Tuesday, October 21, 2008

More Socialists: McCain, Ford, Reagan, Bush I and II, Milton Friedman

A reader wrote in to ask us to explain the mechanism of how people who don't pay income taxes get a tax cut.

Note that total taxes paid on wages = income taxes on wages + payroll taxes.

Yes, many tax filers--38 percent in 2009 under current law--do not pay income tax. They still pay payroll taxes (the employee's share is 7.65% of wages up to a ceiling, and employers pay an equal amount). So if they receive a net credit (i.e. their income taxes on wages is negative), their total taxes paid on wages decline. When they file taxes with the IRS, they owe less. That's the tax cut.

Such tax cuts have been put into law many times in the past, in the form of the introduction and expansion of the Earned Income Tax Credit (EITC) which is one of the chief anti-poverty tools the country has.

There are three ironies in the right's current assault on tax credits as "socialism": 1) McCain himself is proposing a huge tax credit for health care, 2) the main existing credit, the EITC, was introduced under a Republican president (Ford) and expanded by Reagan, Bush I, and Bush II (and Clinton as well), and 3) the EITC is a very close cousin of the negative income tax that was proposed and pushed by Milton Friedman, the grandfather of conservative economics.


Steve Roth said...

Being too lazy to dig it up myself, I'll ask you: if you count payroll taxes, what percent of filers have no net liability?

Seems like this number might provide a more pithy reply.

How has that number changed over time?

Don Pedro said...

Here's the relevant TPC table:

27.9% of tax units (including filers and non-filers) have no net tax liability.

This doesn't really answer the relevant question, though, because this includes many people who aren't working. The same table shows that 19.8% pay no payroll taxes, which means they have no wage income.

Unfortunately, you can't just subtract the second number from the first number. because the second group is not merely a subset of the first.

At low income levels, the EITC is equal to 34% of wages for a filer with 1 child and 40% for a filer with more than 1 child, so it's substantially more than the payroll tax.

One Man Parade said...

You may want to add that the total cost to the U.S. government of both the EITC and the Child Tax Credit is about $45 billion, or less than 1.5% of the $2.9 trillion federal budget. Not exactly a jaw dropping amount of money and certainly not worth the attention its getting on the campaign trail.

Mr K said...

McCain has embraced the very things he derides.

You guys can probably make a nice little blog about this one.