When Half the U.S. Population Pays No Income Tax

By April 15, 2010General

The final question of today’s meeting of manufacturers with Peter Orszag, director of the Office of Management and Budget, came from Rich Gimmel, president of Atlas Machine and Supply, Inc., in Louisville and Cincinnati. Gimmel raised a question that is increasingly informing political and fiscal discussions: Is it a good thing for the nation when a large percentage of the public no longer pays federal (income) taxes?

We’ve transcribed the exchange, and here’s the sound file.

Gimmel: I’m sure you’re familiar with the report that came out..last week that 47 percent of the households pay no income tax. If you add to that people who are directly employed by the government or from government-contract dependent companies, who work for them, you’re seeing a smaller and smaller proportion of the population that is net taxpayers as opposed to net tax consumers. This trend is accelerating, and does that concern you?

Orszag: Let’s me first be clear, let’s just round to roughly half the population who don’t pay income taxes, disproportionately do pay the payroll taxes, so I think it’s important to remember there still is a tax flow, even if it’s not true for income tax.

The second thing that we need to remember is, don’t forget that while I think there is a concern to be, you know, aware of, and one that should warrant attention, that the underlying driver here is basically two things. One is the vast expansion that we’ve had in income inequality in the United States, so that a much larger share of pre-tax income, and therefore also taxes paid, is accruing to the top of the income distribution.

And then the second is a series of tax changes which began under President Nixon and others, and President Ford, to provide incentives for work, for example, through the Earned Income Tax Credit. So at the very bottom there have been a series of changes, the Earned Income Tax Credit and the Child Tax Credit, which are a contributor to that basic phenomenon.

A key driver is also the changes in income inequality we saw, and don’t forget that most of those folks who are not paying income taxes are paying payroll taxes.

Nonetheless, I think the core of your question is what is happening to civil society and our democracy, and are we functioning well? And what I would say is this: And it brings me back to where I started, or my second point. Again: Fully agreeing with Chairman Bernanke that we are an unsustainable fiscal course, I think we are going to face a key challenge over the coming months and years about whether we can get ahead of that problem together, because I think the only way we can do that is on a bipartisan basis.

And that is going to test the political system in a way that it is rarely tested. We do not do well in dealing with gradual long-term problems. Our fiscal trajectory is a gradual long-term problem. Let’s hope that we deal with it before it becomes a crisis. And that is one of the underlying purposes of bringing people together in a bipartisan way, with strong leaders — I’m very pleased that both Simpson and Bowles agreed to devote their time and energy to this — to tackling a key problem like that. So among the other things that I’m hoping we will work tougher in the coming months and years on, is that core problem which, I think,  will need to be addressed and will be a challenge to address, and I hope we can do so together.

Thank you very much.

Jay Nordlinger, an editor at National Review, raised the core of the question at The Corner today in a post, “Mighty Mite: “My notes on taxes in today’s Impromptus include an opinion that is not wildly popular: that every worker should pay taxes — from the pimply kid making minimum wage at McDonald’s to Rockefeller. You know: Everyone contributes to the commonweal; everyone has a stake.”

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