Robin Hood Strikes Again

For nearly half of American households this year, April 15 will be no different from any other day. AP’s Stephen Ohlemacher reported on Thursday that, according to the Tax Policy Center in Washington, about 47 percent of Americans will pay no federal income taxes for FY2009, either because their incomes were too low, or they qualified for enough credits, deductions, and exemptions to eliminate their liability. The bottom 40 percent of income earners, in fact, will profit from the income tax system, since they get more money in tax credits than they would otherwise owe in taxes: rather than tax these households, the government will send them a payment. The top 10 percent of earners, on the other hand, will pay about 73 percent of income taxes, which is to say nothing of the disproportionate effects of the corporate income and estate taxes on high-income citizens.
The income tax is the largest source of revenue for the federal government, having generated $900 billion in FY2008. While virtually all working Americans pay excise and payroll taxes, the former account for a miniscule portion of federal revenue, and the latter are paid with the expectation of retirement benefits.
Mr. Ohlemacher goes on to point out that although the number of households avoiding the income tax is down two percent from 49 percent in FY2008, it has increased by nine percent overall since FY2007, for which the figure was 38 percent. This sustained increase comes in part as a result of the President’s tax cuts for low- and middle-income families contained in last year’s economic recovery package. While this figure is likely to decrease over the next few years as the recession subsides and income levels increase, the President’s campaign promise to eliminate the income tax for seniors making less than $50,000 per year, as well as his current proposals to extend additional tax credits to the poor and middle class while imposing nearly $1 trillion in higher taxes on households making more than $250,000, would have the effect of exacerbating the disparity.
While progressive income taxation is not without its merits, such an extreme level of redistribution raises a few obvious concerns. For one thing, the tax burden falls heaviest on the people most capable of creating jobs—and most capable of shipping those jobs overseas. Given their above-average incomes and above-average rates of saving, these are also the people most able to reduce their output or stop working altogether in response to higher taxes. Furthermore, under this regime, nearly half the electorate has little if any interest in reining in the deficit, since most federal programs outside Social Security and Medicare are all benefit and no cost for the bottom 47 percent of the country.
Given how tremendous this revenue disparity is and the fact that President Obama would like to increase it, the more fundamental question is, What is the endgame? Presumably the President and his party do not believe the top income quintile should shoulder the entire tax burden. But since we seem to be moving in that direction, one wonders at what level of redistribution they will be satisfied. If nothing else, it would be fitting for President Obama to acknowledge this state of affairs and explain the extent to which it is appropriate for the government to “spread the wealth around.”
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