By Josh Barro
Mitt Romney may have killed his campaign by saying that President Barack Obama's base is the 47 percent of Americans who are freeloading, non-income-tax-paying losers. With any luck, he also killed the stupid Republican talking point about "nonpayers."
Tax collections at all levels of government will total about $4 trillion this year. Of that, just $1.1 trillion will come from the federal income tax, which is by far the most progressive major component of the tax system.
So, when Republicans complain about "nonpayers," they're only talking about one-quarter of the whole tax system. Worse, it's a quarter of the tax system that is hugely unrepresentative of our tax system as a whole. Why would you look at only one piece of the tax code to figure out who is a "maker" and who is a "taker"?
Payroll taxes will raise more than $900 billion this year. And payroll taxes are regressive -- about two-thirds of people who don't pay income tax do pay payroll tax, and they pay at a higher average rate than wealthy people do. State and local taxes, which will total about $1.4 trillion, also tend to be much less progressive than the federal income tax.
This is why we exclude so many people from the federal income tax: It's a way to offset the regressivity of other taxes and achieve a desirable level of progressivity in the tax code as a whole.
Contrary to the Wall Street Journal's insinuations, most people who don't pay federal income tax are not "lucky duckies." The Tax Policy Center has a useful chart explaining why people don't pay income tax. In about half of cases, it's because their incomes are simply too low -- a family of four gets a standard deduction and personal exemptions totaling $26,400, so if they make less than that, they pay no taxes.
In the other half of cases, the $0 bill is due to exemptions, deductions and credits. And in 74 percent of those cases, it's due to three specific tax policies -- the Earned Income Tax Credit, which provides income support to poor people; the Child Tax Credit; and tax preferences for the elderly, including an additional standard deduction and favorable treatment of Social Security benefits. Only 26 percent of these filers -- which is to say, about 6 percent of all Americans -- have a $0 income tax bill for other reasons, such as tuition tax credits.
These are policies we adopted for good and considered reasons. The Earned Income Tax Credit, expanded by both parties since its introduction in 1975, is designed to boost poor people's incomes while encouraging them to work. The Child Tax Credit was designed to knock certain low- to middle-income families off the income tax rolls in recognition of the fact that their child-rearing expenses reduce their ability to pay.
And tax preferences for the elderly are just a component of our social insurance system. Excluding a portion of Social Security benefits from tax is effectively a way of augmenting those benefits. If we raised benefits and then started taxing them in full, more seniors would be "on the tax rolls" without any net impact on either the federal Treasury or those individuals' disposable income. Similarly, an expanded standard deduction for seniors serves as a substitute for higher Social Security benefits.
It would be fine to tinker with these rules at the margins. Reforms that broaden the tax base would mostly increase the taxable income of people who already pay income tax, but they would likely pull in some of the current "nonpayers," for example if we eliminated the additional standard deduction for the elderly.
But desirable tax reforms could just as easily go the other way and exempt even more Americans from federal income tax. For example, we could adopt a Michael Graetz-style tax reform that combines a value-added tax with a smaller and more progressive income tax paid only by high income households. Introducing a new broad-based tax would make it workable to narrow the base of the income tax. Alternatively, we could raise the payroll tax and exclude more taxpayers from the income tax.
None of these reforms would involve balancing the budget by accessing some great, untapped fiscal capacity that exists among the 47 percent. And none of these reforms would change who has "skin in the game" -- in any case, most government revenue would come from sources other than federal income tax, and most everybody would be paying tax on something.
The "nonpayer" talking point gets at a "problem" with our tax code that doesn't exist. Now that Romney has hurt himself so badly by using it, I hope it will finally go away.
-0- Sep/19/2012 21:17 GMT