The only thing that we libertarians care about, continued
By Thoreau
It is often said that roughly half the country pays no federal income tax. Leaving aside the issue of whether that’s 50% of workers, 50% of working-age people, or other statistical factors that need to be addressed to determine the accuracy of that statement, there’s also a basic accounting issue: The workers in question still pay Social Security and Medicare taxes.
Now, some will say that yes, they are paying for those programs, but what about the rest of the government? My answer is that, no matter what is written on paper, money is, in some sense, fungible. The very fact that there’s a revenue stream in place for Social Security and Medicare, programs that have traditionally been popular with high-propensity voters, means that other politically important (not to be confused with socially important) programs can be funded without raising income taxes. (The previous sentence is completely false, of course, because they just borrow and spend rather than tax and spend these days, but you know what I mean.)
It’s like, imagine if you came into some sort of windfall, so you paid off your mortgage. Now that you don’t have a monthly mortgage payment, you can use your paycheck to take a vacation. In a very strict sense that vacation was paid for out of your paycheck, but we both know that the windfall is the reason you can take that vacation. In general, the existence of one revenue stream gives you some flexibility in how you use another revenue stream. Those who want to argue that those revenue streams are allocated by statute need to remember that the people who wrote this statutes did so with the knowledge that there were multiple revenue streams, making it possible for them to make the decisions that they made when they wrote the statutes. Like, what if the cops start getting more revenue from asset forfeiture. The state and local laws may have some rules about what that money can or can’t be spent on, but the very fact that they can spend it on something means that they don’t have to dip into some other pot of money for that something. Which gives you more flexibility with that other pot of money.
So, in the big picture, people who pay for Social Security and Medicare are still paying for the operation of the government. Moreover, even if you absolutely reject my argument about pots of money affecting each other, Social Security and Medicare are two of the big three programs. At the very least, they’re paying for a big piece of the government, and since Social Security taxes are NOT progressive they’re paying a bigger proportion of that big piece than they would if they also paid income taxes into the other pieces.
However, because I’m so tired of this “Half of all workers don’t even pay federal income tax!” meme, I propose the following changes to the tax code:
1) Abolish the employee contributions to Social Security and Medicare, and relabel the employer contribution as a Business Tax or something. There are no longer any Social Security or Medicare taxes.
2) Adjust the individual income tax formulas so that the individual income tax is exactly what it was before, plus something that just happens to exactly match the Social Security and Medicare taxes that people used to pay. If necessary, adjust the definition of taxable income for the calculation of what we used to call Social Security and Medicare, to really make sure that the contributions stay the same.
3) Put all of this money into the Treasury, and fund the programs at the exact same levels as before.
I’m sure that I’m missing some details, but I think that everybody gets the idea of what I’m proposing here.
Nobody would pay one cent more or less than before, but we could finally end this stupid “Half of all workers don’t even pay federal income tax!” meme. Now even workers with very low incomes could proudly state that some of their money is going to blow up random people in Yemen and Waziristan.
Comment by the innominate one —
October 8, 2011 @ 2:53 pm
I wonder how much of the fact that 50% aren’t paying federal income tax can be attributed to the fact that the economy is in the shitter and un- & under-employment is high. One just might have something to do with the other.
Comment by Avram —
October 8, 2011 @ 2:56 pm
It’s not clear (to me, at least) from the post whether you’re aware that the Social Security Trust Fund has, in actual fact, been raided to pay for things in the general budget, thereby keeping income taxes lower than they would need to be to pay for the same stuff if the Trust Fund hadn’t been there to raid.
So, instead of the windfall metaphor, it’s more like if your company had a pension fund, and the boss likes to wine and dine visiting stockholders at expensive restaurants to the degree that it would cut into profits and lower the stock value of the company, only instead of paying for the dinners out of actual revenues, he just scoops money out of the pension fund, and writes a memo to return the money at some undefined future point when business has improved. In theory, the cost of the dinners was paid for by the business, but we both know who’s actually paying for them in the long run.
Comment by Thoreau —
October 8, 2011 @ 2:58 pm
I am aware of that, but I didn’t want to touch on it because I find that those discussions tend to go in weird directions. But, yes, you are correct on this point, and it reinforces my point.
Comment by Katja —
October 8, 2011 @ 3:46 pm
Kevin Drum had a couple of posts about that back in July.
Short version: About 46% of all Americans will pay no income tax this year. For 30% because they’re either entirely too poor to pay taxes or because what little they’d pay in taxes gets offset by tax credits for low-income families. 10% are too old — Social Security income does not get taxed (meaning they’re also not exactly rolling in money). About 6% get to pay no income tax through other means.
And obviously, they do pay plenty of non-income taxes still (sales tax, gas tax, etc.). One can argue if payroll taxes for Social Security and Medicare really count, since they are technically separate from the rest of the federal budget.
In short, for 40% of the population it comes down to the fact that they pay no income tax because their income simply is too low to pay taxes. And I’m a bit at a loss why this is often considered an indictment of those people (apparently, being poor is a crime) rather than of a society that is fine with such widespread poverty.
Comment by Thoreau —
October 8, 2011 @ 3:56 pm
Katja,
Those people are free-riding on the rest of us. Predator drones and secret assassination-authorizing death panels aren’t cheap, you know. Nor is it cheap to run the world’s largest prison system.
It’s almost as if those people don’t value all of the freedom being provided by the rest of us.
Comment by David —
October 8, 2011 @ 5:07 pm
Not bad, Thoreau, but the people making the argument rarely say “income tax” but “50% of the parasites (implied to be mostly minorities, immigrants & single mothers) PAY NO TAX AT ALL! It’s an emotional argument about poor people gaming the system and voting themselves extravagant benefits while decent hardworking folk toil to make ends meet and support them.
Comment by monster gardener —
October 9, 2011 @ 10:00 am
Thank you VERY much for your post, Thoreau.
Congratulations on discovering an innovative way to possibly shut this meme down without raising taxes on people who can’t afford it.
Your idea sounds VERY good to me.
Am sick and tired of hearing Sean Hannity and similar blather this propaganda….
Congrats again.
With admiration,
MG
Comment by Steve Trinward —
October 9, 2011 @ 3:44 pm
I like a lot of this proposal, but still believe my longstanding call for a “FICA floor” would do almost the same thing, while putting needed (and earned) cash back into every working person’s pockets! It could also be a step toward moving the “employer contribution” from the mythical “SSI lockbox” to each individual worker’s emergency/medical/education/other savings accounts!
Comment by Patrick D —
October 9, 2011 @ 11:34 pm
So T,
This is the second rather long post on this topic. Both are long on words but short on math. I’m don’t spend much time surfing the nets and most of the commentary I’ve seen focuses on how much “the rich” do pay, not on what “the poor” don’t. Please tell us what percentage of total revenues are going to the government by “class” once all the non-income-tax taxes are taken into account.
Comment by Patrick D —
October 9, 2011 @ 11:35 pm
Doh! “I don’t spend…”
Comment by BrianM —
October 10, 2011 @ 7:36 am
A big reason why families pay no federal income tax is child tax credits, which increased greatly in the Bush years.
http://t.co/dzGcE4ra
http://t.co/sbmCHix1
Comment by Barry —
October 10, 2011 @ 9:15 am
katja: “And I’m a bit at a loss why this is often considered an indictment of those people (apparently, being poor is a crime) rather than of a society that is fine with such widespread poverty.”
Because (a) there’s a strong faction which believes that being poor is, if not a crime, at least a sin, and (b) because the
richlackeys will work like dogs to make it look like the rich are suffering.Comment by mpowell —
October 10, 2011 @ 12:31 pm
I appreciate your goal here, but I don’t agree with your conclusion. I think SS and medicare are very important programs, both for their own reasons, and I think having people explicitly pay into those programs (even if this is meaningless at some level) improves political support for both of those programs.
There is a very real chance that SS benefits will have to be trimmed and I would regard that as unfortunate but acceptable since we would be talking about 10-20% types of reductions. But it would be one of the worst things that this country has ever done if SS is virtually eliminated. It would be a major step backwards in terms of the decency and quality of our society.
Comment by Jonas —
October 10, 2011 @ 3:34 pm
There are other federal taxes as well. We do have tariffs, and tariffs are geared to hit low cost items higher than high cost items simply due to the amounts of each that are sold. For instance, imported drinking glasses have a tariff, and glasses that are less than $1 have >30% tariff, and glasses that sell for more than $10 have a <10% tariff. But these are invisible so no one realizes they are there.
Comment by Thoreau —
October 10, 2011 @ 6:40 pm
mpowell-
I’m not offering this as a serious policy proposal. My point is simply that the status quo is isomorphic to a situation where everybody pays just as much but it gets labeled “income tax”, so the people saying “They don’t pay income taxes!” are full of shit.
Comment by Killing in the Lame of —
October 11, 2011 @ 9:11 pm
Clearly, your Popery smelling self needs to get with the times and take a page out of the New American Protestant Prosperity Gospel. And, it’s black AND white, Rick Warren AND T.D. Jakes.
#racialtranscendence
Comment by Chris Gerrib —
October 12, 2011 @ 9:01 am
I did the math here. 63% of the people who don’t pay income tax are either retired or just entering the work force.