The April 18 return is now behind us and we look to the next year to generate income and pay taxes. However, looking back at the returns just concluded, the analysis projects that approximately 45% or 70 million U.S. citizens will owe no income taxes for 2010. This is a slight decrease from last year where 47% of Americans owed no debt to the IRS for 2009. This means that about half of Americans pay federal income taxes while the remaining half do not. However, most of these 45% non-taxable households pay state taxes through property and sales taxes and through state income taxes. They can also pay non-federal income taxes through FICA payroll taxes for national Medicare and Social Security programs. Only at the federal income level are they not liable to pay taxes.
How is 45% of Households Included in the Tax Free Category?
U.S. households are working at their best to get IRS refunds and avoid paying federal income taxes as much as possible. Through various tax reduction incentives provided by the government, the more households pay less income tax. These tax avoidance incentives include taking out life insurance and retirement plans, using a hybrid car, buying a home, buying bonds, spending on research, and adopting children (among other tax deductions).
How Does This Happen in Tax Reform?
Although the majority of the 45% of the no-tax group are low-income, there are many middle-income and high-income earners who get big tax breaks through the withholding route. The problem with income taxes is that most Americans do not seek immediate benefits from these tax incentives but rather, participate in incentives simply to avoid taxes and get a tax refund. In fact, there are many Americans who are positioning themselves for income from the current tax structure. This over-deduction sorted by Americans has resulted in the IRS paying an estimated $100 billion in tax returns.
So, What Are the Possible Tax Reforms?
In fact, the federal government still needs funds to run national businesses. Therefore, for comprehensive reforms to take place, some of the main focus of change will need to be the income tax issue of the over-incentive list that we all expect to claim every year. In the past, Congress has shown seriousness in looking toward these reforms. However, the question that remains is whether taxpayers are willing to forego these cuts in a bid to embrace reform.