Tax “credit” reform might change who pays taxes

Posted By on June 27, 2011

Why do only 53% of the citizenry of the United States of America pay federal income taxes? Something’s not quite right when nearly half of the people benefiting from from living in this country are voting for, but not funding, those who are elected to spend others peoples money.

WhoPaysTaxes

This could change if congress eliminates the majority of the “credits”  which keeps some families from paying federal income taxes … and once people have “skin in the game” they might think twice about how “their” money is being spent and redistributed in Washington DC.

 

Should everybody pay income taxes?

A broad swath of Americans don’t pay taxes. Do they have ‘skin in the game’ in America’s success?

By Elaine Maag, Guest blogger / June 26, 2011

David Walker, a former Government Accountability Office head, thinks it’s a problem that half of Americans don’t pay federal income taxes. At the June 22 IRS-Tax Policy Center Research Conference, he argued that more people ought to have “skin in the game” when it comes to paying these taxes so they will be invested in our country’s future. I happen to think almost all of those people he’s talking about do have skin in the game—more than he or I, in fact.

For starters, most people do pay taxes. As Walker recognizes, they pay payroll taxes, excise taxes, sales taxes, state income taxes–and more. Tax reform could easily involve some of these levies, so even people who don’t pay federal income taxes today could be affected by reform. And please don’t forget, while today’s credits and deductions do knock many low-income people off the tax rolls, those in the top brackets reap far greater benefits.

Also, as noted by my colleague Eric Toder, people don’t pay income taxes either because they have no taxable income (almost all of the elderly who don’t pay income tax, for instance), or because they qualify for credits that offset their tax liability. For the people in the second group, increases in tax rates could very well hit them in the wallet – either because they’ll owe net taxes or they’ll receive smaller refunds.

The Center on Budget and Policy Priorities recent analysis of those who don’t pay federal income taxes jibes with TPC’s. The conclusion? Most are elderly, poor, or unemployed (including people who are too disabled to work). Whom, I wonder, should the tax man put on the block? And how much money is there to be gained by doing so?

The Earned Income Tax Credit keeps many off the tax roles. But it’s not keeping wealthy people from paying income taxes. TPC estimates that in 2010, about 80 percent of its benefits went to households with income under $30,000.

Furthermore, people tend to receive the EITC for only a couple of years at a time. It might move people off the tax role in some years, but not all years. So even many people who temporarily aren’t paying income tax, likely will in the near future.

If the EITC were run as a spending program rather than a tax subsidy, government could separate its revenue and spending functions. This might diffuse some complaints about people who pay “no taxes.” But that sort of thinking overlooks the real advantages to delivering work incentives through the tax system. It is administratively efficient, is more accessible to workers than traditional spending programs, and has increased work, especially among single parents. Why fix something that isn’t broken?

Of course, as a spending program it would be targeted for cost cutting while as a tax subsidy it has—so far—remained immune.

At a time when we have a serious budget problem, tax breaks should face the same serious review as spending. But tax breaks for low-income families should not be at the top of anybody’s target list. No matter what happens with tax reform, I know where my next meal is coming from. At least some of those who avoid federal income tax thanks to programs such as the EITC don’t. Adding to their income tax burden will not help.

http://www.csmonitor.com/Business/Tax-VOX/2011/0626/Should-everybody-pay-income-taxes

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