People complain that more Americans do not pay federal income taxes. At first glance, apparently 43% of Americans pay no federal income tax. However, the numbers merit closer examination. Paying attention to the headline ignores the real story.
Of households who pay no federal income tax, 12.1% have incomes between $50,000 and $100,000 while 1.3% have incomes that exceed $100,000. In particular, "an estimated 798,000 households in the nonpayer group make between $100,000 and $200,000 a year; 48,000 have incomes between $200,000 and $500,000; 3,000 make between $500,000 and $1 million; and 1,000 households bring in more than $1 million." I have little sympathy for these households.
However, of the remaining 84.6% of households who pay no federal income tax and whose income is less than $50,000, two-thirds of them (46 million households) have incomes of less than $30,000. Remember, many of these households will pay social security and Medicare taxes; many may also pay state or local income taxes. Experts estimate that two-thirds of those who pay no tax at all are elderly and not working. (Data and quotation are from Jeanne Sahadi, "43% pay no federal income taxes," CNNMoney, August 29, 2013.)
Why is this important?
The Tea Party movement and others decry what they perceive as an emerging entitlement culture in the United States. For example, almost 50 million Americans now receive food assistance, a staggering number that represents something between 1 in every 6 or 7 people who live in the U.S. Recognizing that 46 million households have an income of less than $30,000 provides critical context for the number of Americans who receive food assistance.
No less a bastion of conservatism than the managing editor of Fortune, Andy Serwer, recently presented the following analysis as part of his argument for raising effective tax rates on the wealthiest Americans and increasing the capital tax gains rate:
The federal minimum wage was last raised in July 2009 to $7.25 an hour (which works out to $15,080 a year). Consider that in 1968 the minimum wage was $1.60, which is $10.74 in 2013 dollars, or $22,339 a year. ("The Income Gap," Fortune, September 2, 2013, p. 10)
Let's acknowledge that some people abuse the social safety net.
Nevertheless, the data paints a painful picture of a deeply divided America, the haves and the have-nots.
I'm disturbed that we are not having meaningful public discourse about how to create a more effective, compassionate social safety net with a more effective incentive for self-reliance. On the one hand, the large and growing disparity between the affluent and the poor/hungry in this nation raises significant moral issues. The disparity cannot bode well for the nation's future. On the other hand, people who do not share part of the burden of funding the government can easily begin to feel disconnected from the government, a widespread problem in nations that receive large sums of foreign aid or non-tax revenue. Similarly, recipients may begin to believe that the benefits they receive are their right, producing households dependent upon government largesse for multiple generations, a problem with which the United Kingdom now struggles.
These three graphs, reproduced from two articles in the Wall Street Journal from August 31, 2012 that debated the system of entitlements that has developed in the United States over the last fifty years underscore the urgency of having this debate:
(Nicholas Eberstadt, "Are Entitlements Corrupting Us? Yes, American Character Is at Stake," Wall Street Journal, August 31, 2012 accessed August 31, 2013 at http://online.wsj.com/article/SB10000872396390444914904577619671931313542.html and William A. Galston, "Entitlements Are Part of the Civic Compact," Wall Street Journal, August 31, 2012 accessed August 31, 2013 at http://online.wsj.com/article/SB10000872396390444914904577619672512345362.html)
Perhaps the best way to force such a discourse is a Constitutional amendment to require that federal government expenditures not exceed tax revenues unless a two-thirds majority in both houses of Congress agrees and the President signs the legislation. Congress could override a Presidential veto with a three-quarters majority in both houses. The high threshold for approving an exception to expenditures exceeding tax revenues allows flexibility in case of a national emergency. Passage of the amendment would most likely require years, providing time for the federal government to move toward a balanced budget.
The element of this proposal that I find most problematic is that it probably precludes using government stimulus (i.e., deficit spending) to expedite a financial return after a major recession or depression. Conversely, what I find most attractive in the proposal is that it would stop (or at least slow) the erosion of Congressional power by a powerful Presidency, prevent national bankruptcy by forcing the nation to live within its means, and attempt to strengthen a popular perception of government by, for, and of the people.