Tax Analysts Blog

Moving Beyond the Income Tax

Posted on Jul 10, 2009

The phone rang the other night. It was a conservative friend who I hadn't heard from in months. He let me have it about how my last post was complete nonsense. His beef was that I understated the number of American households that pay no income tax. I recently said it was 40%. My pal disagreed and eventually proved me wrong. The actual statistic is closer to 43% -- and projected to increase in coming years. What can I say? Mea culpa.

So 43% of U.S. households pay no income tax. Still seems like a whole lot of people not paying their fair share -- even if their share would happen to be very small.

There was more. My buddy pointed out that the statistic is misleading because low-income people tend to have larger families than rich folks and are far more likely to have in-laws and relatives living with them under the same roof. Therefore, he explained (rather unscientifically), that the actual number of individuals who pay no income tax would be higher, possibly exceeding 45%.

"Why the heck don't you blog about that, Bob?" I guess I just did.

My friend also questions why the U.S. government chooses to report the statistic in terms of nonpaying households, rather than nonpaying individuals. His theory (which strikes me a far fetched) is that the government worries the public at large will loose faith in the federal income tax system should it become common knowledge that close to half the country isn't paying any income tax. I'm not so sure about that; I generally don't believe in conspiracy theories. I agree, however, that public perceptions of equity and fairness have an impact on compliance rates. Perceptions matter, especially for a system largely based on self-assessment.

Fast forward 24 hours. My phone rings again. It's a liberal friend who recently moved to the west coast. I get an earful about how my last post was complete nonsense. Her beef was that the income tax was never intended to tax the poor in the first place, so I should get off my high horse and stop bashing the poor. Our income tax system was originally designed to tax the super affluent, she said, but as the federal government's spending needs increased exponentially over the decades and as other revenue sources proved inadequate (think tariffs), the reach of the income tax gradually trickled down to affect the middle class.

Therefore, she explained (rather unscientifically), that the current income tax is sputtering along just fine, thank you very much. It operates more or less as its designers intended -- despite all its quirks. The rich pay, the middle-class pay, the poor don't. That's progressivity. She didn't want to hear right-wing nuts preach about "class warfare" or "redistributing wealth." Who ever said the individual income tax was supposed to be a broad-based revenue generator for the government? Besides, the poor pay other types of taxes.

"You ought to blog about that, Bob." I just did.

So is there a way to reconcile these clashing perspectives? On the one hand, I'm not against progressivity. Bill Gates probably should be subject to a higher marginal rate than the bag lady who sleeps in the park; or even the working stiff who brings home low wages and struggles to feed his or her family. On the other hand, I like the idea of a broad-based tax to which everyone in our society contributes. After all, we do have a $1.8 trillion annual deficit to close and a national debt that's growing out of control. It's not like Uncle Sam doesn't need the revenue.

Maybe I'm looking in the wrong place. The income tax just doesn't fit the bill. My expectations of what the income tax can reasonably accomplish are too high. I suspect that it's time we ponder those "alternative revenue sources" that I keep hearing about.

Thankfully there was one issue on which both my liberal and conservative friends easily found common ground. Nobody defended Barry Manilow.

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