Who really benefits from the current tax code? The top 1% of taxpayers end up paying almost as much in federal income tax (and some years even more) as the bottom 95% combined. Almost 50 percent of all U.S. households (69 million) are projected to have owed no federal income taxes for 2010. The vast majority of these folks are considered "low income." There are also a handful of millionaire that owed virtually nothing in taxes because of their big investment losses from the 2008 financial crisis. These same millionaires tend to be retired or self-employed. High-income households may also reduce their federal tax liability by making huge charitable donations.
During times of economic trouble, some say the rich should pay more tax. But there simply are not enough rich people to foot the bill even with a tax increase.
So why are the rich such popular targets? Well, BP (LINK) could not fix the catastrophic gusher it called a “leak,” Martha Stewart couldn't quite understand the insider trading laws, Enron executives didn't understand the concept of "fiduciary duty" and Barry Bonds (LINK) apparently struggles with examinations under oath. Since President Obama is struggling to fix the economy, the growing answer seems to be "why not?" The simple answer is that a few bad apples does not necessarily spoil the entire bunch. If the top 1% pay 95% of the taxes, is it really fair that the rest of us ask them to pull more of the weight? Furthermore, what if they finally say no thank you?
Update 5-11-11: We can explain our tax system by analogizing to 10 men going out for dinner. The bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh $7.
The eighth $12.
The ninth $18.
The tenth man (the richest) would pay $59.
Let's further suppose that the ten men eat dinner in the restaurant every day and seemed quite happy with the arrangement. One day, when the owner says,"Since you are all such good customers," he said, "I'm going to reduce the cost of your daily meal by $20."
So, now dinner for the ten only cost $80. The group still wanted to pay their bill the way we pay our taxes. So, the first four men were unaffected. They would still eat for free. But what about the other six? How could they divvy up the $20 windfall so that everyone would get his 'fair share'? $20 divided by six is $3.33. But if they subtracted that from every body's share, then the fifth man and the sixth man would each end up being 'PAID' to eat their meal.
So, the restaurant owner suggested to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33% savings).
The seventh now paid $5 instead of $7 (28% savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before. And the first four continued to eat for free. But the sixth man said, "I only got a dollar out of the $20 and the tenth man got $10!"
"Yeah, that's right. And I only saved a dollar, too. It's unfair that he got ten times more than me!" exclaimed the fifth man.
"Right, why should the tenth man get $10 back when I got only $2? The wealthy get all the breaks!" shouted the seventh man.
"We didn't get anything at all. The system exploits the poor!" said the first four men. The nine men surrounded the tenth and beat him up. So the next night the tenth man didn't show up for dinner. When it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!Under our tax system, people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much and they just may not show up at the table anymore. (There are lots of good restaurants in over seas.)