A great deal of ink has already been spilled over Mitt Romney’s off-the-record remarks at a fundraiser concerning the 47 percent of Americans who are dependent on government, who do not pay federal income taxes, and who would never dream of voting for a Republican presidential candidate. President Obama has woven references to Romney’s supposed contempt for the 47 percent into his stump speech, to great effect. Many on the left are convinced that Romney’s reference to the 47 percent has cemented the perception that he is a clueless plutocrat, thus dooming his presidential campaign.
In response to this feeding frenzy, many on the right have leapt to Romney’s defense. And Romney’s defenders have made at least one crucially important point, which is that the dependency the former Massachusetts governor referenced is a serious and growing problem. In the latest issue of National Affairs, David Armor and Sonia Sousa of George Mason University document the extraordinary growth of federal anti-poverty schemes such as the Supplemental Nutritional Assistance Program (SNAP). Between 2000 and 2010, the number of SNAP beneficiaries has gone from 17 million to 40 million. Much of this growth can be attributed to a rapid rise in the number of non-poor households that receive SNAP benefits. As of 2010, these households accounted for 48 percent of the SNAP rolls. Over that same decade, Medicaid enrollment shot up from 33 million to 54.6 million, and that number is expected to increase dramatically if President Obama’s health-care law goes into effect as scheduled.
One interpretation is that this expansion of the SNAP rolls and Medicaid represents a moral triumph that has materially improved the lives of the poor and near-poor, and that it should be celebrated. Another interpretation is that it represents a profound failure, in that our broken economy has for at least the last decade failed to grow in a way that would have delivered these benefits and more as rewards for hard work rather than dignity-sapping handouts. These views are far enough apart that we can’t expect any real reconciliation of them anytime soon. Even so, Romney’s defenders are right to want to have this debate.
The problem for them is that the Republican nominee didn’t make a very sophisticated point about dependency in his off-the-cuff remarks. Rather, he conflated a number of distinct issues in a particularly destructive and distracting manner. Perhaps the most obvious criticism is that many of those who reflexively oppose the GOP are among America’s well-off, from ultra-wealthy social liberals to upper-middle-class professionals employed by the public sector. And while the dependency of the poor is of great consequence, the dependency of public employees and subsidized industries is at least as important. Then there is the fact that virtually all of the households with no federal income-tax liability pay other taxes. Once we factor in Social Security and Medicare payroll taxes, for example, the share of households that aren’t paying taxes falls to 18 percent. Adding in state and local taxes, including retail sales taxes, causes the number to fall further still.
Even if we do focus exclusively on federal income-tax liability, it is not clear that there is a strong conservative case for dramatically shrinking the 47 percent. Last July, Roberton Williams of the Tax Policy Center broke down why 46 percent of tax units — that is, individuals or married couples filing jointly and their dependents — had no income-tax liability, drawing on the findings of a report he co-authored with Rachel Johnson, James Nunns, Jeffrey Rohaly, and Eric Toder. The analysis is complicated, and it doesn’t line up well with the dependency story Romney seemed to have in mind.
Half of these households have no federal income-tax liability because they report very low incomes. Most of the rest rely heavily on Social Security benefits, which are partly excluded from taxable income, or receive tax credits aimed at raising the disposable income of low-income workers with children. Which of these provisions would we really want to change?
Republicans have championed the earned-income tax credit (EITC) as an anti-poverty tool that emphasizes labor-force participation, and the program is rightly regarded as a success. In fact, there is a case for improving or expanding the program in various ways. We might, for example, embrace wage subsidies that would raise the incomes of low-wage workers who aren’t parents (perhaps by increasing the EITC income threshold for nonparents). We might also take stronger action to reduce fraudulent EITC claims. Yet there is strong evidence that the EITC has increased labor-force participation more than unconditional cash assistance. In doing so, it has encouraged poor people to get on the first rungs of the economic ladder. The central problem facing the poor is that, in the absence of robust economic growth and healthy labor markets, there hasn’t been enough of a chance to climb up the ladder to real economic independence. But the EITC is not to blame.
#page#Tax credits for parents are a low-cost way to recognize that raising the next generation constitutes an expensive investment in human capital that will yield dividends for society as a whole, as Ramesh Ponnuru and Robert Stein have argued on National Review Online. Shielding Social Security benefits from taxation is extremely popular politically, and there is no reason to believe that it creates a particularly strong work disincentive. To the extent that it does, conservatives might consider exempting over-62 workers from the Social Security payroll tax to encourage senior citizens to keep working, as Andrew Biggs of the American Enterprise Institute has proposed.
What is the basic idea that ties these threads together? It is that the tax code should be attuned to the life cycle. Many low-income households are headed by young people, including students and workers in the apprenticeship phase of their careers. Many high-income households, in contrast, are headed by prime-age individuals, who are in a better position to carry the tax burden than their younger or older counterparts. Some prime-age individuals have children, and they are thus obligated to make substantial human-capital investments in their children that generate significant spillover benefits to the wider economy. Other prime-age individuals do not have children.
The elasticity of taxable income (i.e., the degree to which higher income taxes create a disincentive to work) varies between individuals and between broad demographic groups. For example, very young workers and those close to retirement appear to be more tax-sensitive than prime-age workers, and a secondary earner (i.e., the member of a couple with a lower income) is more tax-sensitive than a primary earner. Conservatives have long argued, and rightly so, that these differences between people’s circumstances should be reflected in tax policy. A policy that recognizes such differences is more likely to encourage growth and widespread labor-market participation than one that does not.
Republicans who have embraced the “takers” interpretation of the statistic that 46 percent of tax units don’t pay federal income taxes forget why Republican policymakers of the past created policies like the EITC and the child tax credit in the first place. This has left the GOP vulnerable to the charge of indifference to the fate of the poor. What conservatives should be arguing is that the way to reduce the number of households that don’t pay taxes is to enact policies that make everyone — the 100 percent, to use Mitt Romney’s new turn of phrase — richer. To get there, however, we need tools like the EITC to inculcate the habits of work, and a generous child tax credit to help cash-strapped working parents invest in America’s future work force.
Some have asked why conservatives seem to be repudiating tax reforms that GOP stalwarts such as Ronald Reagan, who celebrated the fact that his 1986 tax reform removed large numbers of low-earners from the tax rolls, championed in the past. Many of today’s Republicans are unacquainted with the case for the EITC, the child tax credit, and the exclusion of Social Security benefits, or else fail to connect these initiatives to the narrowing of the tax base. This is an intellectual failure. We need conservative politicians who are willing to explain why low-income and middle-income parents should be removed from the tax rolls during the years they are making the biggest investments in their children, and to make the case for the EITC program as an alternative to worklessness and lifelong dependency.