Millions of American Taxpayers Make Money Off Federal Taxes

You've heard about the Freeriding Forty Seven. They are the 47 percent of Americans who, infamously, owe no federal income taxes to the federal government. But, as many writers were fast to point out, they all still pay payroll taxes for Social Security and Medicare.

Now meet the Freeloading Fifteen. Those are the 15 million American households who've got it even better. Representing about 10 percent of all taxpayers, they receive more cash from the IRS than they contribute in federal income taxes and employment taxes. (Excise and corporate taxes notwithstanding, you could say they are making money off of federal taxes.) To some, they are low-income Americans benefiting from smart and targeted welfare run through the tax code. To others, they are unacceptable free riders, contributing net zero or worse to the federal government.

Why? As National Journal's Peter Cohn explained it a great article The IRS as 'Sugar Daddy,' if we hate the system, we only have Congress and voters to blame. In the last 40 years, Washington has passed a series of laws, such as the Earned Income Tax Credit and the child tax credit, that send money to lower- and middle-income families through the tax system. Republican presidents started and expanded some of these credits. Democratic presidents have started and expanded some of these credits. No party exclusively owns or disowns the Freeloading 15 million.

Not yet, at least. According to the NJ article, Rep. Dave Camp, the senior Republican on the House Ways and Means committee with jurisdiction over all tax-related issues, wants to roll back these refundable tax credits.* "I don't think the tax code should be used to make payments over and above people's contributions," Camp said. "There's a lot of people that aren't contributing to Social Security and Medicare in any way. And so if you're looking at the long-term sustainability of those programs, it's something that I think you have to look at."

Here's the strange thing. Camp says he's against refundable credits. But he voted for, and still supports, the Bush tax cuts from 2001 and 2003. That law not only doubled and expanded the refundable child credit, but also it would increase the 2010 deficit over Obama's plan by $40 billion -- about the same cost as the entire child tax credit, Cohn points out.

As the chart that leads this article shows, the number of "free-riders" has spiked in 2009 and 2010. Why? Bush owns some of the increase, by reducing tax rates at the bottom and doubling the child tax credit to $1,000. Second, the recession is a major factor, as it has reduced incomes, which brings many families' tax burdens closer to zero.

Third, Obama owns some of the increase. The president's Recovery Act includes about $280 billion tax cuts. The vast majority come from individual income tax cuts (others targeted business and renewable energy projects). About half of those individual income tax credits come from Making Work Pay, which increased working Americans' weekly checks up to $800 a year for families by reducing withholding on paychecks.**

Here's a handy chart from the Tax Policy Center on the Obama tax cuts for individuals.

obama tax cuts.png

Low-income Americans who don't contribute a dime to the government drive some folks nuts. But the under-paying rich who've seen their incomes run away from the median during the 2000s drive some folks nuts, too.

The way I see it, it does bother me that 10 percent of American families contribute net zero to the federal government even as they can vote on expensive programs to which they won't contribute, whether it's foreign wars or domestic entitlements. At the very least, it strikes me as an awkward civic deficiency.

On the other hand, I'm not ready to back a law that makes it illegal for refundable credits to exceed total federal tax liability. And, pace Rep. Camp, I'm certainly not ready to ask the bottom 10 percent to pay more while I ask the top 1 percent to pay less.


*I know, I know: "refundable tax credit" is a scary term, but it basically means money the IRS pays you that exceeds the amount you pay in taxes. Most credits or exemptions (say, the personal exemption) only reduce your tax bill. Refundable tax credits can take your burden past zero, turning your tax bill into a tax payment. So think of them them as tax payments.

**Another quarter of the Obama tax cuts went to middle-upper and upper class families by patching the Alternative Minimum Tax, 87 percent of which went to families making between 100K-500K.