September 19, 2012
By Curtis S. Dubay
However, far too often today, the tax code is fueling the demand for government, and increasing dependency on it. This vicious cycle is destroying the government’s finances and — more importantly — making it harder for Americans to lead productive, independent lives.
So many numbers get bounced around about who pays what, so a little perspective is in order. For more on the 47% who don’t pay taxes, read Rep. Allen West’s guest column.
Who pays taxes?
According to the IRS, the top 1% of American earners (those with incomes over $344,000) received 17% of all income earned in 2009. They paid 37% of all federal income taxes that year (the latest year for which these statistics are available).
The top 10% (those with incomes over $112,000) received 43% of all income and paid 71% of all federal income taxes.
No matter how you slice it, the rich do the heavy lifting when it comes to shouldering the national tax burden. For another viewpoint, read Rex Nutting’s column on the 47%.
Middle and low-income earners, on the other hand, pay almost no federal income tax. The bottom 50% (incomes under $32,000) of earners paid only 2% of all taxes, while earning 13% of all income.
Since marginal tax rates started falling in the early 1980s, the share of federal income tax paid by the rich has grown significantly, while the share paid by the bottom 50% has declined.
Indeed, according to the Tax Policy Center, 46% of all federal tax filers have no income tax liability whatsoever, That figure includes taxpayers in all income levels, but most all of them come from the bottom 50%.
It is not unreasonable for the poor to be exempt from paying income tax. The exact amount of income that should go untaxed is open for debate, but most people would not settle on a level so high that almost half of all incomes were tax-free.
The percentage of non-payers has been growing steadily for years. It is the result of lower marginal tax rates for middle and low-income taxpayers, combined with the growth of tax credits like the earned income tax credit and the child tax credit. Lower rates reduced these taxpayers’ tax liability and the larger credits wiped out what was left.
As a result, these non-payers chip in nothing for federal programs such as national defense, homeland security, the FBI, the judicial system, food and drug safety, national parks, student loans, and many other services funded by federal income tax.
They also pay nothing for anti-poverty programs like Temporary Aid to Needy Families (TANF), food stamps, and housing assistance. Federal government spending is growing unsustainably because of the increase in entitlements, but also because of an explosion of spending on these programs.
When it comes expanding these programs even further as some want, non-payers have no skin in the game. They won’t pay anything for the extra benefits they will enjoy, so they have no financial reason to oppose more and more government spending.
And as the government grows, so does dependence on it. The Heritage Foundation’s Index of Government Dependence bears this out.
According to the Index, in 2012, 67.3 million Americans depend on federal assistance for everything from food, shelter and clothing to college tuition and health care. Like non-payers, this figure has grown steadily for years. In fact, 2012 represented an 8.1% increase in dependency from 2010.
These benefits cost federal taxpayers roughly $2.5 trillion annually. That will only grow higher if spending increases continue.
More spending would make our already bloated government debt worse. But more troubling, it would continue to make even more Americans dependent.
Dependency erodes human dignity and prevents people from reaching their potential.
The goal of government policy shouldn’t be to make more people dependent. It should be to maximize the ability of all Americans to make the greatest use of their endowed abilities so they can lead meaningful, purposeful lives.
Taxes are fostering dependence by exempting too many from the cost of government. They should be changed so more people have a stake in the size of government. Yet another reason the country badly needs tax reform.
Curtis Dubay is a senior policy analyst at The Heritage Foundation, where he specializes in tax issues.
First appeared in The Wall Street Journal's Marketwatch.
Curtis S. Dubay
Research Fellow, Tax and Economic Policy
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