Why 47% — or 46% — of Americans pay no income tax
Tuesday, September 18, 2012
If politics is blood sport, then Republican presidential challenger Mitt Romney just became a gaping wound.
The release by Mother Jones of this video of Romney talking about his fundraising strategy at the Boca Raton, Fla., home of private equity manager Marc Leder is already leading some to predict that it has cost Romney the election.
I’ll leave the political wrangling to the pundits, but what interests me is Romney’s claim about the 47 percent of the people who, as Romney put it, “are dependent upon the government, who believe they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it.”
He’s is referring to those in the country who don’t pay income tax. Now, it may be a stretch to say that all of those who pay no tax are dependent on the government, but the real issue is why so many people pay no tax. Romney implies it’s because they don’t want to take responsibility for themselves, but half the American population can’t be dismissed so easily as freeloaders.
The nonpartisan Tax Policy Center dug into
this issue last year, and its findings provide some context. First of all, the number for 2011 is 46 percent (47 percent was for 2010). And of course, this pertains only to those who don’t pay income tax. That doesn’t mean they don’t pay other federal payroll and excise taxes.
As the TPC found:
About half of people who don’t owe income tax are off the rolls not because they take advantage of tax breaks but rather because they have low incomes. For example, a couple with two children earning less than $26,400 will pay no federal income tax this year because their $11,600 standard deduction and four exemptions of $3,700 each reduce their taxable income to zero. The basic structure of the income tax simply exempts subsistence levels of income from tax.
And what about the other 23 percent? The TPC again:
Three-fourths of those households pay no income tax because of provisions that benefit senior citizens and low-income working families with children. Those provisions include the exclusion of some Social Security benefits from taxable income, the tax credit and extra standard deduction for the elderly, and the child, earned income, and childcare tax credits that primarily help low-income workers with children. Extending the example offered above, the couple could earn an additional $19,375 without paying income tax because their pre-credit tax liability of $2,056 would be wiped out by a $2,000 child tax credit and $57 of EITC.
Those provisions matter most for households with income under $50,000, who make up nearly 90 percent of those made nontaxable by tax expenditures. Higher-income households pay no tax because of other provisions. Itemized deductions and credits for children and education are a bigger factor for households with income between $50,000 and $100,000. The relatively few nontaxable households with income over $100,000 benefit most from above-the-line and itemized deductions and reduced tax rates on capital gains and dividends.
In other words, the problem is the long-standing practice, favored by both parties, of administering social programs through the tax code. Rather than increase federal spending to pay for all these benefits, Congress chose to create incentives in the tax code. What’s more, many of these tax credits provide even bigger benefits to higher-income households, the TPC found, measured both by dollar value and share of income. That’s part of the reason that so many of these tax benefits stay in place.
In fact, if you include corporations, the U.S. loses about as much each year in tax credits — $1.2 trillion — as it collects in tax revenue, according to the TPC. Most of those benefits, about 60 percent, go to the top income bracket. But the remaining 20 percent are enough to zero-out lower-income earners. All of which makes a strong case for a sweeping overhaul of the tax code.
Romney, of course, wasn’t at a fundraiser to discuss tax policy. But rather than writing off 46 — or 47 percent — of the population as freeloaders, he’d be better off focusing the discussion on tax reforms that would bring many of them back into the tax-paying fold.
Quelle: Houston Chronicle