07 April 2012

Tax Myths

A somewhat strange myth has taken hold in some precincts of American conservative opinion that some vast swathe of the population isn't paying taxes. In fact everyone pays sales taxes and other state and local taxes, and as Adam Looney and Michael Greenstone write for the Hamilton Project almost all working-age people pay federal tax on their income.
The main bloc of people who don't pay income or payroll taxes are elderly people. Old people tend not to work, and many old people don't have much in the way of investment income either. But it's not like they're freeloading, they're just people who paid taxes in the past when they were working.
There are a couple of points worth making.

First, Yglesias is correct in noting that technically everyone pays taxes.  Some taxes are direct, like fees for federal services, sales taxes, payroll taxes (which are generally only avoided by student workers, a handful of other workers, and the unemployed), and a few other taxes besides.  Furthermore, everyone pays taxes indirectly, in the form of foregone goods and services.  Corporate taxes are a perfect example of this, and some limited taxes (think: capital gains) also have indirect costs.  Thus, to say that no one pays taxes is technically incorrect and highly misleading.  If conservatives continue to say that there are a large number of people who don’t pay any taxes, they will find themselves facing political problems later.

Second, the more technically correct claim would be that there are large numbers of people who don’t have any income tax liability.  This could mean that some people don’t earn enough to be charged taxes, it could mean that some people are able to claim enough deductions to avoid having to pay taxes, or it may be that someone is able to claim enough tax credits to negate their tax burden.  Not having an income tax liability does not necessarily make one a parasite on the system, and given that a large number of current non-tax-payers have basically paid taxes for fifty or more years, painting them as lazy or as parasites, or as evidence that the system is on the verge of collapse is likely not going to go over very well politically.

Finally, the correct response to this issue should be two-fold.  Conservatives should use this issue to argue for generally lower tax rates for all, in the name of fairness.  Instead of raising taxes on current non-payers, conservatives should argue for lowering rates on current payers.  In keeping with this, conservatives should also call for radical spending cuts.  Ideally, conservatives would cut out all unconstitutional spending, which would cut the current budget by roughly 60%.  In lieu of this, a spending cut of at least 45% would be acceptable.

At this point in time, conservatives have a good opportunity to cut taxes and reduce government spending.  As long as they understand the reality of non-payers and take pains to not put their collective feet in their collective mouths, and as long as they hammer home spending cuts (hopefully in a more serious manner than Paul Ryan), they should have a chance at actually making a difference.

4 comments:

  1. You forget the sizable number who qualify for the Earned Income Credit, which not only zeroes out Federal tax but more than offsets direct taxes paid. So, yeah, there are plenty of folks who pay no taxes at all.

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  2. Government workers and government contractors do not pay taxes. They are paid out of taxes. Their W-2's show that "taxes" are taken out, but that is simply an accounting trick.

    On the other hand, people who earn their income through the free exchange of goods and services actually pay taxes. Their income pays the salaries of the government workers and contractors. Thus, it is true that there are many people in the country who do not pay taxes.

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  3. @Southern Man- "Second, the more technically correct claim would be that there are large numbers of people who don’t have any income tax liability. This could mean that some people don’t earn enough to be charged taxes, it could mean that some people are able to claim enough deductions to avoid having to pay taxes, or it may be that someone is able to claim enough tax credits to negate their tax burden."

    Please read carefully.

    @Brutus- Technically true, but somewhat meaningless since the implicit assumption is that government services are valueless (think of it this way: would current government employees be unable to find work if the government didn't give them jobs? I suspect the answer is mostly no, although I also suspect that most government employees would be paid less if they were in the private sector).

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  4. The median family pays a percent or tow in Income Taxes. They pay 25% off the top to Leviathan. Your point is an excellent one - there are many, many potential allies who don't pay income tax and yet who think they're being screwed.

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