Thursday, August 25, 2011

Do Republicans Want to Raise Taxes on the Poor and Elderly?

It seems that a relatively frequent refrain from Republicans of late is that we shouldn’t raise taxes on the wealthiest Americans because a big percentage of Americans don’t pay any taxes (the percentage is often said to be in the high 40s or low 50s). First, I want to take a brief look at this claim (without getting all number-crunchy) and then I want to talk about what the argument really means.

One of the things to listen to carefully when you hear a politician (or Faux News host) claim that a majority of Americans don’t pay taxes is to see whether they remember to modify the word taxes with  either “income” or “federal” (or both). Lately, at least some politicians and commentators have begun to get a bit more careful, but many play very fast and loose with the language. And making the claim that a majority of Americans don’t pay tax is a very different claim than saying that a majority of Americans don’t pay federal income tax. Those who make the “no tax” claim are either just stupid or they’re trying to deceive their audience. After all, if you buy a loaf of bread, you pay sales tax (at least in most states); if you buy a gallon of gasoline, you pay an excise tax; when you pay your phone bill, a few cents (or more) are taxes collected by the phone company; and most importantly, if you have a job, you pay federal (and probably state) payroll taxes. There are few, if any, Americans who pay no taxes.

So if the speaker desires any sort of accuracy, the claim must be limited to income taxes and not just taxes, in general. While I don’t dispute that the claim that a majority of Americans don’t pay any income taxes sounds bad, it is far less offensive to the ear than the false claim that a majority of Americans don’t pay any taxes.

But let’s go a step or two further in the analysis. Most, though certainly not all, states impose their own income tax. And, while it may be true that many of those who don’t pay federal income tax also don’t pay state income tax, that is neither clear nor accurately reflected in the claim that a majority don’t pay income taxes. One of the reasons that this distinction is important is that Americans receive a deduction for income taxes paid to the state, thereby lowering the amount that they must pay to the federal government. I have no idea (and I’m not really in the mood to do the research) how many people pay state income tax but don’t pay federal income tax, but I’m guessing that it’s not a completely insignificant amount.

Which dovetails into the next point: A principal reason that many people don’t pay federal income tax is because of the various credits and deductions that we’ve added to the tax code. For example, an for an American family earning less than $110,000 (actually more, but that’s where the “phase out” begins), there is a tax credit of up to $1,000 per child. I’ve italicized the word credit because it’s important. A tax deduction reduces the income on which tax is calculated; a tax credit, on the other hand, reduces the actual amount of tax payable. Thus a family earning $50,000 with three kids would (presumably, as I haven’t read through all of the tax code and done all of the math) be entitled to a credit of $3,000. Now, that family would be in the 15% tax bracket and would owe just under $5,000 in federal income taxes before the child tax credit kicked in and reduced that amount to just $2,000. With a little quick “back of a napkin math,” we can conclude that if that family earned only $26,000, the child tax credit would be enough to wipe out their federal income tax liability (for the sake of comparison, a person working 40 hours per week, 52 weeks a year, at minimum wage [$7.25/hour] would earn about $15,000 per year; the family earning $26,000 a year would be employed at about $12.50 per hour). And that is but one credit available to a taxpayer. Low-income Americans are also eligible for credits like the Earned Income Tax Credit (which can be as much as $5,600. And, since the “majority of Americans don’t pay” statistic is of recent vintage, we can’t forget the first time homebuyer credit of $7,500. When all of the various credits that are available are calculated and applied, many Americans who would otherwise pay federal income tax, do not.

Thus, it’s not quite right to suggest that these people are somehow avoiding tax liabilities (and they’re certainly not using offshore or other forms of tax shelters and tax havens for purposes of tax avoidance); rather, we as a country and through our elected legislators have concluded that some conduct is worth rewarding and some people should have their burdens eased.

Keep in mind that there are other sorts of credits and deductions, too. For example, we let people deduct charitable donations from their income; we allow a deduction for the interest paid on a mortgage or home equity loan, and we allow for some deductions (and credits) for medical and educational expenses. Query why, exactly, we allow a tax deduction for charitable giving. After all, if the giving is truly charitable, then why should the giver need a reward in the nature of a tax break?

It is also worth noting that the payroll taxes (for Medicare and Social Security) paid by working Americans amount to a fairly substantial number (and it is also worth noting that the Social Security portion of the payroll tax only applies to the first $120,000 or so of income, so that those earning more than that amount actually pay a smaller portion of their income in Social Security taxes). The temporary reduction of payroll tax rates from about 6% to 4% was of enormous importance to those living from paycheck to paycheck (and note that Republicans now oppose an extension of that reduction…). But working Americans who earn too little to pay federal income taxes (or who are eligible for tax credits that eliminate their income tax burden) still paid more than 4% of their income in the form of federal payroll taxes.

We also need to consider who is not paying federal income taxes and why. By and large, the people who aren’t paying federal income taxes aren’t paying federal income taxes because they don’t have much income. The poor don’t have much in the first place, the unemployed aren’t earning an income, and many elderly are living on their retirement and social security and also have little income. So, perhaps getting upset that a majority of Americans don’t pay federal income taxes is the wrong concern. Shouldn’t we, instead, be more concerned with the fact that a majority of Americans earn so little that they are eligible for enough credits to wipe out their tax liabilities?

So what does all of this mean? Think of it this way: When you hear a Republican tell you that a majority of Americans don’t pay federal income taxes (presuming that they get that statement right in the first place), what they’re really saying is that we need to do one of two things: (a) Remove credits and deductions that allow people to “escape” paying taxes; and/or (b) increase the amount of taxes that those at the lowest income brackets pay. Because only by doing one (or both) of those things do we make the system more “fair” and have more people actually pay federal income taxes. Is that really what Republicans are advocating? At the same time that they are refusing to close loopholes that allow billionaires like Warren Buffet pay lower effective tax rates than their employees (because most of their income is non-payroll and only taxed at the lower capital gains tax rate), do Republicans really want to increase income taxes on the working poor, unemployed, and elderly? Because that’s sure what it sounds like, even if they don’t quite realize that’s what they’re saying.

And, presuming that they really do want to raise taxes on those least able to afford the tax increase, just think what that would mean for the economy. Those people would have less disposable income (after paying more in taxes), so they would be able to purchase fewer goods and services which would drive down demand which would reduce the need for employees which would cause greater unemployment which would further reduce the available income tax base which would, in the end, increase the deficit. But then I guess we could just cut more social services for those that who had been most harmed by those very economic policies. Talk about a vicious circle…

Or, perhaps, if we spent some stimulus money in ways that effectively got people back to work, then the number of Americans earning enough to pay federal income taxes would increase thereby increasing tax revenues. And as those people went back to work, demand for goods and services would increase thereby furthering the need for additional employment which would create still further tax revenues.

Finally, it’s probably worth seeing Jon Stewart’s take on the issue (or at least a related issue). It well-worth watching.

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