(This column is part two in a two-part series. Part one, “Half don’t pay taxes is one misunderstood rubric,” discusses the common misunderstandings the public has about taxation.)
In any given recent year, 40 percent to 50 percent of the “tax units” in our country don’t pay any federal income tax or even get some net amount back. Some see this as a threat to our economy and our democracy, arguing that nonpayers have no economic stake in the fiscal health of our nation.
Is this a valid concern? There certainly has been plenty of commentary devoted to the question over the past two years, though much of it has suffered from misunderstandings of the statistics involved. Yet, some more credible analysts, such as New York Times columnist David Brooks, also have fretted about the issue. Such concerns are misplaced, for a number of reasons.
First, as explained in a previous column , a high proportion of nonpayers simply have incomes less than the threshold levels at which any tax is due. These are largely people 25 and under or 65 and older. Virtually all of them either will pay income tax for many years later in life or already have done so for decades. The idea that because they are temporarily in a low-income phase of their lives they will take a cavalier attitude toward the nation’s economic health stretches credulity.
Unfortunately, because it is hard to mesh the “tax units” tabulated by the IRS with “households” measured by the U.S. Census Bureau and follow these over decades, determining exactly what proportion of people pay taxes for how many years of their lives is difficult. But available data strongly indicate that well over 90 percent of all individuals spend most of their adult lives in households that pay federal income tax. The number of lifelong “lucky duckies” (to use the Wall Street Journal term for those who owe no tax) is very small.
Secondly, the federal income tax originally was designed to be paid by only a fraction of all households. When implemented in 1913, only 358,000 returns were filed out of more than 20 million households. In 1940, even as taxes were being ramped up for World War II, only 7.5 million returns owing tax were filed from 35 million households. Yet, there was little thought that these low payment rates somehow undermined the economy or the political system.
Yes, this was due almost entirely to high thresholds for taxable income rather than special credits for education, child care or low earned incomes. Even though the fiscal pressures of World War II dramatically increased taxes, the 1945 personal exemption of $600, when adjusted for inflation, would equal $7,467 today. That is more than twice the $3,700 allowed for 2011 returns.
According to some analyses, if we junked all current “tax expenditures” – all the special exemptions, deductions or credits – and simply went back to the personal exemptions and zero-bracket amounts allowed 65 years ago, more rather than fewer households would be “lucky duckies.”
Thirdly, as rock-ribbed and revered an anti-tax conservative as Ronald Reagan thought it laudable to exempt more households from paying income taxes. When he signed the Tax Reform Act of 1986, he proudly pointed out that “Millions of working poor will be dropped from the tax rolls altogether” and termed it “a sweeping victory for fairness.”
If Ronald Reagan thought exempting millions from paying federal income taxes was one of the finest accomplishments of his presidency, it is puzzling that so many people who claim to follow in his footsteps view it as harmful.
Some might argue Reagan did not appreciate the extent to which his reforms would create morally hazardous incentives for nonpayers to finagle entitlement programs. There is one case where this may have happened: the 2003 legislation that created Medicare drug benefits. But it is an isolated case.
Despite much editorial fuming about Congress “creating one new entitlement program after another,” Part D Medicare is really the only major entitlement added in the past 40 years. Moreover, spending on some other programs, especially Aid to Families with Dependent Children, now Temporary Aid to Needy Families, has shrunk relative to the overall economy.
Modern conservatives’ concerns about so many Americans not paying taxes is rooted in our history. Many of our founding fathers supported then-common laws that restricted voting rights to those who owned considerable property and who paid taxes. The same worries that a politically irresponsible economic underclass might abuse the vote to plunder harder working and more productive taxpayers were common in the late 1700s.
Some conservatives today, including Newt Gingrich, advocate similarly tying voting to paying federal taxes. However, the political movement we now call “Jacksonian democracy” argued that the democracy was stronger if all white male citizens could vote. Many states’ property requirements for voting were repealed by the 1820s, although some lasted for decades. Remove the “white” and “male” qualifiers and that belief in unqualified universal suffrage has been the consensus for a century. I see no need to abandon it nor for drastic changes to make people pay income taxes for a greater proportion of their lives.
© 2011 Edward Lotterman
Chanarambie Consulting, Inc.