It began as a retort and became a fear. For years, when liberals would accuse conservatives of cutting taxes for the rich, our main argument was that low marginal tax rates on high earners were good for the economy. But we would also respond that rich people actually pay a large share of all income taxes. Over time, many conservatives grew convinced that the true fairness issue raised by the tax code is that this share is too large — and, even more, grew alarmed by how many people were not paying income taxes.
That 47 percent of all tax filers have no income-tax liability is now one of the most widely known statistics on the right. (Actually, according to the Tax Policy Center, the figure was 47 percent in 2009 and will be 46 percent for this tax year, but 47 is the number that has lingered in the public debate.) Economist Michael Boskin, a veteran of Republican administrations, fretted in a recent Wall Street Journal op-ed that tax policy “can create a majority paying nothing and voting more spending at the expense of a taxpaying minority.” When he announced his presidential campaign, Texas governor Rick Perry said, “We’re dismayed at the injustice that nearly half of all Americans don’t even pay any income tax.” Michele Bachmann, also running for the Republican nomination, says she will reform taxes so that everyone pays some amount in income taxes.
Rep. Paul Ryan of Wisconsin echoes this concern. “We’re coming close to a tipping point in America where we might have a net majority of takers versus makers in society and that could become very dangerous if it sets in as a permanent condition,” he said in a recent speech to the Heritage Foundation.
This point of view has even inspired a bit of agitprop. In response to left-wing activists’ claim to represent the oppressed “99 percent” of Americans, some conservatives launched a website where people could post statements from “the 53 percent” who pay income taxes. Slogan: “Those of us who pay for those of you who whine about all of that . . . or that . . . or whatever.”
The argument these conservatives are making has two components. First, it is wrong as a matter of civic morality for some people — let alone large numbers of people — to contribute nothing to the support of the federal government. Second, this situation is politically dangerous because it means that, for a large number of voters, big government is, or appears to be, free. These voters will therefore support the expansion and oppose the retrenchment of government, voting themselves goodies at other people’s expense.
The good news is that these fears are overblown. The 47 percent figure does not mean we are near a tipping point. Most of the people included in that figure do make financial contributions to the federal government, and there is no reason to think that nonpayment of income taxes is turning millions of Americans liberal. The bad news is that worrying too much about this number will lead conservatives down an intellectual and political dead end.
According to the Tax Policy Center, provisions of the tax code that exempt subsistence levels of income from income taxes — the standard deduction, personal exemption, and dependent exemption — are the reason for about half of the tax filers who owe no income tax. Another large group of filers pays no income tax because its members are elderly and benefit from such features of the code as the non-taxation of some Social Security benefits. The tax credit for children and the earned-income tax credit, an effort to boost the pay of low-income workers, wipe out income-tax liability for other taxpayers. Those credits are “refundable,” meaning that beneficiaries can get money on top of paying no income tax. Other provisions of the code account for the rest of the 47 percent: education credits, the non-taxation of welfare payments, itemized deductions, and so on.
The Tax Foundation, a conservative think tank, has estimated how many people paid income taxes each year going back to 1950. That year 28 percent of filers had no (or negative) income-tax liability. It dropped for the next two decades, reaching a trough of 16 percent in 1969. It rose, bumpily, back to 26 percent during the Carter years, fell again to 18 percent in 1984, and then began to rise — especially after the Gingrich Congress introduced the child credit. Pres. George W. Bush expanded that credit, and also reduced the 15 percent tax rate that applied to many lower-income workers to 10 percent. Both moves increased the number of people with no income-tax liability. During the last few years, the number leapt upward because of the severe economic slump. Many people saw their incomes drop to levels at which they were eligible for the earned-income tax credit, for example. It is generally assumed that the percentage of non-payers of income tax will drop once a real recovery begins.
That last point is one that liberals typically make when confronting conservative complaints about the 47 percent: The figure is temporarily inflated. The other thing liberals typically say is that the vast majority of people who do not pay income taxes pay other taxes to the federal government, especially the payroll tax. Federal taxes are still “progressive” — higher earners pay a disproportionate share of federal taxes — but the Tax Policy Center estimates that only about 18 percent of filers pay neither income nor payroll tax.
How to count payroll taxes is a disputed subject. Many conservatives argue that since payroll taxes are dedicated to Medicare and Social Security, people who pay only payroll taxes are contributing to their retirements but not to the general operations of the government. The irony here is that FDR deliberately and explicitly introduced the payroll tax to accompany Social Security because it would encourage people to draw this false connection. In reality, the relationship between payroll taxes sent to Washington and Social Security benefits sent back is loose: Today’s beneficiaries get much more than they sent, and tomorrow’s will get less. (In the case of Medicare, there is no relationship.)
The point of the payroll tax, for FDR, was to ensure that “no damn politician” could ever take away the benefits because (to paraphrase conservative author William Voegeli) all the damn voters would think they had earned those benefits through their payroll taxes. All federal taxes go to the federal government, and all federal spending comes from it: The rest is accounting, and accounting tricks. People who pay payroll taxes are funding the federal government, and conservatives who deny it are falling for a trap FDR set for them.
It follows that the conservative hostility to “refundable” tax credits is mistaken. If a tax credit counts as a tax cut when it applies against income taxes, it counts as one when it applies against payroll taxes too. A particular credit may or may not represent sound policy, but that determination cannot turn on refundability.
It matters how we treat payroll taxes because, while fewer people pay income tax than did so in the Seventies, the burden of the payroll tax has gotten heavier. Count both the payroll and income tax and there is no trend toward lighter federal taxes on the lower middle class. The Tax Policy Center has estimated tax rates over time for families of four who make half the median income. People at that income level in 1955 paid 2 percent of their income to the federal government and faced a 2 percent marginal tax rate on their next dollar earned. People at that income level in 2005 paid the federal government 4.2 percent of their income and faced a marginal rate of 38.7 percent.
There is a certain plausibility to the claim that the more people fall off the income-tax rolls, the more will support federal activism. But there is a series of evidentiary hurdles that this claim cannot begin to overcome. There is no evidence that changes in the percentage of people who pay income tax has had any effect on public opinion, let alone a large one. The U.S. that began the Democrats’ 40-year reign in the House of Representatives in 1954 had roughly the same percentage of non-payers of income tax (24.9) as the U.S. that ended it in 1994 (24.4). A relatively large proportion of the citizenry paid income taxes in the early 1960s. It didn’t stop the Great Society from being enacted. The number of people who pay no income taxes moved up fast between 2006 and 2010, which has helped set off conservative alarms. But voters turned sharply right between the elections of those two years.
The Tax Foundation has calculated the percentage of filers in each state who pay income tax. The ten states with the highest number of non-payers are a strongly Republican bunch: Eight of them went for John McCain in 2008, and nine of them have Republican governors. Keith Hennessey, an economic adviser in George W. Bush’s administration, notes that the historical data suggest that the child credit was the main reason for the increase in the number of non-payers between 1995 and 2007. If the conservative story about falling income-tax rolls is true, then, we should expect to see middle-income parents moving left, compared with the general electorate, during that period. There is no evidence that anything of the sort has happened.
The story also relies on implausible psychological assumptions. It assumes that people who pay payroll taxes but not income taxes make a sharp distinction between the two. But what if they, or many of them, simply think that they have paid taxes? It assumes, further, that immediate circumstances matter more than long-term ones. When conservatives argue for tax cuts for high-income voters, or against tax increases for them, we often point out that some people who are “rich” today will not be in ten years, and vice versa. We argue, further, that high taxes reduce the incentive to work, save, and invest, which presupposes that people can anticipate the taxes they will pay if they gain income. But if they can anticipate future taxes, then the fact that they do not happen to pay income taxes at the moment should not matter.
That point has special relevance for parents who are paying no taxes because of the child tax credit. That credit will not be available to them when their children have become adults. Parents are almost by definition more oriented to the long term, on average, than other voters. They ought to be able to see that their taxes are going to go up when their children grow up, and that if they vote for big government now they will have to pay the bill later.
In one respect, the fixation on the number of people paying income tax is absurdly optimistic. Conservatives who worry about the political implications of this number are assuming that people who pay no income tax will conclude that expansions of government serve their material interests and vote accordingly. But if that’s the case, then surely anyone who pays some income taxes, but gets more in benefits from the federal government, should reach the same conclusion. The real “takers” coalition would then include anyone who is a net beneficiary of the federal government. Under those circumstances merely requiring everyone to pay some amount in income taxes would change nothing. Any welfare state will have a large number of net beneficiaries. In a welfare state that runs routine, large deficits, almost everyone may be among them.
It is entirely plausible that receiving benefits from the government biases some beneficiaries against needed reforms, and that the problem grows more acute the more beneficiaries there are. Surely this is the real cause for concern: Conservatives cannot really believe that it was a flaw in America’s founding that nobody paid income taxes to the federal government for almost all of the country’s history before the welfare state.
But conservatives should seek to remedy the problem by cutting benefits rather than by raising taxes in the hope it will make people more eager to cut benefits. To seek to raise taxes on poor and middle-class people would be a terrible mistake. The idea is bound to be unpopular. And it would alter the character of conservatism for the worse. A desire to cut taxes for people at all income levels, and to oppose tax increases at all income levels, was key to associating conservatism with the diffusion of opportunity in the Reagan years and after. Changed circumstances may demand a different approach than that of three decades ago. They do not compel conservatism to become a creed openly focused on helping one group at the expense of another, a kind of mirror image of egalitarian liberalism.
There are many things to worry about in this world. The number of people paying income tax isn’t one of them.