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5:36 pm
Sun April 15, 2012

The Tax Man Cometh! But For Whom?

Originally published on Sun April 15, 2012 9:30 pm

It's that time of year again – tax week.

With the deadline for Americans to file their income taxes looming, there's a good chance you've heard or will hear from politicians, on cable news and on talk radio about those who pay little or no taxes.

House Majority Leader Eric Cantor has said that we "have a situation in this country where you're nearing 50 percent of people who don't even pay income taxes." There are even those who say that there are nearly 50 percent of Americans who pay no taxes at all.

While it is true that about half of American households pay no federal income tax, the odds that half of Americans are paying no taxes at all are relatively low. Sales taxes, payroll taxes and state taxes make it difficult to avoid paying all taxes completely.

But is it possible?

Weekends on All Things Considered wanted to find out, so the first step was narrowing the search to a state with no sales tax: Alaska, Oregon, New Hampshire, Delaware and Montana.

John Steinhoff, a certified public accountant in Great Falls, Mont., tells host Guy Raz that it is possible to live legally and pay virtually no taxes.

"In Montana, basically, you'd have to be unemployed; so no earned wages," Steinhoff says. "You don't own any real property, you wouldn't pay any sin tax — so no liquor, tobacco, anything like that — and the state of Montana doesn't have a sales tax, so you could still buy food and supplies and not pay taxes."

Looking for a place where that would be possible led to northwestern Montana, and to the home of Lisa Block. She lives there with her husband in an area of the Kootenai National Forest.

The couple live on property owned by Block's father-in-law, so they pay no property tax. They live in the country and take their own trash to the dump, so they don't pay any municipality taxes.

Block makes a modest living running a sewing shop out of their home, but doesn't earn enough income to qualify for a federal income tax. As far as food, they have that taken care of, too.

"My husband and I, we both hunt – deer, elk [and] antelope," Block told NPR's Raz by phone. "We raise our own beef, pork and chickens, and we put in a garden every year."

It turns out, however, that even in one of the remotest parts of America, Block still pays taxes: gasoline taxes for the truck and a state self-employment tax of about $300.

It's not much, but it is certainly not nothing.

Who Does Pay A Lot?

The top 10 percent of income earners in America pay 70 percent of all federal income taxes. People like Jim and Janet Borcheller, who live in Fairfax, Va., are in the top 10 percent of income earners in America.

Jim Borcheller, a defense contractor, is now the family's sole breadwinner. He earns about $110,000 a year. Once your household income exceeds $110,000, you are considered rich by the U.S. government and are in the top 10 percent.

Being "rich," paying your taxes should be easy, but in each of the past two years, the Borchellers have had to dip into their IRA account or savings just to pay their tax bill.

"If we're having trouble making it, I wonder how many other people are," Janet Borchellar told NPR producer Brent Baughman.

The Borchellers have put three kids through college, and between their mortgage, college loans, gas and utilities, they aren't left with a whole lot of disposable income at the end of the month.

Then there's their oldest son who, when he was 11 years old, developed a tumor around his brain stem. He still has it and lives a relatively normal life, but his medical bills are a huge expense.

"I don't expect Uncle Sam to pay for a lot of this stuff, or any of this stuff. We're doing that," says Jim Borchellar. "But ambition is good; wanting to improve yourself is good. And when the government takes away from those who are working hard to try and improve their lot to give it to those who don't work hard [or] don't work at all, that's wrong."

The Borchellers pay a much higher percentage of their income in tax than either President Obama or Republican presidential candidate Mitt Romney, or most millionaires for that matter.

"It may sound like a lot — 10 percent owe 70 percent of income tax — but the top 10 percent receive over 40 percent of the income," says Joel Slemrod, a professor of economics at the University of Michigan.

Slemrod tells NPR's Raz that most of us think it's appropriate that the fraction of income that's owed in tax is higher for higher-income people. He says the top 10 percent of income earners, like the Borchellers, pay 70 percent of income taxes because the tax code is supposed to work in a straightforward way.

"So that a millionaire not only would owe more tax than somebody who earned $50,000, but they would owe more as a percentage of their income than [that] person," Slemrod says.

In our current system, however, high-income earners who make their money through capital gains and dividends from corporations pay a much lower effective tax rate, about 15 percent, than the average person paying 25 to 35 percent, Slemrod says.

For those in Washington who want to fix the federal deficit through taxation alone, Slemrod says all of the rates would have to go up by about half: 10 percent would jump to 15 percent, and the top rate of 35 percent would become about 52 percent.

"That's only looking at this decade," he says. "Looking out at many decades ahead, we face a very large fiscal imbalance due to the promises made through Social Security and especially Medicare, [where] we're tens of trillions short."

Slemrod says most economists think we have to deal with that sooner than later, and increasing taxes should be part of that solution.

How Does The U.S. Compare?

The U.S. collects about a quarter of its gross domestic product through taxes. In countries like Denmark, Sweden, France and Belgium, it's closer to half of their GDP in taxes.

Eduarto Porter, who writes about economics for The New York Times, says that compared to many of these countries, the U.S. tax system is the most byzantine, arcane system in the developed world.

"We use a system of taxation that requires a bunch of different tax rates with a bunch of different exceptions," Porter tells Raz. "Each of these differences, from one rate to another [and] one exception to another exception induces changes in our behavior."

In other words, you do something to avoid a tax, get an exception or get exclusion, and this changes your desire to buy a house, to work or even invest, Porter says. This makes it harder to collect a lot of tax revenue.

"All these behavioral changes ultimately act as a drag on the economy," he says.

A more efficient system, Porter says, is one used in countries like New Zealand, Poland, Canada and Portugal – a value added. It's a federal tax on everything you buy, and it's an idea popular with many economists, Porter says, because it would collect more revenue from more people.

"States that have a much flatter tax structure ... tend to have systems of public finance of government that are much better at reducing inequality [and] at addressing the needs of the middle class and the poor than our does," he says, "because they raise much more money."

The last time an American politician proposed the idea was in 1979, when Oregon Rep. Al Ullman called for a 10 percent national sales tax. The next year, Ullman lost his bid for re-election.

Copyright 2013 NPR. To see more, visit http://www.npr.org/.

Transcript

GUY RAZ, HOST:

It's WEEKENDS on ALL THINGS CONSIDERED from NPR News. I'm Guy Raz. Happy tax week.

(SOUNDBITE OF MUSIC)

SENATOR ORRIN HATCH: ...share some of the responsibility. Now, we don't want the really poor people who are in poverty to have to pay income taxes. But 51 percent of all households?

RAZ: Now, around tax time, there's a good chance you hear about Americans who don't pay taxes. That was the voice of Utah Senator Orrin Hatch. And here's House Majority leader Eric Cantor.

REPRESENTATIVE ERIC CANTOR: And we also have a situation in this country where you're nearing 50 percent of people who don't even pay income taxes.

RAZ: You'll hear it on cable news and talk radio.

(SOUNDBITE OF VARIOUS NEWS SHOWS)

UNIDENTIFIED MAN: Forty-seven percent of Americans not paying taxes. Forty-seven percent.

RUSH LIMBAUGH: Forty-seven percent of Americans do not pay...

MICHAEL SAVAGE: Forty-seven percent of families pay no taxes. That's a very, very bad warning sign for what's coming in this country.

RAZ: It is true that about half of American households pay no federal income tax. But half of the American population paying no taxes? None at all? That's not true. There are sales taxes and payroll taxes and state taxes and more. Our cover story today: taxes, who pays, who doesn't, what's fair and what isn't. In a moment, why being classified by the government as rich is a curse for one family.

But first, given all the attention paid to those people who supposedly don't pay anything, we went out to search for one. For starters, we figured if you paid no taxes, you'd have to live in a state with, at the very least, no sales tax. There are five of them: Alaska, Oregon, New Hampshire, Delaware...

(SOUNDBITE OF PHONE RINGING)

RAZ: ...and Montana, where we cold-called some accountants until someone suggested we call John Steinhoff in Great Falls.

JOHN STEINHOFF: JCCS. This is John.

RAZ: Hey, John. It's Guy Raz here at NPR.

STEINHOFF: Yes, sir.

RAZ: Happy tax week to you.

STEINHOFF: You too.

(SOUNDBITE OF LAUGHTER)

RAZ: I know you're busy. I explained that we were looking for someone who could legally live paying virtually no taxes. John Steinhoff told us it wouldn't be impossible.

STEINHOFF: In the state of Montana, basically you'd have to be unemployed, so no earned wages. You don't own any real property. You wouldn't pay any sin tax, so no liquor, tobacco, anything like that. And the state of Montana doesn't have a sales tax, so you could still buy food and supplies and not pay tax.

RAZ: Hmm. Now that sounds all right. So do you know where we could find somebody like that?

STEINHOFF: You know, I've heard of places like Lincoln, for example, where Ted Kazinski lived.

RAZ: Oh.

STEINHOFF: You know, he...

RAZ: He wasn't paying taxes.

STEINHOFF: ...he lived off the grid.

RAZ: Yeah.

STEINHOFF: And then there's some places I've heard of up in northwest Montana where there are individuals...

RAZ: So we called around northwest Montana for a while until we finally found a woman named Lisa Block.

(SOUNDBITE OF PHONE RINGING)

LISA BLOCK: This is Lisa. Can I help you?

RAZ: Lisa lives in an area of the Kootenai National Forest. Do you pay any property tax, for example?

BLOCK: Property tax? No.

RAZ: That's because she and her husband live on land her father-in-law owns. What about municipality taxes? Do you have to pay any of those?

BLOCK: No. No. Actually, we live out in the country.

RAZ: So no trash collection or that sort of thing?

BLOCK: No.

RAZ: They take their trash to the dump themselves. Federal income tax? Do you have to pay any of that?

BLOCK: No.

RAZ: She doesn't earn enough income to qualify. She makes a modest living running a sewing shop out of the house. What about groceries and stuff? Is that where a big part of your money goes?

BLOCK: No. Actually, my husband and I, we both hunt - deer, elk.

RAZ: Yeah?

BLOCK: Preferably. Antelope. We raise our own beef, pork and chickens. And we put in a garden every year.

RAZ: But it turns out, even in one of the remotest parts of America, Lisa stills pays taxes. Gasoline taxes for the truck and a state self-employment tax.

BLOCK: It was looking the other night about - my self-employment tax was probably going to only be about $300.

RAZ: It's not a lot, but it's also not nothing. So who does pay a lot?

(SOUNDBITE OF KNOCKING)

RAZ: Let's call them the 10 percenters.

BRENT BAUGHMAN, BYLINE: Hi. Janet.

JANET BORCHELLER: Brent. Okay. Talked with you the other day. Yeah.

BAUGHMAN: Hello. Nice to meet you.

JANET BORCHELLER: Come on in.

RAZ: The top 10 percent of income earners in America pay 70 percent of all federal income taxes. People like Jim and Janet Borcheller, who our producer Brent Baughman visited in Fairfax, Virginia this week. They are in the top 10 percent of income earners in America.

BAUGHMAN: How much disposable income do you have at the end of the month after all the bills are paid?

JANET BORCHELLER: Like zero. Not very much.

RAZ: That, of course, is Janet. Her husband, Jim, is a defense contractor and is now the family's sole breadwinner. And why is he in the top 10 percent? Because he earns about $110,000 a year. Once your household income exceeds 110,000, you are considered rich by the U.S. government, the top 10 percent. But in each of the past two years, the Borchellers have had to dip into their IRA account or savings just to pay their tax bill.

JANET BORCHELLER: We do hear, you know, I guess we're top 10 percent. I mean, if we're having trouble making it, I wonder how many other people are.

RAZ: The Borchellers have put three kids through college, two of them live at home. But between their mortgage and college loans, gas and utilities, they aren't left with a whole lot. And then there's their eldest son. When he was 11, that son developed tumor around his brain stem. It's benign. He still has it and lives a relatively normal life, but his medical bills are a huge expense. Here's Jim.

JIM BORCHELLER: I don't expect Uncle Sam to pay for a lot of this stuff or any of this stuff. We're doing that. But ambition is good. Wanting to improve yourself is good. And when the government takes away from those who are working hard to try and improve their lot to give it to those who don't do - work hard, don't work at all, that's wrong. This notion of...

RAZ: As far as the Borchellers go, they pay a much higher percentage of their income in tax than either President Obama or Mitt Romney or most millionaires for that matter.

JOEL SLEMROD: It may sound like a lot - 10 percent owe 70 percent of income tax - but the top 10 percent receive over 40 percent of the income.

RAZ: That's Joel Slemrod, a professor of economics at the University of Michigan.

SLEMROD: And most of us think it's appropriate that the fraction of income that's owed in tax is higher for higher-income people.

RAZ: Slemrod says the top 10 percent of income earners, like Jim and Janet Borcheller, pay 70 percent of income taxes because the tax code is supposed to work in a pretty straightforward way.

SLEMROD: So that a millionaire not only would owe more tax than somebody who earned $50,000, but they would owe more as a percentage of their income than the person who earned $50,000.

RAZ: Well, our current system, it doesn't work that way in many ways, as you know. I mean, explain this to us. President Obama earned more than $750,000 last year. He is paying an effective tax rate of 20.5 percent. Mitt Romney earned millions. He is going to be paying 15 percent. Most people listening to us, probably you and me, certainly, we are paying much higher rates, 25, 30, 35 and on. When you factor state taxes and municipal taxes, even higher in some cases.

SLEMROD: Yes. And so it may seem like a contradiction with the fact that the income tax rate structure is graduated and progressive. The reason we see Mitt Romney and people like that owing a lower fraction of their income in tax is mostly due to the fact that he and, on average, other very high-income people get a lot of their income in the form of either dividends from corporations or capital gains on the sale of appreciated assets.

And since 2003, both capital gains and dividends have been subject to a preferentially lower tax rate, at most 15 percent. That's the reason that people like Mitt Romney often have a lower average tax rate than somebody who earns, say, $50,000 or $250,000 in a year.

RAZ: As you know, there's a debate in Washington about whether to cut, whether to raise taxes, whether to do a combination of both or neither. If, say, the government said we want to solve our deficit problem, our debt problems, only through taxation, how much would each American have to pay to support, you know, the current level of federal spending?

SLEMROD: Yeah. If you look at just the deficits we're facing in this decade - so let's say we wanted to get deficits down to just 2 percent of GDP - all the rates would have to go up by about half. So that 10 percent rate would have to be 15, the top rate of 35 would have to be about 52 percent. And that's only looking at this decade. As you know, looking out at many decades ahead, we face a very large fiscal imbalance due to the promises made through Social Security and especially Medicare, we're tens of trillions of dollars short. And most economists think that we have to deal with that sooner rather than later, and increased taxes probably should be part of the solution.

RAZ: Joel Slemrod at the University of Michigan. Before we go, a little perspective here from Eduardo Porter, who writes about economics for The New York Times. Eduardo Porter, happy tax week to you.

EDUARDO PORTER: Happy tax week.

RAZ: I'm sure you're as happy as I am. So here's Eduardo Porter with a list of countries that collect more taxes relative to their overall economy than the U.S. does. The U.S. collects the equivalent of a quarter of its GDP through taxes. Countries at the top of that list? It's closer to half.

PORTER: Well, it starts with Denmark, then Sweden. Third France, next Belgium...

RAZ: Compared to a lot of these countries, Porter argues, the U.S. tax system is the most byzantine, arcane system in the developed world.

PORTER: ...Spain, Israel, Germany, the United - we use a system of taxation that requires a bunch of different tax rates with a bunch of different exceptions. Each of these differences, right, from one rate to another, one exception to another exception induces changes in our behavior. You do something to avoid a tax or to get an exception or to get an exclusion. So this changes your desire to buy a house, your desire to work, your desire to invest. And all these behavioral changes ultimately act as a drag on the economy.

RAZ: Which makes it harder to collect a lot of tax revenue. A more efficient system, Porter argues...

PORTER: ...Portugal, Greece, Estonia...

RAZ: ...is the system used in a lot of countries on that list, a value added tax. It's a federal tax on everything you buy, and it's an idea popular with a lot of economists, Eduardo Porter says, because it would collect more revenue from more people.

PORTER: States that have a much flatter tax structure where, say, the poor and the middle class pay much more in taxes as a share of their incomes, they tend to have systems of public finance of government that are much better at reducing inequality, at addressing, you know, the needs of the middle class and the poor than our does because they raise much more money.

(SOUNDBITE OF SONG, "TAXMAN")

THE BEATLES: (Singing) Yeah, I'm the taxman.

RAZ: The last time an American politician proposed this idea was actually in 1979. It was Oregon Congressman Al Ullman who called for a 10 percent national sales tax. And the next year, Al Ullman lost his bid for re-election.

(SOUNDBITE OF SONG, "TAXMAN")

THE BEATLES: (Singing) Mr. Heath. 'Cause I'm the taxman. Yeah, I'm the taxman. Now my advice for those who die, taxman.

RAZ: Stay with us. You're listening to WEEKENDS on ALL THINGS CONSIDERED from NPR News. Transcript provided by NPR, Copyright NPR.

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