April 15th - Payday?

"According to the IRS, the bottom 50 percent of tax filers pay less than 3 percent of all taxes. That share is decreasing every year, and the trend shows no signs of reversing."

 - The Heritage Foundation

I come from a long (and proud) line of accountants. Accountants know firsthand how people despise the April 15th deadline. But for a growing majority, Tax Day is a godsend. More people are paying no income tax...and still others end up getting the government to pay them! 

Go with me here...some more money/tax jargon to follow...but it's important!  Stay...with...me...

Tax Cut vs. Tax Credit

The so-called "2001 and 2003 tax cuts" benefited all payers. Tax cuts do not eliminate your tax bill entirely, but instead lower it. Heritage says, "Lower tax rates cannot make a tax filer a nonpayer.  Tax filers are falling off the tax rolls at an increased rate because of tax credits."

Tax credit examples are: the home buyer tax credit, the Making Work Pay credit, energy-saving credits etc. A credit directly lowers your tax liability. It comes off the bottom line. Politicians love these because they can target one specific group of people and claim credit for the gain. And tax credits encourage certain behaviors like buying a house, or a Prius, or going green...the government loves this!

But here's the problem...

Tax Credits Create a Downward Spiral

• The government is creating MORE tax credits.
• Tax payers can use multiple credits to literally erase their bill. More tax credits means less people actually pay taxes.
• It is estimated for 2010 more than 50% of taxpayers will be NON-PAYERS. Non-payers get everything back, and some earn everything back plus extra. 
• This is when Tax Day becomes payday. How? --> If a tax credit causes your tax bill to go below zero...and it's called a "refundable" credit, the government will PAY YOU whatever that negative amount is. 

EXAMPLE: If your tax liability is $100 and you're eligible for a $150 refundable tax credit, the government pays you $50.

Are you with me? 

Now...this is where disaster looms.

What happens when you have fewer taxPAYERS?

• When you have a majority of voters NOT paying taxes, theoretically they could vote themselves "an increasing share of government benefits at no cost to themselves."
• Then all hell breaks lose. Why would a politician cut back on government spending when the majority of the voters benefit without any increased burden personally?
• This creates a growing state of dependency. "Growing dependence on the tax code for income will reduce individual initiative to achieve because [people] will be able to sustain a satisfactory standard of living without exerting any additional effort."
• And your top performers will have less incentive to work hard and earn more because "they will need to pay increasingly higher tax rates to fund the growing dependency of those that earn less."
• You have slower economic growth and a lower standard of living.

I'm not saying my family refuses to claim tax credits simply because the ultimate effect could be disastrous. But just like me, everyone takes advantage. The government wants it that way. Heritage sums it up quite nicely:

"[It's] a deadly recipe for never-ending increases in government spending that will inevitably lead to a fiscal implosion when there are no longer enough productive taxpayers to pay the bill for the expanding welfare state."

Source:

Heritage Foundation: Tax Day or Payday