The lucky duckies who pay no income taxes - another look

According to the January 20, 2003 Wall Street Journal editorial "Lucky Duckies Again: Look at who won't pay taxes under Bush's plan":

As you may have noticed, the critics of President Bush's new tax cut package claim it is a sop to the rich. This charge makes us wonder if they've even read the plan. The truth is that the Bush proposals would make the tax code more progressive, not less. And this isn't altogether a good thing.

The soak-the-rich facts, if any journalists cared to look, are contained in the income distribution tables on the plan compiled by the Treasury Department. Looking at the impact for 2003, Treasury finds that the average reduction in income taxes is a touch more than 12%. But for those who make less than $30,000 the average reduction is about 17%, while for those who earn more than $100,000 it is 11.4% or less. (See the table below.)

There's even better news for modern Robin Hoods. Because the percentage reduction for families with incomes under $50,000 is greater under the Bush plan, those families would pay a smaller share of the total income tax than they do under current law.

Tax Cuts for the Poor
Lower earners would get a larger percentage income tax cut on average under the Bush plan.
Income
Percentage reduction
0-$30,000
17.0%
30-40,000
20.1%
40-50,000
14.5%
50-75,000
11.4%
75-100,000
13%
100-200,000
11.4%
200,000-plus
11.2%
Total
12.3%
Families with incomes over $100,000 would end up paying a larger share of the total income tax. These families would pay 73% of all federal income taxes. Not to put too fine a point on this income redistribution, but taxpayers with incomes over $200,000 could expect on average to pay about $99,000 in taxes under Mr. Bush's plan.


How could this happen? Mr. Bush would relieve 3.8 million lower-income taxpayers from paying any income taxes. The chief tax remover comes from his proposal to accelerate the increase in the child credit to $1,000 from $600, bumping a touch more than three million taxpayers right off the rolls.

No doubt the Bush team proposed this tilt toward lower income taxpayers to mute the class-warrior critics, not that we've noticed any lower decibel level. But one certain consequence is that the plan exacerbates the growing problem of a bifurcated tax system.

We raised this issue several weeks ago, pointing out that the unceasing addition of exemptions, deductions and credits to the tax code was shrinking the tax-paying base. And, as more lower-income people saw tax liabilities fall to zero, more upper-income people shouldered a larger part of the tax burden. We did not, by the way, suggest that lower income people should pay higher taxes. We even went out of our way to flog our favorite horse that everybody should pay less in taxes.

We are merely pointing out the (apparently heretical) truth that the current tax system is very skewed against upper-income Americans. According to IRS data from 2000, the top 5% of tax filers paid more than 50% of total income tax revenue, and the top half of tax filers were responsible for almost all revenue--96% of the total take. This burden on the upper-income holds even when the payroll tax is included in overall distribution tables. (The payroll tax includes the regressive Social Security levy and the 1.45% Medicare tax that applies to every dollar of income.)

The Congressional Budget Office has looked at the distributive impact of various taxes for 1997. The income-tax share of the lowest-income family quintile (the bottom 20%) was negative 1.2% and the share of the highest family quintile was 73.3%. The difference in payroll-tax share was somewhat less dramatic at 3.9% for the lowest quintile and 40.6% for the highest. But when all federal taxes were thrown together, the share of the lowest quintile was 1.6%, while the share of the highest quintile was 60.2%. Karl Marx, call your office.



This super-progressivity comes from two sources: the system of higher marginal-rate brackets for higher income households, and the exclusion of lower income households from any income-tax liability. In 2000, of 129.4 million tax returns filed, about 32 million paid no taxes. Most of these lucky duckies, as we have called them (to some amusing consternation), benefit from tax exemptions, deductions and credits that violate the concept of horizontal tax equity--the notion that people with identical incomes should pay the same amount in taxes.

For instance, the folks at the Tax Foundation have looked at how two single moms--each earning $30,000 a year--would fare under the Bush plan. In 2003, the single mom with one child would pay income tax of $1,028; the mom with two children would not only pay no taxes, she'd also receive a check from the federal government, under the earned income tax credit, for $680. Compared to the single mom who must pay taxes, the single mom who does not is, well, a lucky ducky.

The broader point is that whatever Mr. Bush's tax proposal does for economic growth (and we think it'd do a lot), it gives more proportional benefit to lower-income households. The class warriors should be thrilled.

Also see the editorial "The Non-Taxpaying Class: Those lucky duckies!" which originally appeared in The Wall Street Journal on November 20, 2002.

The lucky duckies who pay no income taxes

According to the November 20, 2002 Wall Street Journal editorial "The Non-Taxpaying Class: Those lucky duckies":

The stars look to be in perfect alignment for tax relief. With a GOP majority in both houses of Congress, the Bush Administration is making eager and energetic noises, and the economy is in what Fed Chairman Greenspan calls a soft spot.

But as the Republicans construct their tax plan, there is a large and under-appreciated fact they would do well to keep in mind. Over the past decade or so, fewer and fewer Americans have been paying income taxes and still fewer have been paying a significant percentage of income in taxes. While we would opt for a perfect world in which everybody paid far less in taxes, our increasingly two-tiered tax system is undermining the political consensus for cutting taxes at all.

Even the barest of glances at tax data reveal a system that is steeply progressive. Tax revenue has been increasingly squeezed out of top earners. According to the most recent data, from 1999, the richest--with income above half a million dollars--constituted 0.5% of taxpayers but accounted for 28% of total tax revenue. Simply put, a tiny group of people (553,380) were responsible for more than one-quarter of the income tax take of $877 billion.

...

Well, maybe you're saying--so what? They can afford it. Then take a look at those who aren't Richie Rich. The most recent data from the IRS, in 2000, show that the top 5% coughed up more than half of total tax revenue. Specifically, we are talking about folks with adjusted gross incomes of $128,336 and higher being responsible for 56% of the tax take. Eyebrows raised? There's more. The top 50% of taxpayers accounted for almost all income tax revenue--96% of the total take.

These numbers are more arresting when compared with the situation 14 years earlier. In 1986, the top 1% paid 26% of revenue, the top 5% was responsible for 42% and the top half contributed 93%. And what about the bottom half of taxpayers? They accounted for 7% of the total in 1986 but only 4% in 2000.

This skewed reality is the result of a growing number of absolutely legal escape hatches. Consider what happens to those in the lowest bracket. Say a person earns $12,000. After subtracting the personal exemption, the standard deduction and assuming no tax credits, then applying the 10% rate of the lowest bracket, the person ends up paying a little less than 4% of income in taxes. It ain't peanuts, but not enough to get his or her blood boiling with tax rage.

Of course, lower-income workers are on the hook for the payroll tax--but a sizable group slip free from even that net tax liability via the refundable earned income tax credit. ("Refundable" means that even if your net income tax liability is zero, the government still writes you a check.)

These numbers represent only people who have a positive adjusted gross income. In 1999, there were 127 million tax filers, 94.5 million of whom showed an income tax liability. That is, 26% had no liability at all. The actual number of people filing without paying comes to 16 million (after subtracting those getting earned income tax credits and thus, presumably, still somewhat sensitive to tax rates). So almost 13% of all workers have no tax liability and so are indifferent to income tax rates. And that doesn't include another 16.5 million who have some income but don't file at all.

Who are these lucky duckies? They are the beneficiaries of tax policies that have expanded the personal exemption and standard deduction and targeted certain voter groups by introducing a welter of tax credits for things like child care and education. When these escape hatches are figured against income, the result is either a zero liability or a liability that represents a tiny percentage of income. The 1986 tax reform, for example, with its giant increase in the personal exemption and standard deduction, took six to seven million people off the tax rolls.

...

This complicated system of progressivity and targeted rewards is creating a nation of two different tax-paying classes: those who pay a lot and those who pay very little. And as fewer and fewer people are responsible for paying more and more of all taxes, the constituency for tax cutting, much less for tax reform, is eroding. Workers who pay little or no taxes can hardly be expected to care about tax relief for everybody else. They are also that much more detached from recognizing the costs of government.

All of which suggests that the last thing the White House should do now is come up with more exemptions, deductions and credits that will shrink the tax-paying population even further.