Nearly 50 percent of American tax filers will pay no federal income taxes in 2009. Half of them earn too little and the other half receive tax credits -- the Earned Income Tax Credit, child-care credits, subsidies for college and savings -- worth more than their tax burden, according to the Tax Policy Center. Many of these people still pay federal taxes, such as payroll taxes for Social Security and Medicare and state and local taxes.
Some criticize the fact that half the country is effectively exempt from the scourge of April 15, but there is a political and economic component to this Zero-FIT (federal income tax) phenomenon. If the Zero-FITs are a political problem, they are also a political creation. When moderate and conservative pols are reluctant to announce new spending programs for fear they will look like socialists, they execute these spending programs through the tax system. If most of these programs flipped to the spending side of the ledger, suddenly millions more Americans would owe federal income taxes. For example, the EITC -- President Ford's initiative -- is now a $50 billion program, maybe the largest component of our welfare system, and yet our politicians don't even have to call it spending. (The exemptions and deductions carved into our Swiss cheese tax regime are called tax expenditures. When the government spends a dollar, it's an expenditure. When it leaves a dollar in the hands of private earners, it's a tax expenditure.)
As a result, this creates an interesting civics problem. The Zero-FITs' federal taxes are earmarked for mandatory programs Social Security and Medicare. So 50 percent of the country is not contributing to the part of the budget that electeds actually control. With half the country currently shielded from the burden of funding a defense and discretionary budget, there are serious questions to ask about how that changes the politics of taxing and spending.
The even more interesting question that spans economics and morality is whether a tax code that exempts half the country is just. The New Yorker's John Cassidy argues from a moral perspective that wealth is a social creation whose marginal utility declines with income, which supports the philosophy of a progressive tax system.
From an economics point of view, it's important to consider disproportionate tax burdens in light of disproportionate earnings. The top 20 percent of US tax payers account for two-thirds of all federal tax revenue, according to the Tax Policy Center's 2009 analysis of President Obama's budget. The top one percent accounts for 23 percent. This are extraordinary numbers, but equally extraordinary is the unbalance of wealth that has developed over the last generation. The top one percent soaked up two-thirds of the income gains of the 2000s, so that in 2007 their share of pre-tax income was the highest since the late 1920s. In 2007, the top one percent took home 23 percent of US income -- the same percent as their projected share of federal taxes under current law.
Is it wrong that half of Americans pay no federal income tax? It is a difficult question. There is an interesting hazard involved with exempting half the country from paying for the discretionary programs it votes for. But that hazard exists partly because politicians have run spending programs through the tax system to shield themselves from critics of big government. The economic question is wrapped up in morality: do we think it is fair to raise the tax burden on the rich simply because they are rich? Utilitarian egalitarianism says yes. But utilitarian egalitarianism is no relief for conservatives who prefer a broader, flatter tax system that mitigates the tax punishment of earning more income.
This debate won't be resolved today, but it's important to juxtapose the falling tax burden on the lower 50 percent with the falling tax burden on the top 10 percent. In 1988, President Reagan's last year in office, the top 10 percent, 5 percent and 1 percent of income-earners paid total effective tax rates of 27%, 28% and 30%, respectively. Under 2009 law, these groups will pay the feds closer to 22%, 23% and 26% of their income -- across the board, an approximate difference of five percentage points. Any way you slice it, tax burdens have slid, and they will have to go up soon.
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