July 12, 2005, 8:14 a.m.
Taxing Issues

Ramesh Ponnuru’s advice to conservatives that they should stop fretting about knocking poor people off the tax rolls is a bit reminiscent of the subtitle of 1960s cult movie Dr. Strangelove or: How I Learned to Stop Worrying and Love the Bomb. The problem is that the bomb has already gone off and Republicans lit the fuse.

Because of the Bush tax cuts, this nation has become a strange twist on John Edwards's “Two Americas” — a growing class of people who pay no income taxes and a shrinking class of folks who are paying all of the bills. Over the past four years, the number of Americans who file tax returns but pay no income taxes after they use their credits and deductions has increased 50 percent, from 29 million in 2000 to 44 million in 2004. In addition to these non-payers, there are 14 million more Americans who earn paychecks, but not enough to be required to file a tax return. That means that the number of working Americans who are outside of the income tax system is 58 million. (This is really not the whole story: When you add up all of the dependents in these households, the figure rises to 122 million, or 44 percent of the U.S. population.)

In contrast to this army of non-payers, the top 20 percent of taxpayers — those earning more than roughly $68,000 — now pay about 80 percent of all the income taxes. This group of not-so-“Lucky Duckies” is largely comprised of dual-income married couples and business owners — whose reward for doing the right thing in society is a higher tax bill.

While the libertarian in me wishes that I was one of these non-payers, the democrat in me fears the long-term effect of a growing class of people who have no stake in the system. The challenging question for the President’s Tax Reform Panel is: “for whom are you reforming the tax code for?”

For more information on the problem of the two taxpaying Americas, see my submitted testimony to the Tax Reform Panel.

Scott Hodge

President, Tax Foundation

Ramesh Ponnuru responds: There are good reasons for the government to adopt a “pro-family” tax policy. Almost everyone agrees that the government should not tax people on the cost of investing in their children. But the government’s recognition of those costs has not kept pace with inflation over the last few decades. Moreover, a pro-natalist tax policy would offset the anti-natalist effects of Social Security.

Some conservatives worry that more generous deductions and exemptions for children would be a bad idea because they take people off the tax rolls. If you follow Hodge’s links, you’ll see that he suggests that any removal of people from the rolls would threaten democracy (in some fairly vague way). But then he goes on to talk about income inequality — and there, he argues that we have to look at the effects of a tax policy over people’s entire life cycle. Why can’t we look at life-cycle effects on the tax rolls too? A pro-family policy takes some people off the tax rolls for a time: the time when they’re raising children. In other words, tax cuts can temporally redistribute the tax burden within an individual household. I don’t see why Hodge can see that in some instances but not in others.

Hodge’s statement also talks about how the tax code allegedly penalizes two-earner families. I think this is a related point. It takes a blinkered vision to see this “penalization” as a bigger problem than the tax code’s treatment of child-rearing couples.