Understanding the Proportion of People Paying No Income Tax in the US and UK

The question of who pays no income tax often leads to nuanced and detailed discussions about the intricacies of tax systems. In the United States and the United Kingdom, the landscape of tax payments varies significantly. While a large portion of US households do not owe federal income taxes, the majority of UK residents still contribute to the national kitty through various means. Let's delve into the specifics.

The US Tax Landscape

According to recent data, 40.1% of US households did not owe federal income tax in 2022. This percentage is notably lower than the 60% recorded in 2021, primarily due to adjustments in tax credits and the status of unemployment benefits. However, it is crucial to understand that beyond federal income tax, a wide array of other taxes apply, such as FICA (Federal Insurance Contributions Act) taxes, excise taxes, and other local and state levies. In 2021, for example, Warren Buffett famously said, 'When I look at my tax form, I don't see me paying any income tax. I see me paying a 20% tax on capital gains and dividends. I also see a 24% Medicare payroll tax on my employment income. It doesn't look to me like income tax. And of course I don't pay any income tax on capital, which is a monstrous privilege.'

Even more interesting is the case of billionaires. Studies have shown that a significant number of ultra-wealthy individuals pay a disproportionately low rate of income tax. For instance, a report indicated that 600 of the wealthiest Americans paid around an average of 8% in income taxes in recent years. This stark contrast is further highlighted by the fact that in the mid-20th century, when the US had the highest quality of life for half a century, the top 1% of earners paid a significantly higher tax rate, ranging from 74% to 91%. This rate was achieved without the need to invest in domestic American businesses, goods, and services at the time. As Donald Trump and his supporters like to say, 'MAGA wants to bring that back. Great again. I'm down for that.' This indicates a shift towards more equitable tax policies and a return to the preeminence of American manufacturing and labor.

The UK Tax Landscape

In stark contrast, the UK presents a much different picture. Essentially, every citizen pays taxes, often in the form of Value Added Tax (VAT) on almost every purchase. While certain food items are zero-rated, there is no practical way to entirely avoid VAT unless one engages in behavior akin to criminal theft. It's important to note that even those below the tax threshold still contribute to the tax system through other forms of taxes, such as payroll taxes and sales taxes.

The Broader Scope of Tax Contribution

There are several interpretations and nuances to consider when discussing non-payers of income taxes. Firstly, it is essential to understand that non-income tax payers still contribute to other forms of taxes like FICA, sales taxes, property taxes, payroll taxes, and various fees. These taxes often constitute a significant portion of the total tax burden on the population. Additionally, the top earners, including billionaires, frequently utilize complex tax schemes to minimize their tax liability, leading to public debates about tax fairness and equity.

The second major interpretation is about those who do not actually earn income and therefore do not owe income taxes. However, even these individuals are subject to other forms of tax. The third interpretation involves those who manage to have all their withheld taxes refunded. In the US, for example, it is nearly impossible for someone earning too little to qualify for income tax obligations; even their withheld payroll taxes would likely be refunded.

The fourth and perhaps most challenging interpretation is whether everyone should be paying taxes and isn't, particularly given the elaborate tax systems in place. It is particularly relevant to mention that the top 5% of households are often not paying their fair share of income taxes, as they shift income into non-earned-income channels, like capital gains, dividends, and other forms of passive income. This reallocation of income effectively reduces their tax liability, contributing to a debate about tax fairness and equitable distribution.

Overall, the nexus of income tax obligations and exemptions is a complex subject that encompasses various tax types, exemptions, and equity discussions. Whether one focuses on the US, the UK, or the global tax landscape, there is a need for ongoing dialogue about tax policies and their impact on societal well-being.