March 23, 2023

Economix Blog: Behind the ‘People Who Pay No Income Tax’

Mother Jones has published a video of Mitt Romney at a private fund-raiser making incendiary remarks about Obama voters – and, well, about half of the electorate.

“There are 47 percent of the people who will vote for the president no matter what,” Mr. Romney said. “There are 47 percent who are with him, who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it, that that’s an entitlement. And the government should give it to them. And they will vote for this president no matter what.”

“These are people who pay no income tax,” he added.

I’ll address just that last part in this post.

Mr. Romney is absolutely correct that about half of American households do not pay federal income tax. (He is also tapping into a now long-running vein of conservative anger at those households.) But he is missing some crucial context on why they do not pay federal income tax.

The nonpartisan and highly respected Tax Policy Center derived the 47 percent number – it is actually 46 percent, as of 2011 – and published an excellent analysis of it last summer.

It found that about half of the households that do not pay federal income tax do not pay it because they are simply too poor. The Tax Policy Center gives as an example a couple with two children earning less than $26,400 a year: The household would pay no federal income tax because its standard deduction and other exemptions would simply erase its liability.

The other half, the Tax Policy Center found, consists of households taking advantage of tax credits and other provisions, mostly support for senior citizens and low-income working families.

Put bluntly, these are not households shirking their tax liabilities. The pool consists mostly of the poor, of relatively low-income working families and of old people. The tax code is specifically designed to reduce the burden on them.

Indeed, the recession and its aftermath have left tens of millions of workers out of a job or underemployed, removing more households from payment of federal income taxes. Moreover, the Bush tax cuts – the signature Republican economic policy of the 2000s, which doubled the child tax credit, increased a number of other deductions and exemptions, and lowered marginal tax rates – erased millions of families’ federal income tax liabilities.

It is also worth noting that though tens of millions of families do not pay federal income taxes, there are virtually no families that do not pay any taxes – between payroll taxes, sales taxes, state and local taxes, and on and on.

For much more detail on the 46 (or 47) percent, read my colleague David Leonhardt’s 2010 column or my 2011 piece for Slate.

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Expansion of Mortgage Program Is Limited in Scope

The effort, built on sweeping voluntary agreements with the mortgage industry to let people refinance even if their homes have declined in value, reflects a new White House emphasis on economic measures that do not require Congress to overcome its bitter partisan divisions.

It also maintains a choice President Obama made in the early days of his administration to focus on reducing monthly payments rather than on the amounts that borrowers owe, the latter being what a growing number of liberal and conservative economists consider necessary to resolve the problem.

Republicans, including the presidential candidates, generally oppose federal aid for distressed homeowners as a bailout for people who made bad choices. The new program, and the emphasis on unilateral action, seem likely to inflame that opposition.

The plan’s modesty, meanwhile, may not assuage Democrats’ anger at the administration for doing too little to help homeowners repair their shattered finances, particularly in the face of evidence that the housing crisis is a major impediment to renewed economic growth.

Speaking in Las Vegas on Monday — in the center of the housing crisis and in a presidential battleground state — Mr. Obama addressed both groups of critics. The problems required government action, he said, and while the new changes were not by themselves sufficient, “that is no excuse for inaction.”

“I’m here to say that we can’t wait for an increasingly dysfunctional Congress to do its job,” he said. “Where they won’t act, I will.” He added, however, that Congress should pass the measures he proposed in September to stimulate growth, create jobs and help the housing market.

Most of the Republican presidential candidates argue that the government should focus on repairing the economy, which will help the housing market. In the meantime, they have said, offering relief to homeowners threatened with foreclosure would be an intrusion into the free market.

“The right course is to let markets work,” Mitt Romney said at a debate in Las Vegas last week. Rick Santorum concurred. Herman Cain said, “We need to get government out of the way.”

Monday’s announcement is an effort to revive a program that has fallen well short of expectations since it was announced in 2009. Under the program, the government-owned mortgage companies Fannie Mae and Freddie Mac have financed new loans for almost one million borrowers who could not qualify for traditional loans because of declines in their homes’ values.

The expansion, announced by the Federal Housing Finance Agency, aims to double that number — although that would still be a small share of the more than 10 million homeowners with loan balances larger than the values of their homes.

“We have far too many Americans who have paid their bills and done everything right on their mortgages and yet they’re still stuck with interest rates of 6 or 7 percent,” said Shaun Donovan, secretary of housing and urban development.

The changes, which will take effect over several months, will let people qualify for new loans no matter how far the values of their homes have fallen, so long as they have made at least six consecutive monthly payments. The plan also will reduce borrowers’ fees, for example, by dispensing with the need for an appraisal in many cases and by automatically transferring mortgage insurance to the new loan.

Fannie Mae and Freddie Mac generally require refinancing lenders to assume responsibility for any problems with the original loan because in making the new loan they are relying in part on that original documentation. That has made lenders reluctant to refinance loans for which they are not already responsible. That provision will now be waived, in exchange for a fee.

But the program still applies only to loans that Fannie and Freddie acquired before May 31, 2009. It does not reduce the amount that borrowers owe. And only borrowers with less than 20 percent equity in their homes are eligible; those with more equity must seek a refinancing through the standard and more expensive channels, although the government is considering making some of the same changes, like reducing fees, for those borrowers.

Jackie Calmes contributed reporting from Las Vegas, and Trip Gabriel from New York.

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