After his tweet, Derek Thompson went to work to answer the same question I had asked: Why didn’t these 7,000 pay any income taxes. This is what he found:
There are 433,000 tax units (individuals or families) reporting cash income greater than $1 million. Seven thousand of those units, or 1.6% of all millionaires, owe no federal individual income tax.
They might not be lucky as they seem, said Roberton Williams of the Tax Policy Center. Many of the things that can bring taxable income down from $1 million to zero are considerable misfortunes, such as: investments that lose significant income, a destroyed home or business (known as a casualty loss), high medical expenses (especially for those who self-insure), or nursing home expenses.
“You can attribute some of those 7,000 non-tax payers to investment choices they made, like tax exempt bonds,” Williams told me, “but a lot of this might be unfortunate happenstance. A tornado tore through your home, you got a very expensive form of cancer, you lost hundreds of thousands of dollars in an investment. Those aren’t choices people made, they’re just legal deductions under the law.”
Should they be? It’s a good question. Burt advocates a sales tax to make sure everyone pays, though this brings to light the questions of what exemptions would be made. There are arguments to be made that things like food should be exempt (as it often is in states). There’s a good likelihood that medical care would fall under that category. Though this is where it would start to get pretty political. If you tax food, do you still tax meals? Unhealthy foods? You know someone is going to want to. And, of course, how does a government that once advocate all-carbs-all-the-time decide what’s healthy?
You run into a little bit of this with local and state sales taxes. My home state at one point exempted take-out but not dine-in, until people exploited the obvious loophole. There was also an exemption for “natural” foods, like orange juice, until the term “natural” became subject to debate (“Sunny Delight has NATURAL JUICES!”). But you can bet with a sales tax running 15-20% at least, the debate would become that much more fierce.
The obvious solution is not to exempt anything, which would work right up until a sob story about some guy with cancer having to spend thousands on sales taxes on a treatment.
I think the generic prescription here is VAT with a partial rebate.
1.6% of millionaires owe no income tax?
If I were to ask “what percentage of millionaires had catastrophic losses to the point where it wiped out their income tax obligations?” in any given year, my guess would be about twice 1.6%.
California taxes food but only if it’s served; prepackaged, pre-prepared food is not taxed.
So if I get a bagel and a pot of cream cheese, neither of these things is taxed, but if the server puts the cream cheese on the bagel then it is taxed.
The cafeteria at work bakes cookies, and they used to sell them in plastic bags, and charged tax. Now they just put out a big bin of cookies, and you use a pair of tongs to put them in a plastic bag, and they *don’t* charge tax.
I don’t support sales taxes. I know they exist to make sure everyone pays something, but I think sales taxes are a hindrance to commerce, and ultimately hurt both consumers and merchants.
I think taxes on income are all that is needed, except perhaps for property taxes in the case of municipalities.