The 51 Percent

The big tax debate last year was over the rich. In Congress, Republicans and Democrats sparred over extending tax cuts for the wealthiest of Americans. From city to city, Occupy Wall Street protests highlighted the country’s growing income inequality, entering the phrase “We are the 99 percent” into the lexicon to refer to taxpayers outside the top 1 percent income bracket.

Now an important debate is brewing at the other end of the spectrum—over taxing lower-income earners—sparked by an estimate last year by the Joint Committee on Taxation that 51 percent of U.S. households pay no federal income taxes.

Conservatives say the statistic shows that the government has gone too far in sparing low-income Americans from meeting the responsibilities of citizenship. “I don’t want the truly poor to pay anything, but you can’t tell me that 51 percent of all Americans are the truly poor,” says Sen. Orrin Hatch, R-Utah, ranking member on the Senate Finance Committee. “Everyone needs to have some skin in the game and recognize that they are part of the government.”

During one Republican presidential debate, Rep. Michele Bachmann of Minnesota proposed that people on the lowest income rung who receive tax refunds pay $10 in income taxes so that they feel some sense of ownership over the government. Herman Cain tapped into this zeitgeist with his 9-9-9 plan, a flashy, simple-sounding proposal that would have raised taxes disproportionately on lower- and middle-income workers. Even though Bachmann and Cain are no longer in the race, the debate over taxes is far from over.

The conservative line of thinking on federal income taxes goes like this: A greater share of the population should pay a tax bill (even a small one) so that everyone understands the true price of government. The Internal Revenue Service has turned into too much of a welfare agency, rife with abuse. The overly complicated tax system, conservatives say, has inadvertently and almost accidentally created a huge, swelling class of people who, thanks to the refundable Earned Income Tax Credit, completely escape paying federal income taxes. Never mind that the first big expansion of the credit came under President Reagan, whose penchant for trickle-down economics still pervades much of Republicans’ rhetoric surrounding taxes and spending.

“Right now, only the rich are paying taxes,” says Scott Hodge, president of the conservative Tax Foundation. “We’ve created a tax system that simply cannot function and that no longer incentivizes behavior, because there is so little income.”

“The concern is that people who are not paying any federal income taxes creates an entitlement mentality.” —Peter Wehner, former director, White House Office of Strategic Initiatives

In an editorial in August, The New York Times dubbed this GOP stance “the new resentment of the poor.” The newspaper’s editorial board wrote, “These Republican leaders, who think nothing of widening tax loopholes for corporations and multimillion-dollar estates, are offended by the idea that people making less than $40,000 might benefit from the progressive tax code.”

Republicans, not surprisingly, say The Times missed the mark. “I don’t take it as a resentment of the poor as much as resentment toward the tax system,” says Peter Wehner, a former director of the White House Office of Strategic Initiatives under President George W. Bush who also worked in the Reagan and George H.W. Bush administrations. “It’s more directed at the tax code than the people receiving the benefits. It’s an inequality, in their minds, a response to Occupy Wall Street,” Wehner says. “This is a reflexive response among some conservatives, who feel like this is a demonstration of a tax system that, in their minds, is too progressive.”

BEHIND THE 51 PERCENT

The Earned Income Tax Credit is a big reason why 51 percent of households pay no federal income tax. One of roughly 200 tax expenditures on the books, the EITC allows working families making under $49,000 (with three children) or $41,000 (with one child) to receive a refundable tax credit. The size of the credit depends on marital status and family size. Working couples also qualify if their combined income is below $18,700. The credit often refunds more money than people pay, thereby kicking some off the federal income-tax rolls.

In 2009 alone, about 27 million families and individuals claimed the credit. Liberals praise the EITC for encouraging work over welfare and for lifting millions of families with children out of poverty. In his testimony before the Senate Finance Committee in May, economist Aviva Aron-Dine argued that expansions of the EITC in the 1980s and 1990s increased the number of single mothers participating in the workforce by more than 7 percentage points.

Over the past 25 years, the credit has changed the portrait of a person who doesn’t pay any federal income taxes—and in some surprising ways. Before the 1986 tax-reform bill, poor people paid about 0.2 percent of individual income taxes, while the top 1 percent of taxpayers paid about 24.6 percent. By 2007, according to an analysis by the nonpartisan Tax Policy Center, those numbers had shifted. The individual income-tax rates on the poorest filers had turned into a refund of roughly 0.3 percent, and the top 1 percent of taxpayers bore 39.5 percent of the burden.