Those who still pay income taxes will be paying even more.
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The Foundation figured that every one percent increase in the share of nonpayers corresponded to an increase of $10.6 billion in transfer payment outlays. The money adds up. Explained the report: “Since the number of nonpayers has increased by 20 percentage points over the last two decades, this model implies that in 2010 alone, almost $213 billion in higher transfer payments resulted from the growth of nonpayers over the last two decades. This represents nine percent of the total $2.287 trillion spent in transfer payments that year.” Stripping out Social Security and Medicare do not change the relationship, but only cut the estimated annual increase to $9 billion.
No such association was evident for non-transfer payments. Although that would seem counter-intuitive, the authors posited that “non-transfer payment spending does not go directly into the hands of the voters. Instead, this spending is often composed of indirect investments and the benefit from this spending is widely dispersed among all voters.” Moreover, perhaps these outlays have hit the point of diminishing returns, and thus voter demand has fallen. Or perhaps overall budget constraints exist and have placed transfer and non-transfer payments in competition, with the former emerging victorious.
The Foundation also found a positive correlation between nonpayers and federal debt. For every one percent increase in nonpayers as a share of filers, the debt/GDP ratio rises .704 percent. “This implies that the 20 percentage point increase in the share of nonpayers over the last 20 years has increased the debt ratio by 14 percentage points.” Such a rise logically follows the increased demand for transfer payments when taxpaying voters seem increasingly averse to higher taxes.
In Washington today the greatest concern over nonpayers is lost revenue. However, the underlying problem is that government spends too much, not that it collects too little. Unfortunately, noted the Foundation, “we are now seeing the fiscal cost of dropping millions of Americans from the income tax rolls in the form of record levels of federal transfer spending and national debt.”
Thus, despite the obvious appeal in further reducing the tax rolls, the Foundation’s “findings imply that when voters perceive the cost of government to be cheaper than it really is, they demand ever more government benefits because they either don’t feel the cost directly or believe that others will be paying those costs.” Which means meaningful tax reform should address the problem of nonpayers.
The Foundation concluded with a call for “a more balanced tax burden.” The wealthy already pay the vast majority of income taxes. According to the Congressional Budget Office, the total share of income tax liabilities paid by the top one percent of households ran 39.5 percent in 2007 (the CBO’s latest figures). The top five percent paid 61.0 percent of all income taxes. The highest earning ten percent were responsible for 72.7 percent of income tax collections. (The same groups also pay the bulk of corporate and social insurance taxes.) It simply isn’t possible to fund the welfare state by extracting more money from those who already are paying the bulk of the bill.
Especially since the attempt to do so likely would further inflate federal outlays. Concluded the Foundation: “so long as income taxes fund the largest part of government spending, exempting half the population from income taxes is not a sustainable fiscal model. Debt accumulation and eventual default await those democracies that fail to connect a majority of voters to the cost of government spending.”
Reconnecting voters may be the most important objective of tax reform. Reducing rates and simplifying administration are important. But ensuring that all Americans have a financial stake in paying for general government operations, and especially transfer payments, may be most vital.
A man of faith in a godless age is hitting Americans where it hurts.
Mr. and Mrs. American Spectator Reader, let P.J. O’Rourke talk sense to your kids.
In Britain, defending your property can get you life.
It won’t take long for conservatives to scratch this presidential wannabe off their 2008 scorecard.
Was the President done in by the economy, or by the politics of the economy?