Catastrophe (8 page)

Washington also showered its largesse on us by granting tax deductions (which cut our taxable income) or credits (which cut our actual tax bill). If we gave to charity, paid a home mortgage, or shelled out money for local taxes, we got to deduct the payments on our income tax returns. But the rule was always the same: you could reduce only the taxes that you had actually paid. If you made a charitable contribution but earned so little that you didn’t have to pay any income taxes, you got no tax benefit from your generosity. You couldn’t go below zero taxes.

But then in 1986, in the days of Ronald Reagan, Washington developed a new policy: the refundable tax credit.

Reagan wanted people who worked full-time and couldn’t work their way out of poverty to be able to get a hand up. He distinguished this hand up from the handouts given to welfare mothers who did not work. To the Gipper and his Republican followers, those who worked deserved our compassion more than those who didn’t.

So Reagan decided that everyone who worked full-time but whose household size was such that they were still impoverished on payday, would get a credit against their income taxes—even if that meant that they didn’t pay any taxes.

But even a full exemption from taxes wasn’t enough for many of the workers Reagan wanted to help. They made so little that even being relieved of the need to pay income taxes didn’t make enough difference to get them out of poverty. So Reagan decided to make the tax credit “refundable.”

Of course, it was a “refund” in name only. Those who got the assistance weren’t really getting back money they paid. They were getting these “refund” checks even though they hadn’t paid any taxes to begin with.

This was called the Earned Income Tax Credit. Congress loved the EITC,
and under President Clinton it expanded it dramatically. In 1993–1994, Clinton—who had pledged to “end welfare as we know it” during his campaign—persuaded the Democratic Congress to beef up the EITC and offer its benefits to people making as much as $25,000 a year or more. If their families were sufficiently large that even this income meant they lived in poverty, they would get a refund. No longer would anyone go to work at a full-time job and come home poor!

As a result, more than 20 million Americans now receive EITC payments averaging more than $1,900 each.
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In 2000, George W. Bush was elected president—swept into office in part by a popular mandate to cut taxes. But during the campaign he had been roughed up by his Democratic opponent, Vice President Al Gore, who said that Bush would only cut taxes for the rich while doing nothing to help the middle class. Gore noted that Ronald Reagan, the ultimate Republican tax cutter, had actually increased income taxes on the middle class, raising the bottom-bracket income tax rate from 11 percent to 15 percent as he was cutting the top levy from 50 percent all the way down to 28 percent.
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Gore warned that Republicans only wanted to cut taxes for the rich and would do nothing to help the average person.

But Bush had gotten elected as a “compassionate conservative” he was determined to help the poor and middle class, as well as the rich, with his tax cuts. Between 2001 and 2003, the Bush administration instituted a federal tax cut for all taxpayers. Among other changes, the lowest income tax rate was lowered from 15 percent to 10 percent, the 27 percent rate went to 25 percent, the 30 percent rate went to 28 percent, the 35 percent rate went to 33 percent, and the top marginal tax rate went from 39.6 percent to 35 percent.
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Still Democrats pressed for more tax cuts for the bottom of the spectrum. How, they asked, can we help those who earn so little that they pay no income tax at all? By definition, tax cuts would offer them no assistance. Unless Bush made an effort to help them, his tax cuts could still be skewered by partisan opponents as a giveaway to the rich.

So President Bush and Congress passed a refundable tax credit of $1,000 per child for every taxpayer who earned less than $55,000 ($110,000 for a couple) and had children under the age of eighteen living at home.
⁶⁸
And if he or she paid no taxes because his or her income was too low, he or she
would
receive
a check. Ninety percent of the parents in the United States are eligible for the Child Tax Credit; in 2005, it led to $14.6 billion in payments or credits to families.
⁶⁹

With the refundable tax credit, Bush was able to argue that a fair share of his tax cuts were going to the poor and the lower middle class, not just to the wealthy. But in passing the credit and making it “refundable,” Bush extended the concept of the tax credit in a potentially dangerous way. Now those who paid no taxes would get a check based not on their particular economic circumstances, as those who benefited from the Earned Income Tax Credit did, but simply because they had children. The EITC is really a form of negative income tax—money paid to adjust for differences in income. But the Child Tax Credit was something altogether different. It was really the start of a new form of national welfare: money people got through the tax system as an entitlement simply because they had children.

Now Obama has taken the refundable tax credit one step further, giving everyone who earns less than $190,000 a tax credit of $400 (or $800 for couples.) And if they don’t pay enough in taxes to use up the $400 credit, they will receive a check for the balance. If they pay no taxes at all, they will receive a $400 check in the mail.
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President Obama has led the United States across an important line in the sand. No longer will we hand out checks to people just because they’ve paid into the Social Security system or served the country in the military. You don’t even need to be part of the working poor or a parent to get a check. You just have to exist and make less than $200,000. The aid encompasses us all: we have all gone on welfare.

Obama’s refundable tax credit is a permanent part of the tax code, an entitlement we’ll have to honor year after year. And it is the way of such things that they never go down—only up.

Obama’s tax cuts also crossed another key line in the sand: they exempted a voting majority of Americans from having to pay any federal income tax at all.

After Bush got through with the tax code, the share of federal income taxes paid by the poorest half of the country dropped by a quarter.
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Today, the poorest half of the nation pays only 3 percent of the national income taxes.
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Now that Obama has passed his refundable tax credit, the bottom half of the nation will probably pay no federal income taxes at all—zero, nada, zip.

Unfortunately, in the future, we can look forward to a majority of American voters having a vested interest in maintaining the Obama tax policies so that they continue to pay no taxes at all, while the burden on those who do pay taxes continues to grow exponentially.

The political ramifications of this policy will be enormous. Tax eaters will strongly outnumber tax payers, and those who are paying for our government will have little or no voice in what the government does.

But, of course, that’s not all: Because of the growth in refundable tax credits, the lower middle class and poor actually
make money
from the tax system. The Heritage Foundation reports that the poorest 20 percent of the country not only pay no income taxes, but they get so much money back that they have an “effective” income tax rate of minus 5.9 percent.
⁷³
The second quintile from the bottom also has a negative tax rate, although slightly smaller, of minus 1.1 percent.
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Once Obama’s tax package is fac
tored in, the bottom half will not only pay no taxes but will actually receive checks from Washington.

But this isn’t the only shift in the tectonic plates of national income and tax policies. As the poor get to pay less and less in taxes and receive more and more in entitlements, the richest Americans will have to pay a greater and greater share of the national tax burden.

Though we’d all agree that the rich should pay a larger share of their income in taxes than the middle class or the poor, the new economics of income and taxation skew the tax payments so drastically toward upper-income families that fewer and fewer people are paying more and more of the taxes.

In 1980, the richest 1 percent of America paid 19 percent of all federal income taxes.
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By 2006, their share had risen to 40 percent.
⁷⁶

And it wasn’t only the very rich who assumed a vastly disproportionate share of the nation’s finances. The top quarter of Americans paid 73 percent of income taxes in 1980, but by 2006 their share of income taxes paid rose to 86 percent.
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Of course, there’s no need to weep for the rich. The past thirty years have seen an incredible concentration of wealth at the very top of our social pyramid. Since 1980, the share of total national income that went to the top 1 percent of our population has almost tripled, from 8 percent to 22 percent.
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At the same time, the proportion earned by the poorest half dropped from 18 percent in 1980 to 13 percent today.
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So there are really three classes of taxpayers in the United States:

1. The tax payers: The top 25 percent, who pay 86 percent of federal income taxes
   
2. The tax neutrals: The middle 25 percent, who pay the rest
   
3. The tax eaters: The bottom 50 percent, who pay no income taxes and get refundable tax credit checks from the government
   

Politically, only a distinct minority—the top 25 percent or, really, the top 1 percent of the country—face any significant tax liability. Giving the lie to Benjamin Franklin’s lament that the only two things you can’t avoid
are “death and taxes,” the bulk of the American population escapes most of the tax burden—and half get away without paying income taxes entirely.

During Obama’s presidential campaign, he promised to cut taxes for 95 percent of all Americans.
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Many were inclined to dismiss his suggestions as political pandering and unrealistic promises. But he meant it. His goal is to cut the taxpaying proportion of the American population to a minority, leaving an electoral majority that is immune to antitax rhetoric.

What will be the impact of this brave new world of tax policy? What might happen as Obama’s policies unfold and more and more Americans end up paying no taxes?

Inevitably, taxes will fade as an issue in American politics. Most people won’t have to pay them. The mass political base of middle-class taxpayers will disappear. Concern about taxes will be the political province only of the outvoted rich.

The antitax movements of the late 1970s and early 1980s, which culminated in the Reagan Revolution of 1980, were based on the outrage of the Joe the Plumbers of an earlier age. The blue-collar worker burdened with high taxes—which he suspected were going to pay welfare mothers who were being paid for not working—formed an infantry that stormed the nation’s political system and demanded cuts in taxes. The Silent Majority of the Nixon years became the Reagan Democrats of the 1980s—the dominant political forces of their eras. Turning their backs on their liberal past, these workers, often contradicting their union’s policy, broke with the Democratic Party and embraced Reagan’s dogma that the government was the problem, not the solution to, America’s ills.

But no more.

Obama and the Left have come to realize that the Achilles’ heel of the antitax movement is its reliance on middle-income voters to win tax cuts that will go largely to upper-income taxpayers. Obama was the first to capitalize on this insight, getting elected on an overt plan to make the rich pay higher taxes while cutting levies for the vast bulk of the population.

By dividing taxpayers by class, Obama nullified the Reagan strategy. But it was the Clinton and Bush tax cuts, which so reduced the tax burden on the middle class that antitax rhetoric meant nothing to them, that made his victory possible.

Obama is passing further tax cuts on the middle class and higher tax
“refunds” for the nontaxpaying poor, dramatically increasing the political isolation of the real taxpayers in America. Before he moves to raise taxes on upper-income Americans, though, he wants first to neuter them politically. By driving a fissure between the middle class, who don’t pay much in federal income taxes, and the richest 25 percent, who pay almost all the taxes, he renders those who have to pay the taxes politically helpless.

And that is Obama’s strategy for the future—the indefinite future: to finance the American government by raising taxes on the politically impotent rich. Hit them hard at the tax office, and then outvote them on election day.