Low-Income, low Taxpayers: New Meat for the Right

Low-Income Taxpayers: New Meat for the Right
By E. J. Dionne Jr.
Tuesday, November 26, 2002; Page A29

Prepare yourself for the latest cause of the political right: You are about to hear a great deal about how working Americans at the bottom of the economy are not paying enough in taxes.

I am not making this up. The Wall Street Journal's editorial page always provides important clues about the Next New Thing among conservatives, and there it was last week assailing "The Non-Taxpaying Class."

You'd think the tax-cutters on that page would be happy with a policy begun under Ronald Reagan to lift the income tax burden from Americans struggling to get by on modest paychecks. But no, it seems that because of our tax structure, the favorite causes of supply-siders -- big tax cuts for wealthy Americans and investors -- are just not popular enough. "While we would opt for a perfect world in which everybody paid far less in taxes," the editors write, "our increasingly two-tiered tax system is undermining the political consensus for cutting taxes at all."

The editorial writers are roiled by the fact that the richest Americans, those with incomes of more than $500,000 a year, account for 28 percent of total tax revenue and that the top 5 percent "coughed up more than half of total tax revenue." The Journal contrasts these unfortunate souls with the thriving person who earns $12,000 a year and ends up "paying a little less than 4 percent of income in taxes."

Worse yet, various tax credits, mostly aimed at helping families raise children, further reduce the income tax burden on low-income folks to the point that "almost 13 percent of all workers have no tax liability and so are indifferent to income tax rates. And that doesn't include another 16.5 million who have some income but don't file at all."

Then comes this remarkable sentence: "Who are these lucky duckies?"

"Lucky duckies"?

Now, I credit my friends on that editorial page with strong principles and powerful feelings of compassion toward high-end taxpayers. But it will certainly come as news to low-income families getting by on two small paychecks that they are lucky duckies.

And the truth is, low- and middle-income people do pay a lot in taxes. They just don't happen to pay the taxes that supply-side conservatives want to cut.

The Journal's editors make only a passing comment on payroll taxes. But the basic FICA tax takes a much bigger share from middle and low incomes than from large ones. The 6.2 percent tax applies on incomes up to $84,900, meaning that if you make that or less, you pay the full 6.2 percent. But Richard Sims, the policy director of the Institute on Taxation and Economic Policy, took the recently published example of a top CEO who earned $122.5 million in 2000 and calculated that his FICA tax rate was 0.00043 percent. Lucky ducky.

Sims also notes that sales and excise taxes hit hardest at low- and middle-income people who have to spend most of their earnings on taxable items, can't save a lot, and don't put much of their money into financial, accounting and legal services, which generally aren't taxed.

According to Sims's figures, the bottom 20 percent of Illinois residents pay 10.8 percent of their income in sales and excise taxes, compared with only 1.4 percent paid by the top 1 percent of earners. In California, the comparable figures are 7.4 percent and 1.0 percent; in Arizona, 8.1 percent and 1.2 percent; in Colorado, 5.1 percent and 0.8 percent.

Yes, the wealthy are paying more in federal taxes, but for reasons that are good news for the wealthy -- "largely because they receive a much larger share of the total income in the nation," says Isaac Shapiro of the Center on Budget and Policy Priorities. Between 1979 and 1997, the last year for which figures are available, the average after-tax income of the top 1 percent of households, adjusted for inflation, rose by $414,000 -- a 157 percent gain. For the middle fifth of households -- the middle of the middle class -- the comparable gain was 10 percent, or $3,400. The bottom fifth was stagnant.

Over the past generation, the federal government's best deed for the working poor -- it started with Reagan and gained momentum under Bill Clinton -- was to reduce federal taxes on their labor and give low-income families an additional boost with the Earned Income Tax Credit. If the goal of welfare reform is to encourage work, we ought to be thinking of more ways of lifting the fortunes of the poorly paid. That's not class warfare. It's good policy. The last thing we need to worry about is whether poor Americans are taxed too little.