by Jon N. Hall 4/3/14
The IRS’s Form 1040EZ is an income tax form that I’ve never been eligible to use. So I never paid it much mind, thinking it was for taxpayers with very low incomes, like teenage burger flippers. Up until 2003, those with taxable incomes higher than $50K couldn’t use the 1040EZ. But in 2004 the cutoff moved up to $100,000, well above the median income. The maximum tax bill using the 2013 1040EZ is $21,286, and the maximum effective tax rate (what one actually pays on one’s total income) is 19.35 percent.
The 1040EZ still isn’t used by many Americans. It’s for those who neither itemize nor take other write-offs. Essentially, the EZ is for those who don’t take advantage of the exceptions in the Tax Code. By exceptions I mean all the ways that one can get one’s tax bill reduced.
Let’s do taxes for some benchmark incomes in three key years using the 1040EZ and see what emerges. If you’d like to verify my work, I’ve included the links to the forms and instructions for those tax years.
In a 2011 article, I floated a tax reform idea that looked at tax year 2000, when the Clinton-era tax rates were still the law. Using the 2000 1040EZ (form, instructions), an unmarried person with an income of $50,000 would pay $8,579 in income tax. That’s an effective rate of 17.158 percent.
So back in 2000, a taxpayer would pay $2,644 more on an income of $50K than he would in 2013, and have an effective rate 5.288 percentage points higher than in 2013.
However, in my 2011 article I used the “average pre-tax income” of the Middle Quintile, which was $51,700. Also, I used the regular 1040 to do the taxes. So I wondered if the 1040EZ of 2000 would produce the same tax bill as did the regular 1040, and indeed it did: $9,055.
So back in 2000, an unmarried person making the average income for the Middle Quintile who used the 1040EZ would have had an effective tax rate of 17.5 percent. That just happens to be 3.5 times higher than the average effective tax rate (5 percent) for the Middle Quintile in 2000.
Since 2000, we’ve gotten a couple of tax cuts and they’ve thrown everything off. On page 6 of this 2007 CBO report, we see that for the Middle Quintile in 2005 the effective tax rate for individual income was 3 percent, down from the 5 percent it was in 2000. From that fact alone we know that things had skewed even more against the EZ filer, so let’s do the taxes for 2005.
Using the 2005 1040EZ (form, instructions), an unmarried person with the average pre-tax income for the Middle Quintile ($58,500) would have had a tax bill of $9,246. So that taxpayer would have had an effective tax rate of 15.8 percent, not the 17.5 percent of 2000. But here’s the kicker, rather than paying at 3.5 times the average effective tax rate for the Middle Quintile, as in 2000, in 2005 that same taxpayer would have had an effective tax rate that was more than 5 times the average.
Though our 1040EZ filer got a tax rate cut, he’s providing a greater share of the revenue. Since the Bush tax rates are now permanent for everyone except the top 1 to 2 percent, that situation continues.
On page 6 of the 2007 CBO report, check out the Effective Tax Rates for Individual Income for the five quintiles. The percentages for 2005 of the lowest to the highest quintiles are: -6.5, -1.0, 3.0, 6.0, and 14.1. As you can see, those in the bottom two quintiles don’t pay income taxes and get money from the government just for filing. But look at those in the Highest Quintile; they have a lower average effective income tax rate than does someone making the average income in the Middle Quintile who files the 1040EZ; that’s 14.1 percent to 15.8 percent. Is that equitable?
Other than one’s personal exemption ($10,000 for an unmarried person), the only write-off one can take with the 2013 1040EZ is the EIC, or Earned Income Credit; (see page 12 in the instructions). But only unmarried taxpayers with incomes below $14, 340 can take advantage of the 2013 EIC. Using the 2013 1040EZ, an unmarried person making that income would pay $433 in income tax, and have an effective rate of 3.019 percent.
That means that a person with a poverty income can have an effective tax rate roughly equal to that of the average in the Middle Quintile. Progressives are always squawking about equality, is that what they mean?
If you’re using the 1040EZ, you’re paying top dollar to the federal government. But your problem is not the 1040EZ; it’s the Tax Code. That means you can’t get relief by using the 1040A, nor the regular 1040. If you have nothing to itemize, if you’re unmarried, if you’re childless, if you’re healthy as a horse — if you’re young — you’re going to pay a significantly higher effective tax rate. Period! End of story! That means that capital formation, i.e. saving, so that you someday can get married, start a family, and buy a house, is going to be more difficult than it should be.
Those who itemize, take the EIC, have dependents, or take advantage of any of the countless exceptions in the Tax Code that allows them to pay less than the full freight, aren’t just being carried by the wealthy, they’re also being carried by those in their own income bracket who either don’t or can’t take advantage of those exceptions. That should rile every young American, especially if they have a tax bill that is more than five times that of someone who has the exact same income.
Finally getting around to looking at the 1040EZ has been an eye opener. Young Americans aren’t just getting screwed by Obamacare, and Social Security, and unfunded mandates, and the ever-rising public debt, they’re getting screwed by the IRS, too. But perish the thought that Congress should change entitlements in any way whatsoever; some poor retiree might have to cancel his annual Caribbean cruise.
Jon N. Hall is a programmer/analyst from Kansas City. • (4574 views)