More than 45 percent of U.S. households won’t owe federal income taxes for 2010. That stems from decades of tax cuts and, in the minds of some Republican lawmakers, it’s also a problem.
Policies designed to ease the tax burden of lower-income Americans and offer targeted tax incentives have pushed millions of people off the income tax rolls. That has bolstered an argument that these households don’t have enough of a stake in the political system because they don’t pay income taxes.
“As a matter of fairness, wouldn’t it make more sense if all citizens paid at least something in income taxes?” asked Orrin Hatch, the top Republican on the Senate Finance Committee, at a March 30 hearing. “I am convinced that it would help us in our fight against excessive federal spending. You get a lot of takers when you ask people if they want more of something and you tell them it’s free.”
Requiring everyone to pay some income taxes could shift more of the burden onto low-income workers at a time when income and wealth are more concentrated at the top of the economic scale. It would also come as Democrats are trying to allow income tax rates for the top two brackets to rise.
“Just as a political matter, it’s really hard to make somebody who’s paying nothing pay something,” said Bruce Bartlett, an economist who worked for Republican presidents and who has been critical of recent Republican policies. “It’s easier to get people who are paying something to pay more.”
Why People Don’t Pay
Lawmakers often cite a 47 percent nonpayer figure from the nonpartisan Tax Policy Center in Washington, which it calculated for tax year 2009, said Roberton Williams, a senior fellow at the center. The figure declined to 45 percent in 2010, and a comparable figure for 2011 is not yet available. It’s likely to be lower, because the $400 per person Making Work Pay income tax credit from the 2009 stimulus law expired at the end of 2010.
Any attempt to add people to the income tax rolls requires examining the reasons why some people don’t pay.
Nonpayers typically have low incomes or are retired and living off their savings. In tax year 2010, a married couple with two children earning $26,000 would pay no income taxes because of the standard deduction and personal exemptions.
Beyond that threshold, the earned income tax credit, the child tax credit and other similar provisions can generate tax refunds for people who pay no income taxes. The introduction of the 10 percent bottom tax bracket as part of the 2001 income tax cuts sought by President George W. Bush also pushed people outside the income tax system.
Other Taxes Paid
Focusing on income taxes doesn’t convey the full picture of the U.S. tax burden. Most low-income individuals who pay no income tax face federal payroll taxes, along with state and local sales taxes.
“It’s a fair point if given in context,” said Dan Maffei, a former congressman from New York who is now a distinguished senior fellow at Third Way, which develops policy ideas for Democrats. “Frequently, the Republicans don’t put it in any context, and often they drop the word ‘income’.”
Any effort to increase the pool of filers could fall most heavily on those at the bottom of the income scale. This is compounded by efforts to reduce top marginal individual and corporate rates to 25 percent, as proposed by Representative Dave Camp, chairman of the House Ways and Means Committee, and Representative Paul Ryan, chairman of the House Budget panel.
To hit that target, Ryan and Camp would need to eliminate $2.9 trillion in so-called tax expenditures over the next decade, according to the Tax Policy Center.
The problem, Williams said, stems from the dual mandate that Congress has given the IRS. The agency runs a tax collection system and a benefit distribution system, doling out incentives for energy, housing, health and income support.
“We’re mixing apples and oranges in trying to get the IRS to run this hybrid system,” Williams said.
Pulling all those functions out of the tax code and turning them into spending programs would make it easier to create a tax code that limits nonpayers to those with very low incomes.
The other approach to increasing the number of federal taxpayers, Bartlett said, would be to impose a federal consumption tax, such as a value-added tax. That would be regressive, too, because low-income individuals tend to spend a greater share of their income than others.
“The more practical problem is simply that we need additional revenue to reduce the deficit,” Bartlett said. “It’s impractical to think we’re going to get that simply by soaking the rich.”
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