So...Who Should Pay Income Taxes?

By :: June 24th, 2011

David Walker, a former Government Accountability Office head, thinks it’s a problem that half of Americans don’t pay federal income taxes. At the June 22 IRS-Tax Policy Center Research Conference, he argued that more people ought to have “skin in the game” when it comes to paying these taxes so they will be invested in our country’s future.  I happen to think almost all of those people he’s talking about do have skin in the game—more than he or I, in fact.

For starters, most people do pay taxes. As Walker recognizes, they pay payroll taxes, excise taxes, sales taxes, state income taxes–and more. Tax reform could easily involve some of these levies, so even people who don’t pay federal income taxes today could be affected by reform.  And please don’t forget, while today’s credits and deductions do knock many low-income people off the tax rolls, those in the top brackets reap far greater benefits.

Also, as noted by my colleague Eric Toder, people don’t pay income taxes either because they have no taxable income (almost all of the elderly who don’t pay income tax, for instance), or because they qualify for credits that offset their tax liability. For the people in the second group, increases in tax rates could very well hit them in the wallet – either because they’ll owe net taxes or they’ll receive smaller refunds.

The Center on Budget and Policy Priorities recent analysis of those who don’t pay federal income taxes jibes with TPC’s. The conclusion? Most are elderly, poor, or unemployed (including people who are too disabled to work). Whom, I wonder, should the tax man put on the block? And how much money is there to be gained by doing so?

The Earned Income Tax Credit keeps many off the tax rolls. But it’s not keeping wealthy people from paying income taxes. TPC estimates that in 2010, about 80 percent of its benefits went to households with income under $30,000.

Furthermore, people tend to receive the EITC for only a couple of years at a time. It might move people off the tax role in some years, but not all years. So even many people who temporarily aren’t paying income tax, likely will in the near future.

If the EITC were run as a spending program rather than a tax subsidy, government could separate its revenue and spending functions. This might diffuse some complaints about people who pay “no taxes.” But that sort of thinking overlooks the real advantages to delivering work incentives through the tax system.  It is administratively efficient, is more accessible to workers than traditional spending programs, and has increased work, especially among single parents. Why fix something that isn’t broken?

Of course, as a spending program it would be targeted for cost cutting while as a tax subsidy it has—so far—remained immune.

At a time when we have a serious budget problem, tax breaks should face the same serious review as spending. But tax breaks for low-income families should not be at the top of anybody’s target list. No matter what happens with tax reform, I know where my next meal is coming from. At least some of those who avoid federal income tax thanks to programs such as the EITC don’t. Adding to their income tax burden will not help.

21Comments

  1. Michael Bindner  ::  12:02 pm on June 24th, 2011:

    I suspect Dr. Walker is being paid to make this argument. It would be preferable if he educated his funders rather than advancing their positions.

    My counter to such an argument is to wonder why so many people have to file taxes at all and at what cost? Poor people do not generally have the quantitative skills to meet the requirements for their tax entitlement – which is why withholding rates are set to a level where a refund is almost automatic. It is assumed that some of that refund goes for tax preparation fees, which are considered by the beneficiaries as a cost of getting the assistance.

    A better alternative is to make the locus of taxation the employer rather than the individual, although in the case of the EITC, this begs the question, which should be asked anyway, of why taxpayers are subsidizing firms who pay low wages. The now expired Making Work Pay credit could also be held up to such scrutiny.

    The Child Tax Credit provides a bigger subsidy and it is available to more taxpayers. It could easily be expanded to take up the slack in the housing sector caused by ending the mortgage interest and property tax deductions (since the biggest cost of each additional child is housing).

    The credit could then transfered to employers as part of a Net Business Receipts Tax, who would adjust salaries explicitly to include the credit while generally lowering salaries across the board so that families with an average number of children would have the same pay, those with less children would have lower pay and those with more would have higher pay. This would actually make older employees more competitive, especially if longevity were further compensated by dividends from stock grants rather than annual increases. Many highly productive employees would still be working today in such a compensation system.

    Under such a system, employers would have the same level of paperwork as required under the current system – however most employees would not have any paperwork beyond confirming that the child tax credit reported to the government matched the credit amount reported to them.

    If there is still a desire to make taxpaying more visible, a receipt visible Value Added Tax could do the job (supplementing the NBRT).

    In order to make the total income of higher income workers invisible to their employers and asset managers, personal income taxes should still be collected from high income earners, investors and heirs (replacing the inheritance tax on estates by counting cash disbursements from selling inherited assets as normal income). Continuing individual taxation at this level frees rich people to work if they so chose, rather than becoming unemployable because the wages paid to them would require that their employers pay a higher NBRT on their wages. That might not hurt a CEO, but it would effect quite a few others – at least in the years they inherit or realize investment gains – which are really none of their employers’ business.

  2. Vivian Darkbloom  ::  2:27 pm on June 24th, 2011:

    “If the EITC were run as a spending program rather than a tax subsidy, government could separate its revenue and spending functions. This might diffuse some complaints about people who pay “no taxes.” But that sort of thinking overlooks the real advantages to delivering work incentives through the tax system. It is administratively efficient, is more accessible to workers than traditional spending programs, and has increased work, especially among single parents. Why fix something that isn’t broken?

    It would also give us quite a bit more budget clarity. I’m quite certain that every single recipient of benefits derived from “tax expenditures” is going to make the very same argument—these things are administratively easier to deliver through the tax code than direct spending programs. So, why fix something that isn’t broken?

    And,

    “Of course, as a spending program it would be targeted for cost cutting while as a tax subsidy it has—so far—remained immune.”

    That’s exactly right. And it is for exactly the same reason all the other tax expenditures have so far remained immune as well. It also explains the reason why these efficiency arguments are put forward—to obfuscate the spending from the taxing and to garner a bit more immunity. It is, however, good to hear someone so clearly admit it.

    This piece is *not* about reducing tax expenditures or the deficit. This piece is really only about how we should re-distribute income through the tax code. And that’s precisely why we will likely never come to an agreement to eliminate tax expenditures or any significant percentage of them. Everyone is ok with eliminating tax expenditures, so long it does not affect one’s ideological constituency group.

  3. delmont  ::  3:39 pm on June 24th, 2011:

    Payroll taxes are “income” taxes.

    Lower income people pay a lot of ‘payroll income taxes’. Payroll taxes are very regressive… hitting the very first dollar earned.

    FICA alone is a 15.3% tax on every dollar earned by average workers (employers do NOT pay half– the worker pays it all in reality). The U.S. Supreme Court has repeatedly ruled that Social Security “contributions” are strictly a tax on income… totally unconnected from any government ‘promise’ to pay future benefits. Also, Social Security Administration data shows that workers in the top-half of American earnings distribution live over 6 years longer (collecting benefits) than workers in the bottom half.

    It’s an ‘income tax’ if the government takes it out of your paycheck. This habitual game of excluding payroll-taxes to falsely portray lower income people as freeloaders — is economic nonsense.

  4. Ken Bernsohn  ::  4:45 pm on June 24th, 2011:

    both side of this argument have forgotten the old truism, “The only fair tax is one on somebody else.”

  5. Ralph H  ::  10:36 am on June 25th, 2011:

    You have no idea at all of the difficulties of being an employer! Not every company is GE. Most employers are small and expecting us to adjust salaries in accordance with the number of children is childish and something perhaps a kid in high school would propose. My under 25 person company has one accountant and she is busy paying bills, trying to handle our insurance and keeping us in business. We outsource payroll as do most companies, because the feds have made complying with regulations too complicated for most small companies. Most of my emplyees with multiple kids are paid the lowest salary. They happen to lower skilled. If required to up their pay and take it from my key people I would get rid of them! This is similar to early Healthcare initiatives that would have mandated all employees receive 65% employer healthcare funding, which would have resulted in overall loss of low income jobs.

    If “progressives” want to expand entitlements, do it through the tax system and a program like medicare or SSI. Really do not impose any mandate on business. A small 25 person company has same requirements as a 10,000 person company and much less manpower to deal with it.

  6. Curly  ::  2:49 pm on June 26th, 2011:

    The problem is that to many people are not only not paying taxes they get more back in the form of tax returns than they pain in. The rest that don’t pay income taxes are living off the government anyway.
    If the people could not get free money form the government there would be more willing to take the jobs that only illegals take now. Except for the people that is incapable of working because of physical or mental conditions should have to work for what they get. The welfare would be based on the hours worked. I have seen in the past, I have not been in the position to see it more recently, well able to work people (mostly men) either get welfare directly or from their wives or girl friends and not work themselves but used their ‘free’ time to get into mischief. If the people who get free money from the government had equity in the country they would be less willing to have government to provide everything they need.

  7. Nick Knight  ::  3:26 pm on June 26th, 2011:

    Many people who pay no or little taxes, make so little that taking taxes from them, would put them under, and cost the government even more. In America it is fine to pay people unlivable wages. With productivity rising and wages having frozen for the past thirty years, something has to give. No shock America is becoming a toilet.

  8. Nick Knight  ::  3:29 pm on June 26th, 2011:

    Since such a small amount control in the around 85 percent of the nations wealth, maybe they should pay that amount in taxes.

  9. Hoppe  ::  4:57 pm on June 26th, 2011:

    I don’t think I or anyone should have to pay any taxes to pay for entitlement programs and defense unless I make a realllly lot of money. Like a million bucks a year, or if I get a job as a congressman;)

    Let all those rich people pay the taxes. They probably stole it from us working guys anyway.

  10. Gia  ::  8:36 pm on June 26th, 2011:

    Why on earth are we even thinking about taxing the poor & disadvantaged when the super-rich hold 40% of the wealth in this country & pay only 17% of the taxes?

    If tax reform is in order, I think EVERYONE should pay the same, say 25%, & no deductions or subsidies for all the various dodges that the top 1% use to NOT pay taxes in the country that makes it possible for them to BE super-rich. No corporate subsidies for corporations with massive profits; let them bloody well pay for their own developments. Those profits are essentially coming out of the pocket of the middle class & going into the pockets of the already too wealthy.

    I’m NOT against the rich. I don’t mind some people having more wealth. I just resent them having ALL the wealth generated by a struggling working class.

    If everyone paid taxes on ALL income, other than inherited wealth & primary home sales — ie, including all other capital gains! — then most of us would end up paying less & only a small percentage would end up paying more because mostly they avoid having to pay much at all atm & there would be plenty of tax income & we could quit arguing about this.

    I can’t believe that people are taxed on their SS income & health benefits. Only thieves could come up with THAT dodge!

    GRRRRRRRrrrr…

    Okay, I confess, any discussion of increasing taxes on people who are already struggling to survive gets me in a state of outrage. I’ll sit down & have a cup of tea. :)

  11. Gia  ::  8:48 pm on June 26th, 2011:

    Geez, Curly. I haven’t paid taxes the last two years because I haven’t had enough income to necessitate filling out a return. I’ve been living off my savings (equity from a house I was forced to sell because I could no longer afford to live in it) while I desperately search for a job. No unemployment. No Social Security. No nothing. THERE IS NO GOV’T ASSISTANCE FOR SINGLE, CHILDLESS, SOBER, SANE, ABLE & EDUCATED, FORMERLY MIDDLE-CLASS PEOPLE who can no longer find jobs. I am NOT living off the state. I don’t know where my rent is coming from this month. I will soon be on the street. WHO are the people you imagine ‘living off the government’? If the government would give me a job helping to rebuild our country, I would jump at it. The government does seem to be able to find enough money to help out the irresponsible, profiteering banks & insurance companies & keep them afloat. Is that ‘living off the government’??

    Further GRRRRrrrrrrrrs….

  12. Gia  ::  8:49 pm on June 26th, 2011:

    I believe paying taxes is our patriotic duty, NOT — as so many others frame it — a terrible & unfair burden. I would gladly pay taxes… if I only had an income!

  13. Nancy Irving  ::  7:20 am on June 27th, 2011:

    Good post, but “role” should be “roll” and “diffuse” “defuse.”

    Sorry for the nits, but it’s incumbent on us libs to be lit[erate].

  14. Jeff  ::  10:00 am on June 28th, 2011:

    No one should receive the “earned income tax credit” this is simply welfare without calling it such. When 47% of people pay no income taxes they can simply vote themselves benefits by supporting the party that creates more and more entitlement programs.

  15. Taxpayer  ::  11:33 am on June 28th, 2011:

    I think that they should do away with the income tax program and replace it with a flat rate tax. This flat tax would apply to everyone who purchases products and services, with grocery and medical items being exempt. The rich, who buy more goods and services, would pay more in taxes but would be paying the same percentage. You would receive your full paycheck, without the taxes being deducted…….the taxes would be paid much the same as sales tax. If you don’t buy anything….you don’t pay taxes.

    Initially this flat tax would save the people millions of dollars because if you pay a flat tax, there is no need to file an income tax return…..thus no IRS staff or audits, no tax forms and booklets to reproduce each year, and no tax write offs.

  16. mike c  ::  7:14 pm on June 28th, 2011:

    Sic is welfare disguised as a tax credit. It is riddled with fraud. Be honest and take it out the tax system

  17. Not Rockefeller  ::  10:32 pm on June 28th, 2011:

    Gee, Michael, been reading the Communit Manifesto lately? “From each according to his ability, to each according to his need.” A direct quote from Karl Marx – and exactly what you are espousing – pay people more who have large families regardless of their level of productivity. That would sure encourage people to have small families – NOT. You have to be an Obama supporter with a philosophy like that.

  18. George Clark  ::  3:31 pm on June 29th, 2011:

    Sorry to bust your bubble dear friend, but low income folks do not pay income taxes. Yes they are held out if you let them be but when the year end comes up, guess who owes absolutely nothing? Yep the low income folks. In fact if they are working they even get extra money back. I’m middle class and I would like a deal like that myself! I pay in and they keep it. Lower income folks pay in and get it all back with a bonus. Don’t you just love America!!!

  19. Pat  ::  5:51 pm on June 29th, 2011:

    I believe it is spelled tax ROLLS not tax roles.

    I read recently that the statistic that half don’t pay income tax is incorrect as stated. What that number means is that many people had enuf tax withheld that come April 15, they don’t owe more or are due a refund. So if you owe $3000 tax, but had $3500 withheld, and get a refund, you are part of that 50% people are (mis)stating that you paid no income tax at all. Folks have been mis-stating this, and the media failed to correct the error…I am trying to check this out, but I think it is true. Even as a low income person, since I have no children, I would pay taxes except that I got married, and my husband’s income is non taxable social security benefits because he is retirement age. I was paying taxes on my very low income before we got married, and I am clever about minimizing my tax burden. Check it out yourself, I am pretty sure that what I read recently is correct, and the statement has been repeated over and over erroneously for political gain.

  20. hank  ::  11:58 pm on July 6th, 2011:

    YES, YES, YES. Even if it is only $10 per month, or per year. Something to make an actually stake in the outcome (as opposed to the current system where the main investment is in making sure that someone, anyone else get shafted with the tax bill so you can keep YOUR credit or tax break).

  21. vi da nam  ::  9:28 pm on November 24th, 2011:

    […]According to the Office of Tax Analysis, the U.S. individual income tax is “highly progressive,” with a small group of higher-income taxpayers paying most of the individual income taxes each year.[…]