The 47 percent: Think too few Americans pay income tax? Here’s how to change it.
By Neil Irwin,
Let’s take Mitt Romney at face value. If he believes that too few Americans pay federal income tax, how could he change that? And what would be the result?
The answers will not seem very attractive to most voters — or, for that matter, Republican politicians.
Romney argued at a private fundraiser last spring that the 47 percent (actually, it’s 46 percent) of American households don’t pay federal income taxes amount to a group that is “dependent upon government, who believe they are victims, who believe the government has a responsibility to care for them.”
Arguments along these lines have percolated on the right for at least a decade, going back to when the Wall Street Journal editorial page described these Americans, who have enough deductions and credits to pay no income tax, as “lucky duckies.” This gives them every incentive, the Journal and conservatives have argued, to vote into office politicians who will expand the welfare state, content in the knowledge that they won’t have to pay for it.
Much rarer, even among those who embrace that argument, is advocacy of some of the specific policy changes that would make those duckies not so lucky. Here are three of them:
Some 44 percent of those who pay no federal income tax escape the burden because they are elderly. A major reason: Social Security benefits are generally untaxed for those recipients without substantial additional income. But if an enterprising politician wanted to change that, it probably wouldn’t be easy.
One approach would be to begin taxing all Social Security benefits like they were ordinary income. Presumably, the government would increase the amount of payments to make the after-tax payments the same, but this adds a lot of complexity: Right now, say, the government might pay a senior $15,000 a year, untaxed. In this scenario, suddenly the government is paying the person $20,000, but requiring them to fill out a 1040 form and send $5,000 of it back to Uncle Sam. In other words, it adds a lot of complexity to that elderly person’s life while, in effect, not changing anything substantively.
If you are an advocate of limited government, it could be true that forcing that senior to fill out an income tax form might make him a greater skeptic of government spending. But in the near term, it would be more of a boon for H&R Block than for the elderly or the U.S. Treasury.
There are other tax benefits for the elderly that could be eliminated without such Rube Goldberg processes, like an extra-high standard deduction for the elderly; eliminating it would mean more seniors facing an income tax obligation.
Stop subsidizing children
As it set about to cut taxes more than a decade ago, the George W. Bush administration put particular emphasis on what it saw as a pro-family tax code. In particular, it doubled the per-child tax credit to $1,000, made it refundable even to families who didn’t have enough income to benefit otherwise. It increased the standard deduction for married couples to eliminate the “marriage penalty” that had made it more costly, from a tax perspective, for many to marry rather than stay single.
“Tax relief is an achievement for families that want the government tax policy to be fair and not penalize them for making good choices,” said Bush at the signing ceremony for the legislation on June 7, 2001. “Good choices such as marriage and raising a family.”
But those carve-outs mean that more families with children don’t pay any income tax, to the consternation of many conservatives. According to the Tax Policy Center, in 2011, there were 6.1 million families in the lower- to middle-income brackets — $30,000 to $75,000 — who did not pay federal income tax because of child tax credits and income credits for the working poor.
Depending on what happens this year, those tax subsidies for child-rearing and marriage could go away. The 2001 Bush tax cuts are scheduled to expire at the end of the year, and while both President Obama and congressional Republicans say they want to keep these provisions (the dispute is over tax rates for those making more than $250,000), if they cannot reach a deal to avoid the “fiscal cliff,” the family-friendly tax policies would go away.
Add a value-added tax
This wouldn’t change the ratio of people who pay federal income tax. But if Romney and his allies really wanted to ensure that the burden of paying for federal benefits is more widely shared among their countrymen, the surest way to do it would be a value-added tax.
Prevalent in Europe, the tax works like a turbo-charged version of the sales tax charged in most U.S. states. But instead of only collecting the tax on final retail sales, a VAT is charged at each incremental level in the production and distribution of a product, making it harder to evade.
The 46 percent of American families who do not pay income tax have to buy things — food, clothing, furniture — and so would be hit by a VAT in the form of higher prices for almost everything they purchase.
Proportionally, a VAT would fall more on lower-income people than those with high incomes, resulting in them carrying more of the burden of paying for government services. An average family in the top 20 percent income bracket, making more than $91,931, spends 62 percent of its after-tax income on goods and services, according to the Labor Department’s Consumer Expenditure Survey. By contrast, the bottom 40 percent, those making less than $35,209, spend more each year than their incomes.
The idea of a new tax is hardly a crowd-pleaser, however, even among those who worry that too few people are footing the bill for the U.S. government. On the Wall Street Journal editorial page last year, for example, Ernest S. Christian and Gary A. Robbins argued that “a VAT is the ideal choice for those whose goal is to refinance government sufficiently to allow it not only to continue ‘business as usual’ but also to expand on a grand scale.”