It’s a standard line in Republican presidential candidate Michele Bachmann’s stump speech.
“We live in a world where only 53 percent of Americans pay federal income tax, 47 percent pay nothing,” the Minnesota congresswoman recently said in Iowa.
Bachmann’s figures are roughly correct: By most estimates, 46 percent of American households had no federal income tax liability this year, either because they didn’t make enough money or their credits, exemptions and deductions exceeded their tax bill. Some filers without an income tax bill even got refund checks from Uncle Sam.
Other Republicans and conservatives have echoed her concerns, suggesting tax reform that could include a required minimum payment from almost everyone.
“The poor need jobs, and they also need to share some of the responsibility,” Republican Sen. Orrin Hatch of Utah said last July.
Sen. Roy Blunt, a Missouri Republican, also insists it’s a mistake to allow some taxpayers to pay no federal income levy. “I do think you value what you pay for,” Blunt said. “Whether that’s a copay at the doctor’s office, or actually having a stake in the income tax system.”
But Democrats and some liberal groups contend the GOP’s federal income tax claims are misleading. Even Americans who don’t pay
taxes pay a bucketful of other taxes and fees, they point out.
“All Americans pay taxes,” Citizens for Tax Justice, a liberal public interest group, noted recently. “Everyone who works pays federal payroll taxes. Everyone who drives pays federal and state gas taxes. State sales taxes affect everyone who shops, and state and local property taxes affect everyone who owns or rents a home. Most states have income taxes.”
The argument over the federal tax structure is expected to move to the center of the presidential campaign next year. It’s already part of the debate over the federal deficit, and GOP candidate Herman Cain rose in the polls after proposing major cuts in federal income taxes and a new national sales tax as part of his 9-9-9 proposal.
Republicans want to reform taxes for a variety of reasons, of course — lower tax rates, for example, would spur job creation, they say — but many also think requiring an income tax payment from everyone would make the system more fair.
But some who study the tax code are worried that major federal tax reform could upset the delicate balance among all the taxes Americans pay, potentially making the tax system less fair. That’s particularly true because states and cities also are discussing major changes in the way they collect the money needed to run their branches of government.
Among the states seriously rethinking their tax codes are Missouri and Kansas.
“There are substantial threats at both the federal and state level that, in combination, would really do a number on middle- and low-income families,” said Matthew Gardner of the Institute on Taxation and Economic Policy.
The growing segment of taxpayers with no federal income tax liability is the product of many years of changes in federal law aimed at specific groups, particularly the poor, the elderly and young families with children. The expansion of popular programs such as the child tax credit and the earned income tax credit have not only eliminated income tax bills for millions of Americans, but — because the credits are refundable — they’ve actually meant government checks for millions of Americans who pay no taxes to begin with.
And that angers some groups.
“Exempting huge portions of the population from the primary source for the federal government’s discretionary budget effectively disguises the burdens it places on our economy,” said Andrew Moylan of the National Taxpayers Union.
But the credits and exemptions have made the federal tax system progressive: The more you earn, the more you pay, both in actual dollar amounts and as a percentage of your income. The top 1 percent of earners paid 37 percent of all federal income taxes in 2009, studies show.
That picture changes, though, when state and local taxes are added into the mix. In Kansas City, the Census Bureau reports, a family with two wage earners and one child, making $25,000, paid almost 13 percent of their income in state and local taxes in 2009. However, the same size family earning $150,000 paid just 9.6 percent of their income in state and local taxes, the study showed.
Because it has a flat 1 percent earnings tax, a state income tax and relatively high sales taxes, the state and local tax burden in Kansas City is considered regressive — that is, lower earners pay
taxes as a percentage of income.
“Nearly every state and local tax system takes a much greater share of income from middle- and low-income families than from the wealthy,” the Institute on Taxation and Ecomic Policy concluded in 2009.
As a result, the combined tax burden — federal, state, and local — only slightly tilts in favor of the poor and middle class, Citizens for Tax Justice recently concluded. “The tax system as a whole, including all the types of taxes that people pay, is just barely progressive,” it said.
Even some conservative economists maintain that the tax burden is flatter than some believe.
“Everybody does pay taxes,” said David Stokes of the Missouri-based Show-Me Institute, although he added “it’s a bad thing” that some federal taxpayers escape any income tax liability because it encourages them to support income tax increases for others.
Mayor Sly James’ Municipal Revenue Commission, now examining Kansas City’s tax structure, is expected to take a look at the fairness of the local tax burden.
It isn’t clear whether the argument at the local or federal level will have a dramatic impact on the income-for-sales tax swap now under discussion in Missouri, or the state income tax phase-out proposal widely expected in Kansas next year. Several groups have announced plans to organize opposition to the Missouri ballot measure, while the group proposing the swap has started gathering petition signatures to put the change on the ballot.
But plans for federal tax reform are likely to go forward in the 2012 presidential election year, from such candidates as Bachmann, Cain and others — regardless of the picture at the state and local level.
“To accomplish a fairer, flatter and simpler tax system will take a complete reform of the tax system,” Bachmann is telling her Iowa audiences. “It means abolishing what we currently have and starting over again.”