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Should ‘the 47%’ Pay Income Taxes?

As many commentators have pointed out in the wake of recently publicized comments by GOP presidential candidate Mitt Romney, the main reasons that 47 percent of households do not pay federal income taxes are provisions in the tax code that 1) provide basic exemptions for subsistence level income; and 2) offer tax expenditures that wipe out a household’s tax liabilities or provide refundable credits.  These provisions mainly benefit senior citizens and low-income families with children.  These two groups account for the bulk of the non-tax paying units.

The implication of some of the discussion is that the country would be better off, and programs like Social Security and Medicare more likely to stay solvent, if these provisions were changed and more units paid taxes.  Is that true?  This piece takes a brief look at the tax treatment of low-income families with children. My next blog post will look at the provisions for retirees.

Low-income families with children, like other households, are eligible for the standard deduction and personal exemptions.  These provisions are designed to exempt subsistence levels of income from tax and to adjust for differences in ability to pay by family size.  For a head of household in 2012, the standard deduction is $8,700.  The personal exemption is $3,800.  So a mother with two children would have zero taxable income with an income of $20,100.  Is that too high or too low?  My view is that, given that the 2011 poverty threshold is $18,123 for a family of three, it seems about right.  But you can judge for yourself.

In addition to the basic provisions, low-income households with children also benefit from three tax expenditures: the child tax credit, the child and dependent care tax credit and the earned income tax credit.

Rates on payroll taxes, which help pay for programs including Social Security and Medicare, have increased since the early 1980s (not including a temporary reduction for 2011 and 2012), but these increases have not produced a more regressive federal tax structure.  The reason is that the growth of the payroll tax has been accompanied by a major expansion in the Earned Income Tax Credit.  This provision, which was originally introduced in 1975, actually began as a modest attempt to reduce the regressive effects of a rising payroll tax.  The credit was made permanent in 1978 and expanded significantly in 1986.  It was expanded again in 1990 and, in 1993, President Clinton and Congress doubled its size to ensure that full-time minimum wage workers would not live in poverty.

The federal EITC comprises a series of credits that operate differently for different types of families.  All share a common formula, however.  The formula increases the credit for each dollar of earnings up to a certain level; maintains the maximum credit through an amount of additional earnings; and then gradually phases out the credit at higher incomes.  Most importantly, the EITC is refundable, which means that even those who have no taxable income under the federal income tax will receive a check.  For example, in 2008, a worker with two children could claim a maximum credit of $4,824, with the credit phased out at $38,646 (see Figure).

Figure. Value of the EITC, by Income, Unmarried Filers, 2008 Source: Urban Institute and Brookings Institution: Tax Policy Center. 2008. Tax Facts: Historical EITC Parameters. Washington, DC.

The EITC has served to more than offset the increasing payroll tax rates (see the table above).  Between 1979 and 2005, the total effective tax rate on the bottom quintile has been cut in half and for the second quintile has been cut by about one third.  In contrast, the effective tax rate on the top quintile has been virtually unchanged.  Thus, while the EITC is not a modification to the payroll tax, it has substantially reduced the burden of that levy.

Source: Congressional Budget Office. 2009. “Effective Tax Rates for All Households, by Comprehensive Household Income Quintile, 1979-2006.” Washington, DC.
Total also includes the corporate income tax and excise taxes.

Without a substantial increase in the EITC, which could create problems of its own, a substantial increase in payroll tax rates to restore Social Security’s solvency could put low-income workers at risk.  Therefore, it is imprudent to rely on the payroll tax any more than necessary.  Furthermore, the legacy costs associated with the start-up of the Social Security program provide a logical reason to transfer some of the burden of financing Social Security from the payroll tax to general revenues.


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    • What kind of question is that, of course EVERYBODY SHOULD PAY TAXES, you mean to tell me I have to work for a lazy bum laying around and collecting the fruits of labor.
      If you think that anyone should be exempted, you do not belong in America.

    • Everyone should pay a “Flat Tax” on income! Period

    • The commenters here seem to have missed the point of the article which lays out the truth that the 47% is made up mainly of working people — otherwise they wouldn’t be filing income tax returns. Someone who is disabled and totally dependent on government funds would not file a tax return in the first place.

      The 47% figure is from the IRS and it is of tax returns filed which have after all deductions and credits $0 in taxes due. It is higher now because so many have lost jobs or have only one worker in a family working at fairly low income jobs. If there pay would rise I am sure they would be glad to pay some taxes from it.

      There are some tax units with humongous incomes in this group — they just have humongous tax breaks they take advantage of. One recent year 8 of the 400 highest incomes in America paid no taxes. They use things like the Romneys’ $78,000 deduction for their dancing horse. In fact Romney may well have been in the 47% himself some years as Reid was told. Perhaps that is why he won’t release his past years income tax returns.

      To sum up, the people in the 47% are virtually all working people or retired low income seniors. They should never be called lazy or said that they don’t take responsibility for themselves.

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    • Who ever gets medicaid or welfare benefits should repay it to the government when they starts working. It should be treated like a interest free loan. Welfare benefits should be deducted from future social security payments.

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  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.