid about 8 percent of their income in Social Security and Medicare taxes, while those who made $20,000-$40,000 paid about 9 percent. There were exceptions, of course, including some very low-income elderly who did pay no federal taxes at all. But many of them paid state sales taxes. So almost no one pays no tax.
Everybody benefits from tax breaks but me. In truth, almost everybody gets subsidies from the tax code. If you are a low-income working family, you benefit from refundable credits like the Earned Income Tax Credit and the Child Tax Credit. If you are a high-income taxpayer, you benefit from the deductions for charitable giving, the exclusion of municipal bond income, and the preferential tax treatment of capital gains and dividends. If you are middle-income, you benefit from deductions for mortgage interest, state and local tax payments, and exclusions for retirement and college savings and employer-sponsored health insurance. In total, these subsidies reduce federal revenue by more than $1.2 trillion-a-year.
The estate tax forces millions of families to sell their businesses. With the House about to vote to repeal the dreaded death tax, it is worth looking at the numbers. The law currently excludes from tax estates valued at $5.4 million ($10.8 million for a couple). In 2013, 2,596,993 people died in the U.S. Fewer than 4,000 estates paid the federal tax. How many of those decedents owned family farms or small businesses? We figure 20. Oh, and whether estates owed tax or not everyone gets to “step-up” the basis of assets they inherit. Thus, when the heirs eventually sell those assets, they will pay no tax on capital gains that Aunt Sally accrued but never realized during her lifetime.
Tax filing season is terrible. Sure, collecting all those documents and filling out those forms is a pain in the neck. But only about one-third of taxpayers itemize deductions, which creates all that paperwork. About 40 percent of filers used either the simpler Form 1040A or the even-easier 1040- EZ which is pretty close to the return-on-a-postcard that some reformers pine for.
And then there is the bottom line. Last year, the IRS paid $374 billion in refunds to 119 million taxpayers. Without Tax Day, how could they have gotten all their money back?
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.