Jobs and Taxes

47% of Americans, Mitt Romney told a room full of well-off Republicans last May, pay no income taxes, believe they are victims entitled to government housing, health care, and food, and will therefore be deaf to his platform of lower taxes and will inevitably vote for Barack Obama. Romney's chances of winning the election were already only about one in four, and the fallout from these remarks should reduce them further. They are however a fascinating commentary not only on how rich Republicans think, but on the consequences of the economic changes of the last few decades.

The image of a huge mass of undeserving Americans wasting their tax money has of course been part of Republican campaign rhetoric since the New Deal. Their rhetoric has had an effect, and dependency in certain key categories has been reduced. Bill Clinton gave into the Republicans in the midst of an election year and ended welfare as we knew it--and it had never been a truly big-ticket item in the federal budget anyway. The growth in "entitlements"--a very prejudicial word whose history deserves to be studied in depth--relates mainly to Social Security, Medicare, and Medicaid, especially the last two. Paul Ryan has made clear that he would like the last to to shrink, leaving older and poorer Americans without resources to pay for health care. In a week or two at the most, I shall have a long post--an essay, really--shedding some light on the intellectual roots of that idea. But I want to focus today on something else, on the make-up of that 47% and exactly what it reflects about how America has changed. To begin, we must review the data on who doesn't pay taxes, and why, available here.

Of the 47% of households not paying federal income tax, fully 43% of them--nearly half--are elderly. Most or all of their income, presumably, is Social Security, some of which is tax exempt and which is not high enough to make them pay taxes after standard deductions anyway. But Romney pays no penalty for attacking them, because they do not see themselves as worthless freeloaders. They feel, with perfect justice, that they have earned their benfits and do not see themselves as victims. They should however have the grace to realize that they are not paying for any genuine freeloaders lower down the age scale--but many of them clearly don't see that at all. In any case, if we take them away from our total of non-taxed households, we are reduced to 20% of households not paying taxes.

After the elderly the next largest group of households not paying income taxes--30% of Romney's 47%, or 14% of households--are benificiaries of the earned income tax credit, which allows the working poor--now including households earning as much as $45,000--to claim credits of several hundred dollars per child. This has been our principal response to the stagnation of decline of real wages in the lower half of the income spectrum, and it has been steadily increased under both Republican and Democratic Administrations. What Romney and his audience should have understood--but naturally didn't--is that this 14% of households are hard-working, poorly paid Americans, whose minimum wage is substantially lower in real terms than it was four decades ago, and who need in effect to be exempted from federal income tax to allow them to live at all. The federal government does have a serious long-term fiscal problem at the moment, and one reason is that so many people are exempt from taxes, but the solution is to pay them truly living wages, something Republicans consistently oppose. As it is, these people--the working poor--are NOT living on government entitlements, but we have had to exempt them from the income tax to allow them to subsist. Meanwhile, they pay an effective 13.2% payroll tax anyway, which is the maximum that Mitt Romney has been paying on his millions of income every year. These people are probably the most highly stressed people in the country right now, and they are the ones who have the biggest reason to resent Romney's remarks. Obama ad-makers, take note.

Another 17.6% of the 47% fall into three categories. The first receives a large portion of its income from other cash transfers, including Supplemental Security Income, which goes mainly to disabled people, and Temporary Assistance to Needy Families, what is left of the welfare program. It may also include people trying to live on unemployment benefits. That 2.8% of all households is probably the only group of households that comes close to fitting Romney's description of the entire 47%, and that numerical discrepancy should disqualify him from serious consideration as President. The other two significant categories are those whose standard deduction lowers their taxable income to zero--in other words, more working poor and unemployed people with little or no income at all--and those benefiting from "education credits" who evidently are spending a large portion of their income on education to better themselves. We have now accounted for 74% of the non-taxed households in the country, and very few of them resemble Romney's image of them all.

And what about the rest? I won't detail the whole list, but I want to mention two categories. 5.1 % of untaxed households avoid income taxes with a mixture of tax-exempt interest and itemized deductions and 1.3% pay "reduced rates on capital gains and dividends (zero rate on gains and dividends that would otherwise be taxed at 10 or 15 percent, 15 percent rate combined with credits)." I don't understand that last category and I would appreciate hearing from anyone who does, but this total of 6.4% seems to be composed of extremely well-off Americans. Ironically, it is almost identical in size to the group exempted from income tax because their income comes from disability or TANF--the closet group, once again, to Romney's definition of freeloaders.

What all this means is fairly clear and I've written about it here before. The income tax is more progressive than it was, say, at the height of the Reagan era, although less so than it was under Clinton. (Another interesting fact that is beginning to emerge is that people making from $50,000 to perhaps $200,000 probably pay the highest share of their income in taxes of anyone, and a much higher share than the superrich.) A significant number of low-income working Americans are in effect exempt from it, for the very good reason that they can't afford it. But the tax system as a whole is much more regressive because, to repeat, these working poor are paying a full 13.4% of payroll taxes (counting the employer contribution as employee income, as most economists do.) We are all very concerned right now with the problem of unemployment, but I'm not so sure that it's a bigger problem, in the long run, than our expanding low-wage economy, the outcome of decades of globalization and the erosion of organized labor. That is what is leaving more and more Americans without income to fuel economic growth.

I have not had time to study the Republican reaction to Romney's remarks, although I heard Sean Hannity explain the night they were revealed that what Romney said was absolutely true. (No surprise there--not a week goes by without him mentioning the same figure.) Romney himself did not back away from them. I think they would doom him to a landslide defeat in a country whose educated population understood the basic facts of our economic life, but we are no longer such a country. The average voter doesn't understand that aside from the elderly and those receiving unemployment benefits, there aren't even 5% of households living off the government. He will probably lose, but the faith-based ideology he is selling will remain strong and influential in Washington. I'll have a great deal to say in the coming weeks about the sources and content of that ideology, because yesterday, after a prolonged struggle of six weeks, I completed a project I had undertaken in order to understand what has happened to my own country. I finished Atlas Shrugged.