About those “people who don’t pay taxes”

Republicans have spent a lot of time lately complaining about the sizable portion of Americans who now don’t pay federal individual income taxes.  Current estimates show that over 45% of taxpaying units have a zero or negative federal individual income tax liability, a percentage that has grown over time.

To them, they say, it’s a “skin in the game” problem.   Minnesota Rep. Michele Bachmann, for instance, recently said “We need to broaden the base so that everybody pays something, even if it’s a dollar. Everyone should pay something, because we all benefit.”

Let’s leave aside for the moment the fact that people who don’t pay federal individual income tax are still being taxed in substantial ways — including payroll tax and gas tax at the federal level (the individual income tax only represents 41% of federal revenue) — and look at just who these “nonpayers” actually are.  Are they “lucky duckies” as the Wall Street Journal like to call them?  And just how did they get to the point of paying no federal individual income tax?

Obviously, the key factor behind most of the folks who fall into the nonpayer category is their income.  Specifically, they don’t have a lot of it.  88% of nonpayers have household incomes of under $40,000.  Of the remaining 12%, almost half of them have incomes of over $100,000, including about 4,000 households with incomes over $1 million (that’s up 53% from 2007, even though the number of households with incomes at that level has fallen over that time).

There are other key attributes that tend to drive whether one is a nonpayer or not:  46% of nonpayers are elderly and 64% of nonpayers have dependent children.

So how did we get to this situation?  The short answer is that both parties have filled the tax code with targeted credits.  In the immediate WW-II period through the Nixon Administration, the percentage of nonpayers stayed pretty close to 20%.  The introduction of the Earned Income Tax Credit in 1975 spiked that percentage up slightly such that the percentages tracked closer to 25% until the late 1990s.

Since then, the tax code has been littered on a bipartisan basis with multiple credits that have, in part, caused the sharp increases we have seen in recent years.  The first step was the introduction of the Child Tax Credit in 1998, which gave a $400 tax credit for each dependent child on the return.  This credit was expanded in 1999, 2001, and 2003 (reaching its current level of $1,000).  In 2001, the child and dependent care credit was expanded, and in 2003, the new lowest tax bracket of 10% was established and taxpayers got a cut in capital gains and dividend taxes (this contributes greatly to the wealthy folks who fall into the nonpayer category).  In 2008, taxpayers received stimulus checks, and in 2009, the stimulus bill included the Making Work Pay Tax Credit (replaced in 2011 by a temporary payroll tax cut).

These provisions, building one upon the other and in combination with the weak economic conditions, have created the 45%-plus nonpayer rate we have seen in recent years.  Removing these tax credits would fully cut the number of nonpayers in half.

The real question, then, is where do we go from here?  Should we follow Republican logic to its conclusion, remove the credits, and raise taxes on 60 million lower-income Americans?

That’s where the question gets tougher.  Removing credits like these actually impact all Americans, and the middle class and wealthy would take the brunt of the damage.  Except for the earned income tax credit, all of the credits noted above provide greater benefits to the top three quintiles of Americans than they do the poorest in our society.  In total, the top 20% earn twice as much as a percentage of income (and far more than that in real terms) as the bottom 20% from these provisions.

As such, removing these credits — in and of themselves — is not a solution.  Not only would it take money out the pockets of those who can least afford it, but it would further squeeze middle-class families AND take substantial money away from the wealthy — the so-called “job creators” Republicans have been so anxious to protect.

The real answer to what we’re facing is a return to principles embraced on a bipartisan basis in 1986.  Simplify the tax code by removing all but the most essential credits and deductions.  Lower rates across this wider tax base.  Treat all income the same, regardless if it was earned through work, earned as a capital gain or dividend or inherited.

Such reform would accomplish goals that both parties have:  more people would be paying in, the tax code would be simpler (it shouldn’t be used as a backdoor way to handout money), and it can continue to be just as progressive (or even more so) than before.

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  1. Popping the bubble: more data that bursts commonly-held GOP tax beliefs | Brick City Blog - November 14, 2012

    […] talked about this on more than one occasion, but the data shows that many conservative/Republican talking points on tax policy just […]

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