The Bowles-Simpson column of the summary chart has been corrected. We apologize for the errors. Additionally, the Wyden-Coats international corporate tax section has been supplemented.
As it happens, Mitt Romney’s tax plan wouldn’t do much to change the number of Americans who don’t pay federal income taxes. But the three major bipartisan tax reform proposals would. In fact, two would increase it considerably, and the one that exempts the most people from income tax is also the hardest on the poor.
The three plans on offer are the tax section of the Bowles-Simpson debt plan, offered by the co-chairs of President Obama’s fiscal commission in late 2010; the tax section of the Domenici-Rivlin debt plan, a debt reduction proposal put out around the same time by the Bipartisan Policy Center, and Wyden-Coats, a bipartisan bill in the Senate championed by Oregon’s Ron Wyden.
The short version: Currently, most people making less than $46,000 are exempt from the income tax, a cutoff which Bowles-Simpson preserves. But Wyden-Coats moves it up to almost $60,000, and Domenici-Rivlin moves it up to more than $75,000. For comparison, in 2011 the mean income for the fourth quintile was $80,080. So Domenici-Rivlin would mean that between 60 percent and 70 percent of Americans don’t pay any income tax, even as it increases the burden on poor people.
Here are the details of each plan (click to enlarge); the blue squares are provisions that increase the deficit, the yellow ones are provisions that are ambiguous on the deficit, and the green ones are provisions that decrease the deficit:
In general, the Tax Policy Center has found that Domenici-Rivlin hits high earners the hardest, followed by Bowles-Simpson. Wyden-Coats cuts average tax burdens almost across the board (the dashed line is the current tax code):
What does this mean for the 47 percent currently not paying income taxes? The relevant provisions for those people are the standard deduction, the Earned Income Tax Credit and the child tax credit. As Brad noted yesterday, 74.4 percent of those who don’t pay income tax are exempt because of the standard deduction or credits like those for working families.
Bowles-Simpson doesn’t touch those provisions, but Wyden-Coats triples the standard-deduction, and Domenici-Rivlin replaces the standard deduction, personal exemptions, and Earned Income Tax Credit with a tax credit worth 21.3 percent of the first $20,300 somebody earns. How does that change things for a two-earner family of four?
Bowles-Simpson is less generous more or less across the board while Wyden-Coats is significantly more generous for all but the poorest households. Domenici-Rivlin is a little bit better for the extremely poor, significantly worse than the other three plans until you reach the mid-$30,000s and then pulls out ahead, remaining much more generous for high earners. Indeed, the standard deduction provisions of both Domenici-Rivlin and Wyden-Coats are big boons for middle-class and high-income households, as you can see if you expand the above chart to include people making up to $300,000:
The consequence is that despite Domenici-Rivlin hitting the working poor harder than the rest of the plans, it’s the plan that increases the proportion of the population not paying any taxes the most. Here is the estimated tax burden by income for each plan, assuming one takes the standard deduction and only utilizes the EITC and child credits:
So Bowles-Simpson doesn’t much change the number of people with zero or negative income tax liability. But Wyden-Coats greatly increases the number who wouldn’t pay income taxes, and Domenici-Rivlin would increase it further, though it would do so, in part, while raising taxes on the working poor.
In fairness, the Domenici-Rivlin approach to poverty reduction has other virtues. The plan would pay out the earnings credit as part of paychecks, a big improvement over the Earned Income Tax Credit, and there is no phaseout period, meaning there isn’t a incentive for the working poor to earn less to avoid losing benefits. But it’d have to a bit more generous to match the current tax code’s benefits.
So at the very least, tax reform isn’t likely to reduce the number of people paying no income tax, and two plans stand to increase it considerably. The 47 percent, in other words, only stands to gain members.