Tuesday, September 18, 2012

Why do 47% of Americans Pay No Income Tax?

 .....And what matters about Mitt Romney's revealing statement.

Last year conservative pundit Ramesh Ponnuru destroyed the argument of the "freeloader myth." And while I ultimately disagree with Ponnuru's conclusion (that the point of conservatism is to make sure nobody's taxes ever get raised), the rest of his column is on point. Ponnuru painstakingly takes us through the tax code to explain why poor, elderly, and many middle class families pay no net federal income taxes. And he has background on the history of the policies that created this situation.

I really didn't want to have to step through the tax code again, since doing my own taxes is brutal enough, let alone projecting a fake person's taxes, so I'll let Ponnuru tell you:
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.
Also as Ezra Klein noted in a blog post last night, of the roughly 47% who pay no net federal income taxes, over 45% of those can be easily explained.

(Source: The Tax Policy Center)

1) 28.3% of the country are middle income folks who pay no net federal income taxes due to a series of tax credits and deductions: Personal Exemption, Dependent Exemption, The Child Tax Credit, the Home Mortgage Interest Deduction, and depending on how far their income has dropped, the Earned Income Tax Credit and other deductions for things like Student Loan Interest. But of course people still pay regressive payroll taxes along with local and state taxes. And of course everyone pays the flat sales and sin taxes that help fund state and local government services.

2) 10.3% of the country are elderly and end up paying no net federal income taxes due to the tax laws that exempt some social security benefits from taxation.

3) 6.9% are poor people with incomes under $20,000. Or as the Republicans call them, "the lucky ones." Again, they take advantage of many of the tax credits and deductions described previously. It's just that their incomes are so low, it results in them paying no net federal income taxes.

4) Less than 1% are the rest - most likely the ultra-rich with complicated tax shelters and some other tax cheats.

Romney has spent the last month or so defending his vague tax plan against valid charges that in order for it to be deficit-neutral, then taxes on the lower and middle income people will go up and/or many lower and middle income deductions will be reduced or eliminated. It's going to be a lot harder for him to make a convincing case that he does not intend to raise taxes on the lower and middle incomes after his revealing comments from this week. His statements show a person who is disdainful to those who are suffering and barely getting by.

And moreover, he and his rich brethren view tax avoidance as a proud moment of individual accomplishment. "I pay all the taxes I'm required to pay and not $1 more" is Romney's standard defense of his tax rate. Yet when lower and middle income people take advantage of similar benefits in the tax code, he treats them as freeloaders. Project much?

For a multi-hundred-millionaire paying, at most, a 13% tax rate in his only tax return we're privy to, his conclusion apparently is that the major unfairness in the tax code isn't that people like him are paying too little, but that middle class people have too many tax deductions and the poor and elderly are extremely fortunate to have insufficient taxable income.

The question is was this just another Romney pander to the economic conservatives in the GOP base or does he really believe it? If it's the former, then it shows a real lack of courage on his part and a questionable cynical strategy at best. And frankly it shows a lack of competence on the campaign trail that is puzzling for someone whose main selling point is executive success. If it's the latter it reveals a person who, in spite of his CEO background, has completely misdiagnosed the real problems in the country during the last decade. Voters should reject him for it either way.

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