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Neil H. Buchanan

Do Some Americans Pay No Taxes? The Contrived Claims That Everyone Must Help Pay for the Government


Thursday, April 22, 2010

Last week, as part of the ever-growing annual circus surrounding the April 15 tax deadline, conservative commentators focused on a relatively novel complaint about the U.S. tax system: Supposedly, 47% of all Americans paid no taxes at all in 2009, meaning that just over half of the country would "pay for the government" while the rest received a free ride.

That claim was dishonest on several levels, and mainstream media outlets and policy think-tanks did a surprisingly good job of debunking the factual claims underlying the argument. The New York Times and others explained to anyone who cared to listen that the 47% number was relevant only for federal income taxes, not other federal taxes or state and local taxes.

As tax-policy analysts have long known, everyone pays taxes in the U.S., and the country's tax system in the aggregate turns out to be roughly proportional – that is, nearly everyone pays the same percentage of his or her income in taxes. That proportion is, moreover, low both by comparison to other countries, and relative to our own history since World War II.

The entire discussion last week, therefore, was based on a manipulated collection of half-truths and outright distortions. Even so, the discussion raised an important question that went not only unanswered but virtually unacknowledged: Would it be a bad thing if some fraction of people in the country really had no tax liability? If it were really true that 47% of Americans paid no taxes at all, in other words, would we want to change the system so that everyone was forced to pay taxes?

There is a certain intuitive appeal to the claim. The editorial board of USA Today, for example, weighed in as follows: "It's not healthy for society if somewhere between a third and half of all potential tax filers don't help share the cost of most of government, from defense to highways to national parks. Everyone above the poverty level should have at least a minimal stake in financing the nation."

That claim, however, was not backed up by any actual arguments. It was, instead, presented solemnly as a self-evident truth. Yet the claim evaporates under scrutiny, for a number of different reasons. In the remainder of this column, I will explain four separate reasons why this "everyone should pay something" claim ultimately makes no sense.

Even if the claim falls apart upon closer inspection, however, it will not always receive such closer inspection and thus, it is nonetheless dangerous. That is because the claim implies that the U.S. tax system should move away from the ability-to-pay principle. And taking the claim seriously would, in fact, push us toward changes that would harm the least well-off Americans, while benefiting the most comfortable among us, who hardly need the additional assistance. This is exactly the opposite of what we should do.

An Impossible Line-Drawing Exercise: What is a "Minimal Stake"?

USA Today's editors argue that it is unhealthy if one-third to one-half of all potential taxpayers pay no tax, because they should "share the cost of government." If that were true, however, how would we know when we had reached the point where everyone was paying enough?

There is no principle available to allow us even to begin to address the question of what might constitute a "minimal stake." Is it some arbitrary percentage of one's income? That would lead to a classic slippery slope, because if 5% is deemed a "minimal stake," then why is 4% too low? Or 3%? Or 0.5%?

While it is true that many tax-policy questions ultimately must be answered by drawing arbitrary lines, we usually have at least some coherent underlying theory to guide our policy choices. For instance, exclusions and standard deductions are set in order to prevent people in poverty from paying taxes. (USA Today's editors do at least grant that those who are truly in poverty should not be asked to pay taxes).

Also, tax rates are determined, at least in part, by policy-makers' consideration of the effects on tax avoidance and economic behavior that might come with excessively high rates. This, for example, was the basis for abandoning the income tax rates in the 90% range that were imposed upon the rich in the 1950's and early 1960's. By contrast, however, there is no principle on which one could base a claim that some particular minimal level of tax liability is enough to provide the "stake" USA Today describes.

Other potential principles are equally unpersuasive. Should the tax burden be "high enough to hurt"? If so, how high is that? Given that the federal gasoline tax adds less then 1% to the average American's tax liability each year, yet people express great distress about gasoline taxes whenever prices rise, it seems unlikely that even the lowest level of tax liability would not make someone say that they are harmed by the tax.

Perhaps we could resort to the legal concept of "nominal damages," in which the losing party in a lawsuit is ordered to pay one dollar in damages. One dollar would certainly be a "minimal stake"; but at that point, we would have to ask what the point is in collecting a dollar from millions of people, just so that they are "sharing" in the cost of government. The concept collapses on itself. Such an exercise could also cost far more than it is worth, especially if the one-dollar rule were to be consistently enforced.

Human Decency: Why Do We Exempt Anyone From Taxes? And Why Are We Still Asking the Very Poorest to Pay Sales Taxes and the Like?

As noted above, the underlying issue in any discussion of those who do not pay taxes is the ability to pay. The federal income tax system is designed specifically to keep certain people off the tax rolls. That even the poorest people pay other taxes is, if anything, a failure of our system to deal humanely with people who are barely getting by.

With the federal minimum wage currently at $7.25/hour, for example, a person who plays by the rules and works full-time throughout the year will earn $14,500. If that person is supporting two children, that family actually falls below even the minimum poverty levels set by federal standards. Without programs like the Earned Income Tax Credit, even full-time workers and their children would starve.

Would it not be possible, however, to say that at least everyone above the poverty level must have a "minimal stake" in the system, even as we allow the poorest citizens not to pay taxes? That, at least, is a bright-line rule that is based on a sensible underlying rationale; but it still leaves unanswered the question of why the near-poor and even the lower-middle-class should have positive net tax burdens in a society in which thousands of citizens have annual incomes in the tens of millions of dollars.

In other words, if we were to take this idea of "minimal stakes" seriously, we would reduce taxes on the highest-income people and shift the burden to people whose incomes have barely kept up with inflation for the past generation or more. And we would do this in the name of what amounts to little more than a gut instinct, i.e., that paying taxes is the only thing that counts as having a stake in the government and "financing the nation." If we are to shift the tax burden downward, placing its weight more heavily on the people least able to bear it, we should surely have a better reason than that.

What Counts in Determining People's Tax Burdens?

Even if we decided that the "minimal stakes" argument was reason enough to enact regressive changes to the tax system, however, it turns out that the label "taxes" is so flexible that it provides no guidance in determining who "contributes" and who does not. As I discussed in a recent FindLaw column, it has become popular among both Republicans and Democrats in recent decades to call spending programs "tax cuts." Also known as "tax expenditures," these programs are often designed as tax credits, which are dollar-for-dollar reductions in tax liabilities for people who qualify for the credit.

For example, child tax credits transfer money to families with qualifying children, in exactly the same way that we could transfer money to such families simply by sending them a check from, say, the Department of Health and Human Services. In fact, many of the people in the 47% of taxpayers who will have paid no net federal income taxes in 2009 would have paid positive taxes but for one or more credits. A person who bought a house, for example, might have qualified for the $5000 home buyer credit. If the remainder of that person's federal tax liabilities was less than $5000, then he or she would suddenly count, under a metric such as the one USA Today suggests, as "not contributing to the cost of government."

Just as we can design financial benefits so that they work through the tax system, and thus appear to be reductions in taxes, we could instead design a new system in which everyone pays positive taxes, but some – perhaps even most – would also possibly qualify for one or more benefits – to help cover the cost of higher education, to reduce the burden of mortgage payments, etc. They would receive those benefits in the form of checks that are formally not part of the tax system.

As things stand, we have an arbitrary collection of spending programs that count as "tax cuts," while other programs are arbitrarily called "direct spending." Changing the labels on those programs could completely change the picture of who is contributing to government and who is not. Although it would be an empty exercise, we could even have a system in which everyone pays exactly the same number of dollars in taxes every year, with most people then receiving offsetting benefits from non-tax agencies of government.

Designing Government to Be a Burden

Given that – as I have argued above – the system of taxing and spending can easily be relabeled to make it appear that everyone is paying taxes, it might make more sense to describe the "minimal stake" principal not as requiring a minimal amount of taxes paid by each person or family, but as requiring a minimal net burden of taxes on each person or family. That is, no matter how we label the government's activities, perhaps the underlying principle is that we should design taxes and spending so that no one is a net winner from the activities of the government. Then, and only then, would everyone really end up bearing a burden due to the existence of government.

That would, however, be a genuinely odd principle on which to base a system of government. The Preamble to the United States Constitution says that we created our system of government to "promote the general Welfare," which rightly suggests that government is created because doing so is a net positive to society. We are better off , not worse off, because we have a government. We have a modern economy because we have a government. Because that is true, it would be literally impossible to design a tax-and-spending system that would serve some desired goals (encourage educational attainment, support child rearing, and so on) while creating a net burden on everyone.

Moreover, if the concern is that some people are receiving too much benefit from the government relative to what they pay, then the highest-income citizens of the country are arguably the biggest offenders. It is they, after all, who benefit most from the system of private property, contracts, criminal law, and all other aspects of the rule of law that have made this country so wealthy. Those with the most also have the most to lose. The wealthy pay large tax bills, but their after-tax incomes are large and growing. If the idea is to get people to stop freeloading, then the entire concept is turned on its head: On this logic, it is the rich who are not paying enough.

What Does it Mean For a Person to Contribute to Society?

The argument that some people in the poorer half of the country are not contributing to fund the government is, therefore, simply incoherent once it is broken down and analyzed in depth. The government makes it possible for a modern economy to function. Some of our citizens work, yet end up paying no net taxes (at least as we currently label them). However, their work contributes to the profits and incomes of those higher up the ladder. These citizens might not write the checks, but they surely contribute as much as – if not more than – the rich, who are supposedly over-burdened by government.

In the end, what truly matters is the ability to pay. If it really turned out that we could fund the government by not collecting taxes from some large fraction of the people with modest incomes, then we should do so. Those who supposedly "pay for" the government would still be doing very well.

Neil H. Buchanan, J.D. Ph. D. (economics), is a Visiting Scholar at Cornell Law School, an Associate Professor at The George Washington University Law School, and a former economics professor.

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