Taxes

Ronald Reagan and the 47 Percent


Ronald Reagan and the 47 Percent

AP Photo

(Replaced with magazine version.)

Mitt Romney, meet Ronald Reagan. The Romney-Ryan campaign labels the 47 percent of people who don’t pay federal income taxes as “takers.” But to President Reagan, the godfather of today’s conservatives, anyone who worked for a living was a maker, whether he or she paid taxes or not.

Reagan strongly supported the Earned Income Tax Credit (EITC), which sends checks to Americans who work but earn less than around $46,000 a year, depending on family size. Recipients of the credit are among those who don’t pay income tax, but Reagan never regarded that as a problem. His administration estimated that the 1986 reform of the tax code would remove 6 million working poor from the tax rolls. Reagan called the reform a “sweeping victory for fairness” and “perhaps the biggest antipoverty program in our history.”

If what Romney really wants is to get more people to pay income taxes, there’s a straightforward way to do it. Just eliminate the standard deduction and the EITC, and tax all of workers’ income starting from the first dollar they make, presumably starting at a low rate. The downside is that “there are people who are working now who would stop working,” says Jesse Rothstein, an economist at the University of California at Berkeley’s Goldman School of Public Policy.

For many low-skilled people with low earning potential, the take-home pay they would receive after the elimination of that deduction and the EITC wouldn’t be worth the effort. It’s not necessarily laziness: The cost of commuting, suitable clothing, child care, and the like comes to nearly everything many of them would earn, if not more, says Rothstein. Romney is sensitive to disincentives that face the rich; those that face the poorest Americans are far bigger.

Far from trying to get more people on the federal tax rolls, the latest proposals from various bipartisan deficit reduction commissions would actually exempt more Americans from paying income tax—in the name of encouraging them to work, and work harder. Phasing out the credit by income, as is done now, dampens people’s incentive to earn more. For a couple with two children, the EITC declines from a bit more than $5,000 at $20,000 in income to zero above $46,000. The Domenici-Rivlin Debt Reduction Task Force plan proposed in 2010 has a refundable earnings tax credit that would apply to the first $20,000 of someone’s income and would be paid to all taxpayers, regardless of income. That would eliminate the phase-out effect, says Loren Adler, a senior analyst at the Bipartisan Policy Center, the task force’s organizer. He estimates that the plan would increase the number of Americans not paying income taxes by approximately 2 percentage points. (All workers pay Social Security and Medicare taxes.)

If Romney wanted to get more Americans paying taxes without discouraging them from working, a simple trick would be to turn the EITC into a grant. Nothing would change except the accounting. That might set a difficult precedent, says Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities. Imagine if the mortgage interest deduction were replaced with an annual check from the government to help people pay for their mortgages. Suddenly a prized middle-class perk would look less defensible.

“The reason the Earned Income Tax Credit has been so successful politically over time is that it melds values that liberals and conservatives emphasize,” Marr says. It does, however, shrink the tax rolls. And to a new generation of Republicans, that appears to be anathema.

The bottom line: Economists say that trying to get more Americans on the tax rolls could actually discourage them from working.

Coy_190
Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.

Hollywood Goes YouTube
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus