Wednesday, September 19, 2012

The "47%" Are Not Freeloaders, and the Top Bracket Gets a Lot More Tax Breaks

There have been plenty of responses to Mitt Romney pronouncement that half of all Americans are freeloaders.  Just about all have said that Romney is wrong.  (Well, there's Rush Limbaugh.  But as usual, he's the exception that proves the rule.)

I want to publicize one response in particular, because I think it does an outstanding job explaining not only why Romney is way off-base about the "47%," but also why Romney is wrong about the rest of the populace who do pay income taxes.  The content of the response is precise and well documented.  But what's most significant is who's making it:  Loren Steffy, the business columnist for the Houston Chronicle.

What I like about Steffy is that, even though he's unquestionably a business Republican, he's generally quite careful to separate political dogma from economic facts.  In this case, the economic fact is that the "47%" pay no federal income taxes because Congress has created tax breaks that allow low-income households to reduce their taxable income to zero.  This does not mean that these households pay no sales taxes or payroll taxes or, in many cases, real estate taxes.  It simply means that as a matter of national policy we have decided as a country that some incomes are too low to tax without creating economic hardship.

Moreover, Steffy is excellent at pointing out the self-serving hypocrisy of Romney's position.  That is revealed by this contrast:  those in the very bottom tax brackets get to take advantage of only about 20% of the tax breaks available in the Internal Revenue Code; but those in the top tax bracket get to utilize about 60% of the tax breaks.  So if someone wants to say that the poor, the sick, the elderly and the under-employed are coddled by the tax code, how much more is that true for the well-off?  Romney, in short, needs to be candid:  the rich get a lot more government welfare than the "47%" do!

The ultimate point, of course, is that all of us are so under-taxed that the federal budget cannot be balanced, even with draconian cuts to domestic services and defense.  How to fix that without damaging the vulnerable even more is the great moral challenge of this decade.  Here's Steffy's column:

The 47 percent may not be who you think.

A video released Monday shows Republican presidential challenger Mitt Romney, speaking at a private fund raiser in Boca Raton, Fla., citing an often-used statistic that 47 percent of Americans don't pay federal income tax.

Romney went on to imply that all of them are likely to vote for President Barack Obama because they people who "are dependent upon the government, who believe they are victims, who believe the government has a responsibility to care for them ..."

In other words, almost half the American people are freeloaders.

I'll leave it to my colleagues on the Opinion page to assess any political fallout from this statement, but the issue of those who don't pay taxes is an important economic problem that transcends politics.

First, Romney's numbers pertain to 2010. In 2011, the number dipped to 46 percent. Also, he's talking only about those who don't pay income tax; he wasn't saying they pay no taxes at all. Many still pay payroll and excise taxes, sales tax and so forth.

The Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution, dug into the issue last year.

The center's study found that about 78 million Americans didn't pay federal income taxes, and more than 70 percent of them earn less than $30,000 a year.

Of those who didn't pay, about half simply didn't earn enough to pay income taxes using the standardized deduction. For example, the center found that a couple with two small children earning less than $26,400 paid no income tax last year because they get a standard deduction of $11,600 and four exemptions of $3,700 each.

"The basic structure of the income tax simply exempts subsistence levels of income from tax," the study said.

Seniors and the poor

Of the other half, most took advantage of tax provisions that benefit senior citizens and the working poor, such as child care tax credits, and extra deductions for the elderly. The center found these types of deductions were most widely used among households that earn less than $50,000 a year - the same amount that each plate cost at Romney's fund raiser.

Children and education

The remainder of those who didn't pay taxes include households that earned between $50,000 and $100,000 but reduced their tax bill primarily with credits for children and education.

The problem, then, isn't that almost half of all Americans are deadbeats and freeloaders.

The biggest cause behind the 47 - or 46 - percent that Romney cited is income that is too low and the long-standing practice, favored by both parties, of administering social programs through the tax code.

The tax code is chock-full of benefits such as deductions for mortgages, interest for college loans and contributions to retirement accounts, just to name a few.

Rather than increase federal spending to pay for these benefits, Congress chose to build incentives into the tax code.

Many of these credits provide even bigger benefits to higher-income households, the Tax Policy Center found, measured both by dollar value and share of income.

For example, the few households that earn more than $100,000 a year and don't pay income tax benefit the most from itemized deductions and lower tax rates on capital gains and dividends, the center found.

The rich, of course, have long used tax shelters and loopholes to avoid paying their full amount of taxes.

Benefits at the top

About 60 percent of all tax benefits built into the tax code go to the top income bracket, which isn't a surprise. By comparison, only 20 percent of the tax benefits are enough to zero-out lower-income earners.

All of which makes a strong case for sweeping tax reform.

Romney, of course, wasn't at a political fundraiser to discuss tax policy. But rather than writing off 46 - or 47 - percent of the population as freeloaders, he'd be better off focusing the discussion on tax overhauls that would bring more of them back into the tax-paying fold.

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