The One Economic Number That We Need to Talk About: 47%

Before you tell people that 47% of the country does not pay taxes, please look at the data.  The problem isn't the American people. The problem is the American government.

On August 29, the Tax Policy Center (TPC) updated its projections of the number of Americans who have no federal income tax obligation from 47% to 43%. The original report from 2009 was the genesis for the implosion of Mitt Romney's presidential campaign. Few times have 16 words been so expensive: "There are 47% of the people who will vote for the president no matter what." 

Romney should have looked into those numbers before painting half of the country with a broad brush. He depicted half the country as "dependent on government," self-made "victims" who believe that "government has the responsibility to care for them." These statements — even if they were true — are a lot coming from someone whose income enjoys a favorable tax rate.

There is a level of comedy here. Romney is blaming Americans for over dependence upon the government, when even modest research would have told him that the problem is the government dependence on tax credits for buying votes. According to Roberton Williams of the TPC, the cost of tax credits has risen to nearly $1 trillion annually. So the government gave away in 2009 almost as much as it collected ($1.1 trillion).

(Read about how Social Security contributes to the 47% here.)

Romney's statement refers to people not paying taxes in 2010. In the previous year, the government passed the The American Recovery and Reinvestment Act of 2009. In it, we find educational subsidies, home buyers subsidies, home improvers subsidizes, health care subsidizes, and car subsidizes. We paid people to work. We paid people not to work.  We paid people to be retired. We paid people to be children. It is surprising that anyone paid taxes.

These subsidies of course do not go exclusively to the 47%. Mitt Romney could create his own cottage-industry for tax shelters. He enjoys an artificially low income tax rate on his earnings from Bain. He has skillfully avoided millions of dollars in future estate taxes. More unfathomably, he was able to build an IRA valued somewhere near $100 million. IRA have limited contributions, so more than $999,500,000 of that sum is profits on investments. It is tens of millions of dollars in taxes not paid.

What do we know about the claim that 47% of Americans do not pay income taxes?  First, the TPC claim is a projection based on models, not actual tax data. Second, the base year 2010 was close to a peak year for negative taxability because of the combination of a poor job market and the increase in the tax credits to fight the recession. Third, the problem is larger than not paying taxes. More than 15% of taxpayers collect credits that exceed the taxpayer's income and payroll tax combined.  

The TPC wants people to understand that these people pay taxes, just not income taxes.  They explain that, "Fully two-thirds of households that pay no federal income tax have workers that pay payroll taxes." It also introduces a range of other taxes collected by the federal government to suggest that the 47% probably do pay some taxes. 

The problem here is that many of these taxes do not cover the cost to collect them. In 2012, the government collected $590 billion in payroll taxes. In exchange for that revenue, the system made roughly $2.5 trillion of promises for which there is no funding. Social Security has structural problems, but it is difficult to call this revenue a tax, when the government is losing more than $4 in benefits for every $1 it collects.

Of course it isn't enough just to lose money on Social Security.  The government provides a subsidy to the lower-wage workers so that they can afford Social Security.  The Earned Income Tax Credit (EITC) was "designed to offset the burden of the Social Security payroll tax for low-wage workers with children." It has been expanded since its inception in the mid-1970s, and now costs more than $60 billion annually.

Romney used the 47% figure to paint a picture of deadbeats, seeking to bleed the nation dry. The problem is that the IRS has progressively taken on a larger and larger role in social policy which it can't afford. 

Of course, Romney wants to blame the citizens for catching the money rather than the government for throwing it. 

Related Reading:

The Tax Policy Center provides some insight on the 2013 data.  

The Tax Policy Center provides information on the longer-term projections ("T13-0228 - Tax Units with Zero or Negative Income Tax Liability Under Current Law")