[emphasis added by OP]

The Income Tax System is Broken

43 Percent Of Americans Pay No Federal Income Tax, A Sign That Something's Wrong, Writes Declan McCullagh

April 15, 2009 | by Declan McCullagh

(CBS) On April 15, don't be surprised if the line at your local post office is a bit shorter than usual. That's because your neighbors may not be paying any income taxes this year.

An astonishing 43.4 percent of Americans now pay zero or negative federal income taxes. The number of single or jointly-filing "taxpayers" - the word must be applied sparingly - who pay no taxes or receive government handouts has reached 65.6 million, out of a total of 151 million.

Those numbers come from an analysis published yesterday by the Tax Policy Center, a joint project of the Urban Institute and Brookings Institution. Neither is a low-tax or conservative advocacy group; the Urban Institute was created under the Johnson administration during the Great Society era, and it receives most of its funding from the federal government.

"You've got a larger and larger share of people paying less and less for the services provided by the federal government," says Roberton Williams, a senior fellow at the Tax Policy Center. "The concern is that the majority can say, 'Let's have more benefits, spend more,' if they're not paying for it. It's 'free.' That's not a good thing to have."

By historic standards, today's situation is an aberration. Between 1950 and 1990, the number of owe-no-money federal tax returns averaged 21 percent, dipping to 18 percent in 1986, according to Tax Foundation data. In the 1990s, the owe-no-money percentage hovered around 25 percent of taxpayers.

But then politicians began another round of tinkering with the tax code, adding reams of new pages to an already incomprehensible set of rules that even the guy overseeing the IRS can't seem to figure out.

Democrats wanted to lower taxes on the least affluent, while Republicans wanted to lower taxes on everyone. The result was bipartisan enthusiasm for tax credits aimed at everything from children (1997) and college students (1997) to hybrid cars (2005) and homebuyers (2009). Many of these credits dole out cash to people even if they report no income, making them mere government handouts.

"There's no difference at all in terms of the effects on the federal deficit," says Williams of the Tax Policy Center. "It's perfectly equivalent. It's just easier to say, 'I cut your taxes' as opposed to 'I created a new federal program to send money to people.'"

I'm talking here about federal income taxes, not other taxes like Social Security, Medicare, state income taxes, sales taxes, or car registration taxes, some of which are extracted through payroll deductions. The owe-no-money crowd tends to get hit by at least some of those.

The perils of today's situation should be obvious. The United States is close to a tipping point - where most people can skip the post office run on April 15 to mail a check because they're expecting one from the government instead.

"It is somewhat odd that you have a decreasing number of folks paying into the federal income tax system, a decreasing number of folks who have a stake in what the government pays for," says Matt Moon of the non-partisan Tax Foundation in Washington, D.C.

It then becomes tempting to vote for politicians promising more and more handouts, paid for by money forcibly extracted from an ever-shrinking number of their neighbors. In addition to being immoral, it's poor public policy: people who pay no taxes but nevertheless get benefits are less likely to be careful overseers of their elected representatives.

"At some point people become less and less invested in making sure their government is accountable and frugal," says Peter Sepp, vice president for policy and communications at the National Taxpayers Union, a lower-tax advocacy group. "If you pay very little for getting all kinds of government benefits, you might view those programs as a bargain, even though they may waste tens of billions of dollars a year."

As a candidate, President Obama promised still more tax credits, including ones aimed at child care, "clean cars," and savings accounts. As the Wall Street Journal explained at the time: "You can receive these checks even if you have no income-tax liability. In other words, they are an income transfer - a federal check - from taxpayers to nontaxpayers. Once upon a time we called this 'welfare,' or in George McGovern's 1972 campaign a 'Demogrant.'"

A recession, the stimulus, and innumerable bailouts have placed Mr. Obama's plans on hold. But the expiration of the Bush tax cuts at midnight on December 31, 2010 will renew interest in a tax law rewrite.

That will be an opportunity to gut the current system and replace it with something simpler and fairer. After all, if government is important enough to force most of us to work until April 13 to pay its bills, why shouldn't everyone share the pain?

Declan McCullagh is the chief political correspondent for CNET and a CBS News EconWatch contributor. Previously, he was Wired's Washington bureau chief and a reporter for Time.com and Time magazine in Washington, D.C. He has taught journalism, public policy, and First Amendment law. He is an occasional programmer, avid analog and digital photographer, and lives with his wife in the San Francisco Bay area.

By Delcan McCullagh

© MMIX, CBS Interactive Inc. All Rights Reserved.

Exactly. You can't be refunded more than you put in.

I think she means if they deducted $1000 from your pay for the year but you get a $500 refund check. That $500 you have already paid but are being returned for overpayment.

Oh, if that's the case, no issue. Then monies have been paid in.

Huh? How else would you get a refund check? The gov doesn't send 'refund' checks if it isn't a refund from funds already paid.

And if somebody is getting a refund check, I imagine that most of them have definitely paid some taxes. I believe that it would be very rare for anyone to get a refund of the entire amount that they had paid in throughout the year.

I am more concerned with those people who don't "believe" in paying taxes and just flat refuse to file and pay what they owe.

Thank you, Jack, you answered before I had to.

BJean, if you think this doesn't happen, then yes, maybe you should be required to take a test before voting. :wink2:

Jack of course there is fraud. There are dishonest people everywhere. Tax cheats are perpetrating a crime against the rest of us tax payers who do not cheat.

Why would you call monies they get through dishonest means, a refund?

You and Beth have labeled me uninformed and shockingly obtuse so why don't you just enlighten me instead of expecting me to google something - you know I can't read.

It works with income tax too. It wouldn't be fair if Bill Gates and I paid the same tax. It's not really even fair if we pay the same percentage. Because 10% of his income is nothing to him, but to me it's a big portion of my disposable income.

But....how is that any difference from what you pay in income taxes anyway? If you normally pay 10% to the government, and Bill pays 10% to the government, then the only "unfair" part of that is that you think he should pay more.

My husband and I pay taxes every paycheck. We have even upped our dependant number to have less money taken out. But at tax time, once we deduct all of our allowances, we itemize, we still end up "owing" no taxes and get a refund for what we did pay in.

Now my sister who makes very little money, pays little taxes during the year, and gets more money back than what she paid in due to the earned income credit. I hate this loophole that she can use, but she's not cheating to get it...it's legal! Why in the world should someone get more than what they paid in? But until that loophole is closed, she and millions like her will continue to get more than they paid.

And although it might not be "fair" for some people to pay more than others....it's already happening. Why not a flat tax based on income levels? 0% for the people who make less than a certain amount and then graduated up to a max level. Like I said it's already happening now, it's just a lot more complicated to do so.

43% may pay no taxes, but the top 5% pay over half the taxes and the top 50% pay over 96% taxes. The top wage earners pay most of the taxes now, so it would hardly be any different going to a flat tax system.

I think a flat tax would be perfect.......although I'm not an economist. It might be bad for small business, or big business, or group XYZ. I think that something needs to be done with the overly-complicated tax code, though.

My husband and I pay taxes every paycheck. We have even upped our dependant number to have less money taken out. But at tax time, once we deduct all of our allowances, we itemize, we still end up "owing" no taxes and get a refund for what we did pay in.

Now my sister who makes very little money, pays little taxes during the year, and gets more money back than what she paid in due to the earned income credit. I hate this loophole that she can use, but she's not cheating to get it...it's legal! Why in the world should someone get more than what they paid in? But until that loophole is closed, she and millions like her will continue to get more than they paid.

It's not a loophole. It's a plan intended to transfer wealth from one group to another.

I think a flat tax would be perfect.......although I'm not an economist. It might be bad for small business, or big business, or group XYZ. I think that something needs to be done with the overly-complicated tax code, though.

Either a flat or a usage tax. Both have their benefits.

The Fair Tax (Americans For Fair Taxation: Americans For Fair Taxation) is a national sales tax which would replace income, social security and medicare taxes. It has the advantage of capturing revenue from every single person who purchases goods -- even illegal aliens, "tax evaders" and tourists. Generally the wealthier people spend more money so they would pay more and vice versa....a self regulating system, so to speak. There are many, many benefits and i encourage you to take a closer look.

Actually Teridoodle, in Florida many years ago, they decided to raise sales taxes rather than real estate taxes. At a time when many cities/counties had a lower (around 6%) sales tax and higher real estate taxes, places in Florida had 8% sales tax with lower real estate tax assessments. Homeowners loved it. It worked pretty well too, especially in high tourist areas that did an enormous retail business selling to non-residents.

And if somebody is getting a refund check, I imagine that most of them have definitely paid some taxes.

Not necessarily.

But....how is that any difference from what you pay in income taxes anyway? If you normally pay 10% to the government, and Bill pays 10% to the government, then the only "unfair" part of that is that you think he should pay more.

It's unfair because 10% hurts "me" more. Let's do some math.

Say I make 40,000 and live in an area where basic necessities for my family are 30,000 a year on average. That means I have 10,000 in disposable income. If there were a flat tax of 10% on income, then I'd pay 5,000 in taxes. Which would give me 5,000 in disposable income. For my family of four. For a year.

Now we have someone who makes 200,000 and lives in the same area. So their disposable income is 170,000. Their tax is 20,000. So they have 150,000 left over.

See how the flat tax doesn't make a dent in their disposable income but renders my family not able to not be able to do anything besides scrape by? And how it that good for the country to have a bunch of people who can't even afford to save for a rainy day. One emergency will wipe out my entire disposable income for possibly years to come.

Or how about someone who makes 30,000. Their tax is 3,000 so now they have less money than it takes to live on. That's not sustainable. Can bankruptcy and welfare be far behind? What possible purpose does it serve society to set up a system like that?

At least with sales tax, what people pay is proportionate to what they have to spend.

If you want to have a flat tax, you have to do it on disposable income to be remotely fair IMO. That way the family of four living on $40,000 is only being taxed on $10,000 and has a chance to get ahead.

But I still think the graduated system is better and I say that as someone who has spent most of the past 10 years in a high tax bracket, those two years of no income not withstanding.

McMad, obviously I do not understand the earned income tax credit. Don't you have to have paid into the system to receive money back or are you saying that some people receive money from the IRS without ever having paid in any money?

It's unfair because 10% hurts "me" more. Let's do some math.

Say I make 40,000 and live in an area where basic necessities for my family are 30,000 a year on average. That means I have 10,000 in disposable income. If there were a flat tax of 10% on income, then I'd pay 5,000 in taxes. Which would give me 5,000 in disposable income. For my family of four. For a year.

But my point is that for your above family, 40K / yr would put them in the 15% tax bracket anyway. So no matter what their cost of living is, or if we're using a flat or graduated tax as a model, they still owe that 15%. If the flat tax for the above family was 10%, they'd actually be saving money over the current system.

Or how about someone who makes 30,000. Their tax is 3,000 so now they have less money than it takes to live on.

I would put forth that the area that person is living in is simply "too wealthy" for their income. That's why I don't live in a super swanky area of Dallas (ok....that's actually not the reason, but you get my point?)