The Non-Taxpaying Class
Those lucky duckies!
The Wall Street Journal, Nov. 20, 2002.
The stars look to be in perfect alignment for tax relief. With a GOP majority in both houses of Congress, the Bush Administration is making eager and energetic noises, and the economy is in what Fed Chairman Greenspan calls a soft spot.
But as the Republicans construct their tax plan, there is a large and under-appreciated fact they would do well to keep in mind. Over the past decade or so, fewer and fewer Americans have been paying income taxes and still fewer have been paying a significant percentage of income in taxes. While we would opt for a perfect world in which everybody paid far less in taxes, our increasingly two-tiered tax system is undermining the political consensus for cutting taxes at all.
Even the barest of glances at tax data reveal a system that is steeply progressive. Tax revenue has been increasingly squeezed out of top earners. According to the most recent data, from 1999, the richest--with income above half a million dollars--constituted 0.5% of taxpayers but accounted for 28% of total tax revenue. Simply put, a tiny group of people (553,380) were responsible for more than one-quarter of the income tax take of $877 billion.
Well, maybe you're saying--so what? They can afford it. Then take a look at those who aren't Richie Rich. The most recent data from the IRS, in 2000, show that the top 5% coughed up more than half of total tax revenue. Specifically, we are talking about folks with adjusted gross incomes of $128,336 and higher being responsible for 56% of the tax take. Eyebrows raised? There's more. The top 50% of taxpayers accounted for almost all income tax revenue--96% of the total take.
These numbers are more arresting when compared with the situation 14 years earlier. In 1986, the top 1% paid 26% of revenue, the top 5% was responsible for 42% and the top half contributed 93%. And what about the bottom half of taxpayers? They accounted for 7% of the total in 1986 but only 4% in 2000.
This skewed reality is the result of a growing number of absolutely legal escape hatches. Consider what happens to those in the lowest bracket. Say a person earns $12,000. After subtracting the personal exemption, the standard deduction and assuming no tax credits, then applying the 10% rate of the lowest bracket, the person ends up paying a little less than 4% of income in taxes. It ain't peanuts, but not enough to get his or her blood boiling with tax rage.
Of course, lower-income workers are on the hook for the payroll tax--but a sizable group slip free from even that net tax liability via the refundable earned income tax credit. ("Refundable" means that even if your net income tax liability is zero, the government still writes you a check.)
These numbers represent only people who have a positive adjusted gross income. In 1999, there were 127 million tax filers, 94.5 million of whom showed an income tax liability. That is, 26% had no liability at all. The actual number of people filing without paying comes to 16 million (after subtracting those getting earned income tax credits and thus, presumably, still somewhat sensitive to tax rates). So almost 13% of all workers have no tax liability and so are indifferent to income tax rates. And that doesn't include another 16.5 million who have some income but don't file at all.
Who are these lucky duckies? They are the beneficiaries of tax policies that have expanded the personal exemption and standard deduction and targeted certain voter groups by introducing a welter of tax credits for things like child care and education. When these escape hatches are figured against income, the result is either a zero liability or a liability that represents a tiny percentage of income. The 1986 tax reform, for example, with its giant increase in the personal exemption and standard deduction, took six to seven million people off the tax rolls.
This complicated system of progressivity and targeted rewards is creating a nation of two different tax-paying classes: those who pay a lot and those who pay very little. And as fewer and fewer people are responsible for paying more and more of all taxes, the constituency for tax cutting, much less for tax reform, is eroding. Workers who pay little or no taxes can hardly be expected to care about tax relief for everybody else. They are also that much more detached from recognizing the costs of government.
All of which suggests that the last thing the White House should do now is come up with more exemptions, deductions and credits that will shrink the tax-paying population even further.
Conservatives for Higher Taxes, Part 2
Three more reasons why higher taxes on the poor are an idiotic idea.
By TimothyNoah
Posted Tuesday, November 26, 2002, at 3:50 PM PT
In the Nov. 26 Washington Post, E.J. Dionne takes note of the bizarre new conservative idea that poor people don't pay enough income tax. As Chatterbox explained yesterday, the editorial page of the Wall Street Journal test-marketed this party line on Nov. 20 with an editorial headlined, "The Non-Taxpaying Class." If it's received favorably by the winger elite, expect a nationwide GOP rollout early next year. (As Andrew Card would say: From a marketing point of view, you don't introduce screw-the-poor themes during the Christmas season.)
Why are right-wingers, who usually make a point of opposing any and all taxes, suddenly interested in hiking the amount of federal income tax paid by those least able to afford it? The Journal editorial offered three reasons:
Economic. If poor people pay more in taxes, rich people can pay less.
Political. If poor people pay more in taxes, they'll learn to hate the government and vote Republican. (This is the first instance Chatterbox is aware of that a political party has used torture to win converts. Vee haf vays of making you join der GOP!)
Poli-sci.If taxes get too progressive, that creates a large, politically powerful constituency (the poor) that benefits from government spending without having to pay for it.("Workers who pay little or no taxes can hardly be expected to care about tax relief for everybody else.")
The economic and political reasons are so crude that they don't require any counterargument. The poli-sci reason raises a thought-provoking theoretical question that bears no relation to reality. It's interesting to note that, according to Steven Weisman's new book, The Great Tax Wars, the precise opposite argument was made against the income tax when populists pushed it through Congress after the Panic of 1893. (The Supreme Court declared it unconstitutional, delaying its implementation until passage of the 16th Amendment in 1913.) Rep. William Bourke Cockran, a Democrat from New York, opposed the income tax because it was "baksheesh" that would turn control of the government over to the wealthy. "Does any sane man believe," Cockran declared on the House floor, "that a government entirely supported by a class would not ultimately be controlled by a class?" It seems to have escaped Cockran's notice that the compulsory nature of the income tax denied rich people leverage, and that campaign contributions and outright bribes were a much more direct form of baksheesh.
The worry that poor people would vote in ever-larger government at no cost to themselves is less nonsensical on its face, but there are a few problems.
Problem 1: Poor people have a lower election turnout rate than rich people. The Motor Voter Act, which was supposed to make it easier for low-income people to vote, added 10 million people to the registration rolls over the past decade. Yet voter turnout has stayed flat. Strategies to organize welfare recipients into a political force have had some impact at the local level, but none at the national. The proletariat stubbornly refuses to seize the means of production.
Problem 2: Rich people suck harder on the federal teat than poor people do. Or rather, they did last time anyone checked. In a 1992 article for the Atlantic, Phillip Longman and Neil Howe uncovered Congressional Budget Office data showing that U.S. households with income over $100,000 averaged $5,690 in federal cash and in-kind benefits, while households with income under $10,000 averaged $5,560. If you added in tax benefits such as the mortgage interest deduction, the average federal subsidy for the under-$10,000 group stayed about the same while the average for the over-$100,000 group rose to $9,280. It's probably worse now, because, as Chatterbox noted in an earlier item, Republicans shifted congressional spending from poor constituencies to rich constituencies after they won back the House in 1994. During the 1894 congressional debate over enacting an income tax, Rep. William Jennings Bryan cited the greater benefit government bestowed on the wealthy as a reason to make the tax progressive. "Who is it most needs a navy?" Bryan said. "Is it the farmer who plods along behind the plow upon his farm, or is it the man whose property is situated in some great seaport where it could be reached by an enemy's guns?"
Problem 3: The tax code isn't all that progressive. As Chatterbox noted yesterday, when you add in payroll and other federal taxes to the income tax, the proportion of their income that rich people pay in federal taxes is roughly equal to their share of the nation's income. Moreover, as Dionne noted, state taxes tip things the other way. According to a 1995 study by the union-funded Citizens for Tax Justice (which is working on an update), the lowest 20 percent of income earners paid, on average, about 13 percent of their income in state and local taxes, while the highest 1 percent paid, on average, about 8 percent. Before we start worrying whether federal taxes are too progressive, the country should face up to the fact that state and local taxes are too regressive.