Paul L. Caron

Sunday, September 21, 2008

How Many Americans Should Have Skin in the Income Tax?

In 2006, roughly 33% of individual income tax filers reported no tax liability (up from 25% in 1998 and 20% in 1981).  The Tax Foundation reports that the Presidential candidates' tax plans would increase this number dramatically -- 44% under Obama's tax plan and 43% under McCain's tax plan:


The Tax Foundation rightly notes:

It is time for a serious public discussion of whether it is desirable to have so many Americans disconnected from the cost of government and what the consequences are of using the tax system as a vehicle for social policy.

See also Don't Mess With Taxes.

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Glenn Reynolds has some thoughts here:

"Personally, I'd like to see everyone pay at least some income tax, and I'd like to see the amount of tax paid, by everyone, go up or down every year in tandem with federal spending. That would encourage fiscal discipline directly. It would also make it harder for politicians to promise everybody a free lunch, but hey -- why shouldn't they sacrifice something, too?"

Posted by: Nemo Dat | Sep 22, 2008 9:01:48 AM

Yes, of course I am aware that other major taxes exist. California is near the highest in all taxes. Property tax RATES are low, but sky-high property prices bring the property tax bills up to dollar levels paid in other states.

The question here is whether it's important that ALL of the major component taxes are paid by a large majority of citizens, or whether one major tax should appear to be cost-free to a large segment of the population.

FDR made SS benefits universal to ensure continuing public support for the program. Making the income tax nearly universal would ensure continuing public resistance to higher income taxes. That's one reason that people take different sides on whether more people or fewer people should pay income tax.

As I said, California has already conducted a practical experiment of limiting the income tax to the top half of the population. California's income tax revenue stream has been through two boom and bust cycles recently. The legislature spends everything during the boom years and then faces horrible budget crises when the revenue drops.

The sales tax revenue stream is broader based and much less volatile. It seems that volatility and progressivity go hand in hand.

Posted by: AMTbuff | Sep 21, 2008 5:53:37 PM

attn: amt buff: california gets a ton of its revenue from state sales taxes, which apply to everyone and are extremely regressive and cyclical. CA has among the highest state sales taxes in the country.

Posted by: taxlawstudent | Sep 21, 2008 2:07:35 PM

The Tax Foundation puts a lot of effort into tracking down and analyzing those of us in the United States who don’t pay any federal income tax because we’re not liable for any — a group that’s been growing for more than two decades and now includes about a third of American households.

The Foundation, which subscribes to the “Lucky Ducky” interpretation of this phenomenon, sees this as a bad thing. When they discuss it, they have a tendency to pretend there are no such things as FICA, inflation, excise taxes, corporate taxes, sales taxes and other state taxes, and so forth, and so they will claim that these lucky duckies are “nonpayers” who “have no tax liability” because their “entire tax liability” is “wiped out” by various credits and deductions that legislators use “to funnel money to groups of people they want to reward” who then end up “disconnected from the cost of government.” The subsequent Wall Street Journal editorial about how awful the government is to the virtuous rich then just about writes itself....

Posted by: David Gross | Sep 21, 2008 9:51:43 AM

I'd like to see this graph extended all the way back to the 1950's. I suspect that the downslope you see from 1980-84 is the tail end of a long trend. That was when tax brackets were not indexed, and bracket creep pushed lower-income families back onto the income tax. Non-indexation of the $600 exemption per child was the main culprit, since that was quite a large amount when it was originally enacted.

Regardless, it certainly makes sense to have an intelligent debate about whether the income tax should be a tax on all productive people or a tax only on the other guy. Also, as a practical matter, when an income tax exempts half the population its revenues are quite volatile, as California has amply demonstrated for the last decade or more.

Posted by: AMTbuff | Sep 21, 2008 8:52:56 AM