Those who still pay income taxes will be paying even more.
Under economic pressure, the Obama administration has pursued an increasingly vigorous class war strategy. At the same time people continue to be dropped from the income tax rolls. This likely expands government and increases what the rest of us will have to pay.
Throughout its early history the federal government didn’t have an income tax. But a century ago the states ratified the 16th Amendment. Even then, in its early years the income tax affected few people. Only during World War II, when up to three-quarters of the national GDP was consumed by the military, did the income levy become broad-based.
However, the U.S. is now moving in the opposite direction. A recent study by William Freeland, William McBride, and Ed Gerrish for the Tax Foundation reported that 58 million people, 41 percent of all tax filers, had no tax liability; indeed, many of them are receiving money back from the government. Explained the Foundation: “There are currently more Americans off the tax rolls than at any time since 1940, when the income tax became a ‘mass tax’.”
Nonpayment results from the expansion of deductions and credits, including those which are refundable, that is, which generate a federal check for those who owe nothing. Under 2011 law, noted the Tax Foundation, a family with an income of $45,000 could end up receiving $274 after taking the standard deduction, personal exemption, two child credits, and the Earned Income Tax Credit. The family also might be eligible for credits for child care, education, and hybrid vehicles.
In 1950, 28 percent of filers were “nonpayers.” That reflected a relatively high value of the personal exemption compared to average incomes. The nonpayers’ share dropped to 16 percent by 1969. It rose again to 26 percent in 1975, and then dropped until the 1986 Reagan tax reform. Reported Freeland, McBride, and Gerrish, “Since then, the percentage of tax filers with no income tax liability has grown dramatically. Indeed, in the twenty years between 1990 and 2010, the percentage of nonpayers nearly doubled, from 21 percent to 41 percent.”
Related to nonpayers are nonfilers. Millions of people earn something, but not enough to require them to file a tax form. “By some estimates, when these nonfilers are added to the number of nonpayers, the total number of Americans outside the income tax system jumps to roughly 50 percent of all households,” observed the Foundation.
Tax reform increased the values of the personal exemption and standard deduction, which benefited everyone, but especially lower-wage earners. More recent has been the rapid growth in the value of tax credits, which directly reduce a filer’s tax liability. Noted the Foundation: “In 1990, the combined value of these credits was roughly $20 billion, after adjusting for inflation. Two decades later, the combined budgetary cost of both the basic and refundable tax credits reached a remarkable $224 billion in 2010.”
An important reason the credits cost more is that they are available to more people. Explained the Foundation: “In 2001, the share of those tax filers between $50,000 and $75,000 with no income tax liability was roughly one percent. By 2009, that share had jumped to 12 percent. The threshold at which the typical married couple with two children will likely be nonpayers given the standard deduction, personal exemption, and only two dependent child credits is now roughly $47,000. This is without any additional deductions or credits, such as the mortgage interest deduction.”
Of course, nonpayers are subject to other taxes. Indeed, most low-wage workers pay more in Social Security than in income tax levies. However, the income tax is the biggest and most visible source of federal revenue. It also is seen as the chief source of funds for general government operations, in contrast to others, such as the payroll tax, which are formally dedicated to particular purposes (even though, in practice, money is fungible). People seem most likely to measure the personal cost of government by their income tax liability.
If government spending were going down, we might celebrate the rise of nonpayers. Reducing the number of people subject to the burdensome and intrusive income tax would be an unabashed good. However, government expenditures have been rising steadily and rapidly. Real, inflation-adjusted outlays jumped 58.4 percent between 1980 and 1990. They “only” increased 28.2 percent during the 1990s. They went up almost exactly the same amount during the first decade of the 21st century. It certainly appears that more people perceive government as an essentially free good as a result of what is commonly called the “fiscal illusion.” Explained the Tax Foundation:
Basic economic theory tells us that consumers will respond to a drop in the price of a product by demanding more. By extension, economists predict that as the price of government goes down for a citizen, he or she will then demand more of it. When the cost of government is shifted away from a citizen through deficit spending or progressive taxation, this creates disproportionate demand.
Yet satisfying this demand is likely to slow economic growth. The Foundation recognized the argument that expenditures on education and infrastructure may yield an economic benefit, but observed:
“[T]ransfer payments can retard economic growth because they redistribute income from working individual to non-working individuals. Numerous studies suggest that as transfer payments and their accompanying taxation grows, a nation’s economic growth potential and employment opportunities suffer.”
Does the rise of nonpayers encourage increased outlays? The Tax Foundation reviewed federal spending and taxing from 1950 to 2010 and found only a weak correlation. As the Foundation noted: “total government spending grew steadily over the 60 year time period we considered, while the percentage of nonpayers fluctuated considerably.” It appears that the overall bias toward government growth essentially swallowed much of the impact of the growing number of nonpayers.
However, the Foundation discovered a stronger relationship between nonpayers and transfer payments. Noted the Tax Foundation: “After the late 1960s, with the start of the Great Society programs, the growth of transfer payments and the growth of nonpayers begin to move closer together. For example, the percentage of nonpayers spiked in 1975 to nearly 26 percent. This spike corresponds to a sharp increase in transfer spending. Over the past 25 years, the two trends seem to track each other quite closely, with both reaching their 60 year peak in 2009 and 2010.”
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