March 23, 2023

Economix Blog: Who Pays and Who Takes

Comments made by Mitt Romney at a private campaign fund-raiser about the nearly half of Americans who have no income tax liability have heated up a debate over who pays and who takes from the federal government.

Budget experts argue that virtually all Americans – rich and poor – pay into the government revenue system. And most Americans – rich and poor – at some point in their lives receive a form of government benefit.

Only about 8 percent of American households do not pay income or federal payroll taxes, once you discount older people. Most of those households are very poor, earning less than $20,000 a year, according to a study by the nonpartisan Tax Policy Center, which initially derived the 47 percent number Mr. Romney cited. (In 2011, it was actually 46 percent.)

Moreover, almost no families fail to pay taxes of any kind, given the ubiquity of property taxes, sales taxes, sin taxes, state and local levies and other government revenue sources.

A report by the Hamilton Project, a research group within the Brookings Institution, also notes that demographics matter when talking about who pays taxes. In any given year, millions of households will not be liable for federal income taxes. But many of those households are young or old – students or retirees. During their prime working years, the people in those households will almost certainly pay federal income taxes.

Moreover, among those families in their prime working years, many will see their federal income tax liability wiped out by credits for children and child care, including the earned-income tax credit. But once those children grow up, or the family’s income rises, the tax liability reliably returns.

Finally, the report notes that the recession has skewed these figures. There are about 12.5 million Americans out of work, and millions more who are underemployed or who have dropped out of the labor force. Reductions in income make it easier for the credits and subsidies in the tax code to erase a given family’s income tax liability.

Then, there’s the flip side of the coin: If we’re all paying in, who is getting the payout?

Census data shows that about half of the population lives in a household where at least one member is receiving a government benefit. Many households receive more than one.

As of the second quarter of 2011, 34 million households were receiving Medicare, 38 million Social Security, 15 million food stamps and 23 million Medicaid, for instance.

There are a variety of reasons. The number of Americans relying on the safety net surged during the recession and the sluggish recovery. Unemployment for many and stagnant wages for many more translate into increased need. A person’s age matters as well. Older people tend to draw government benefits like Medicare and Social Security. Increasingly, as my colleagues Binyamin Appelbaum and Robert Gebeloff wrote this year, those benefits go to the middle class, not the poor.

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Disagreement Over Payroll Tax Cut’s Impact on Social Security

The Obama administration, many budget experts (but not all) and the chief actuary for the Social Security Administration say the proposal will do no such thing. But some conservative Republicans and liberal Democrats who agree on little else are just as adamant that it will.

Both parties predict the payroll tax cut will be extended beyond its Dec. 31 expiration, though the question of how — or whether — to pay for it and some other unrelated issues in the year-end legislation continued to hold it up on Wednesday. Still, the disagreement over the tax cut lingers. It is less over money than philosophy, and reflects a debate as old as the 75-year-old program about Social Security’s fundamental structure.

Critics predict that one extension will lead to another as politicians balk at raising taxes to their former level, especially if unemployment remains high.

“Imagine that next December the unemployment rate is 8 percent and a year later it’s 7.4 percent,” said Robert Reischauer, a former director of the Congressional Budget Office, who is one of two public trustees for Social Security. “We’ll still be trying to stimulate employment and terminating the payroll tax holiday will be a big hit on most families, one that will hurt job growth.”

Democrats fear that repeated extensions would disrupt the link that President Franklin Delano Roosevelt forged to lock in support for Social Security: with workers taxed for their benefits, politicians would not cut them. And Republicans object that transferring general revenues to Social Security to offset the tax cut makes the program more like welfare, and worsens the federal budget deficit.

Politics aside, the bottom line is that a temporary tax cut is inconsequential to Social Security’s long-term health, from an accounting perspective. The threat remains the financial pressure of an aging population.

Social Security is essentially a pay-as-you-go system, with payroll taxes from workers flowing back out to retirees, survivors and the disabled. Last year, before the tax cut, the system for the first time since 1983 collected less in taxes than it paid out to 55 million beneficiaries — $49 billion less.

The program’s operating deficits will grow as more of the 78 million baby boomers become eligible. But trust fund reserves built up over years of annual surpluses will not run out until 2036, when tax revenues will cover three-quarters of benefits, trustees project.

That projection would be unchanged by Mr. Obama’s proposal to extend and expand the payroll tax relief that he and Congressional Republicans agreed to a year ago to spur the economy, because they also agreed to transfer general revenues to Social Security to make up the difference.

The trust fund “would be unaffected by enactment of this provision,” Stephen C. Goss, the chief actuary for Social Security Administration, wrote to administration officials — just as he had about the tax bill a year ago.

The 12.4 percent payroll tax is split between employees and employers, and the current break reduces workers’ share by 2 percentage points, to 4.2 percent. Because that reduces Social Security revenues this year by about $105 billion, the program is credited with that amount from general revenues. And workers get credit for the full tax for purposes of calculating their future benefits.

This fall, with the economy still fragile, Mr. Obama proposed as part of his $447 billion job-creation plan to extend the tax cut for 2012, increase it to 3.1 percentage points and expand it to employers for their first $5 million of payroll — in effect cutting the tax in half for employees and most employers.

His proposal, which was more popular with Mr. Obama’s political advisers than with Treasury officials, would have reduced Social Security revenues by $240 billion next year. Democrats recently limited their proposal to employees and the self-employed, cutting its cost to $185 billion given complaints from liberals and conservatives.

Last December liberal lawmakers, conservatives and advocates for the elderly mostly went along with the tax cut since it was intended for a year only. But when the White House began talking of an extension months ago, after economists predicted that economic growth would slow half a percentage point without the tax cut, opponents in both parties mobilized.

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