New column: Time to pay the price

By Justin Fox | October 31, 2008 | +

My new column is up online and in the magazine with McCain and Obama on the cover, together for perhaps one last time. It begins:

In 2002 the inimitably audacious editorial writers at the Wall Street Journal brought to the nation’s attention the existence of a vast and allegedly pernicious class of “lucky duckies” who pay no federal income tax because their incomes are in sub-$40,000 territory and they qualify for one or more of the many credits added to the tax code in recent decades.

Since then, thanks to tax changes proposed and signed into law by President Bush, this impoverished yet fortunate class has only grown–to 45.6 million households, or one-third of all income tax filers, according to the Tax Foundation, a right-leaning think tank with a reputation for getting its numbers right. If the various tax cuts and credits Barack Obama has proposed on the campaign trail are enacted, the group estimates, that figure will rise to 63 million, while John McCain’s tax plans would bring the tally to 62 million. Either way, more than 40% of the population would stand to come out even or ahead on April 15.

What are we to make of this development? Some conservatives say it endangers the underpinnings of American democracy, echoing the 2002 Journal editorial: “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.” This argument is historically obtuse, considering that the federal income tax was initially designed to hit only a tiny minority of high earners and exempt the other 99% (it first became a mass tax during World War II). It’s also misleading, in that lucky duckies still get hit with payroll taxes for Social Security and Medicare, federal excise taxes, state and local sales taxes and so on.

But the growth in the ranks of those who pay no income tax does raise an important question that both Obama and McCain failed to fully answer during the current campaign: How the heck are we going to finance our government? The question has been looming for a while because of the chronic deficits of the Bush years and the soon-to-escalate demands on Social Security and Medicare. It has gained urgency lately, with Washington committing vast sums to fighting financial panic and with more deficit-financed emergency aid surely on the way. Read more.

One final note: I really wish I had read Shawn Tully’s new Fortune article on the HENRYs (high earners, not rich yet) before writing my column. Because then I could have worked in the HENRYs alongside the lucky ducks.

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bryanfromhouston

“How the heck are we going to finance our government?”
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Easy. We should move to immediately ration healthcare unless you can afford it. Further, we should cut back on our military expenditures and aggressively pursue a sustainable peace-time posture that maximizes our soft power and encourages robust economic conditions. Finally, we should return to the tax code of pre-Bush, and employ an aggressive green jobs and education platform on the scale of the Manhattan project.
.
None of the above is popular with everybody, but that is what the country should do. It is like working out. It doesn’t feel good to get in shape until you are in shape. But once you’ve gotten yourself in shape, working out (saving, exporting, and reducing expenditures) can be fun and when done with reasonable moderation often healthy for the body. No difference here for the country.
Curmudgeon

I felt the crosshairs on my back when I read your conclusion; you are almost certainly correct. Here’s another one – local governments are increasingly imposing user fees for specific services to individuals. Might we see the proliferation of user fees at the Federal level? $500 for a passport rather than $65, for example? Is international travel an inalienable right?

@Bryan: Not bad ideas, but I see no national discussion, let alone commitment, to ration health care. And wars excluded, spending on national defense isn’t that high. Even if we were to do these things, I don’t think it will come close.
Bob from Howell

I’ll tell you how to pay for this: Institute a uniform, fair tax in place of the overly convoluted graduated income tax which nobody understands. Giving tax credits or deductions or all that nonsense makes it that much worse to understand. Everybody would pay at the same rate, exempting only the lowest income folks, making everybody’s percentage manageable and everybody shares equally in paying down the deficit. Increases to periodically meet increased costs would be a whole lot easier to legislate.
Think of all the money that could be saved by cutting down the IRS and devoting those jobs to retrieving money overly spent on government contracts, etc.
bryanfromhouston

Curm,

The real benefit is on the backend. Initially, though, you’re right. All it would do is slow down deficit spending to a crawl from a sprint. The advantage is really gained when you maximize individual wealth earning power. This way you can grow the ranks of those who are so poor that they couldn’t afford to pay taxes without lowering their living standards (could go there, but no national discussion here either). In any event, I will continue contributing $50,000 of income taxes from my earnings to the government for services. I like roads, a strong military, police, schools and a reasonably secure border. It allows me to continue to make money.
tegwar

I’d forgotten how offensive that Lucky Duckies editorial was. You know, the lucky family might be busting its hump daily just to survive and they don’t have to pay income taxes to the feds!? Meanwhile, there are unlucky families pulling down hundreds of thousands of dollars a year and forced to choose between a new boat or a third vacation home – but if only the federal income tax didn’t pinch them so hard they wouldn’t be forced to face such a tough choice. Patently offensive that editorial. (and it’s in a related vein that the flat tax idea is a failure – not all dollars earned are equally discretionary in their use. And, all the benefits of a high end society are not equally enjoyed by all – see foreclosures v. bailouts).

That off my chest, first thing to say, there really is a lot of income at the top which can be taxed if needed. The focus on the top marginal rate is apt – how high can it go? Prior to Reagan we had peacetime top rates as high as 70% and, during and just after WWII the top rate hit 93%. Sure, there are tax payment vs. tax evasion issues up there, but it’s been done. A better focus, potentially, is on average tax rates. Average tax rates for the upper income segments are lower than they were 30 years ago (and inequality has risen over that same span). I would argue we shouldn’t so quickly deny the potential revenue raising capacity of high income taxation.

The philosophical point about so many not paying general purposes taxes is well put. And if we again have an economy which functions well for most of the economy, levying income taxes on a broader swath of the population seems desirable. But, given that the economy has functioned well for most of the population for some 5 to 10 years out of the last 35 to 40, now does not seem the right time to raise that concern.
tegwar

Also, I live in fear of the ‘user fee’ financed government. It’s the abdication of responsibility / authority on the government’s part. Look schools or roads or the military are one of those things that benefit everyone. They shouldn’t be paid for exclusively by those who like booze, gambling, traveling or patenting ideas. That’s almost a worse idea than the flat tax.
Curmudgeon

@tegwar: I wasn’t advocating user fees, just see it headed in that direction. I’m not sure what to make of a large segment of the population not paying income taxes. It seems intuitive that people would care more if they had “skin in the game.” But at the individual level it’s hard to relate the taxes you pay with the services you get.
Tony E.

About the HENRY article (Sorry, but I couldn’t see where to comment over there).
I don’t have any sympathy with the people in that article. I make under $50k a year and I (currently) work for an automotive supplier. I’m sorry, but spending $1800 a month on day care and saving $1500 a month for college is a luxury when the majority of people can’t afford college all together. Chances are if you live in an affluent neighborhood, your school is going to be pretty good compared to most. One solution could be to have one parent stay home and raise the kids. This could also move them out of the higher tax bracket and AMT.
But a flat tax or consumption tax would solve both the HENRY and Lucky Ducky problem. Installing a consumption tax would give an incentive to the government to make sure that Americans had good jobs.
And we spend more on defense than all other countries combined. I’m sure that there is room in there for cuts. Taking half of the defense budget and using it to actually build the schools, hospitals, water treatment plants, etc. in the third world would do more for national security than what we have now.
http://angrybear.blogspot.com Ken Houghton

Income tax is not the only tax. Those 40% all pay SocSec taxes and Medicare/Medicaid taxes, which is about 15% of their “income” by WSJ Editorial page reckoning.*

And you know this. So why do you scream about “the soon-to-escalate demands on Social Security and Medicare”–which continue to be funded by the Lucky Duckies–unless you’re auditioning for the WSJ editorial page?

*WSJ Editorial page pretends that if those taxes were eliminated, employers would raise the salaries of their employees by the “employer” portion of the tax, leaving us with an entirely new but no different definition of “I gave at the office.”