The Homa Files

Note: This analysis was originally posted on July 31, 2008.  It’s the post that has gotten the most hits, and the topic is ‘hot’ this week on the talk shows.  So, here’s a flashback .
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Despite the drumbeat of warnings from various sources, the prospects that a minority of voting age Americans will be paying Federal income taxes under the Obama tax plan doesn’t seem to arouse much visible public anxiety.

Why?

First, for those in the emerging majority that won’t pay any income taxes – or may even be getting government checks for tax credits due – the deal is almost too good to be true.  To them, Obama’s  plan must make perfect sense.  So, why rock the boat? 

Second, some people argue that low-earning people who don’t pay income taxes shoulder a regressive payroll tax burden to cover Medicare and Social Security.  Yeah, but these programs – which are most akin to insurance or forced savings plans — offer specific individual benefits that are directly linked to each wage earner’s contributions.and the benefits phase down quickly as qualifying income increases.  That is, they’re not as regressive as many people argue. 

Third, most of the energetic criticism of Obama’s plan has centered on its redistribution intent — taking over $130 billion of “excess” income from undeserving rich people, and giving it directly to those who earn less and need it more. 

Fourth, most folks just don’t believe that the numbers will really shift enough to create a voting majority of citizens who don’t pay income taxes. They’re wrong.  Very wrong.

Here are the numbers … and why they should bother you.

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Today, 41% of voting age adults don’t pay Federal income taxes

Based on the most recent IRS data, slightly more than 200 million out of 225 million voting age Americans filed tax returns.  That means that 25 million adults – presumably low income ones – didn’t file returns and, of course, didn’t pay any income taxes. See notes [1] to [4] below

Of the 200 million voting age filers, approximately 68 million (33% of total filers) owed zero income taxes or qualified for refundable tax credits (i.e. paid negative income taxes). [5]

Add those 68 million to the 25 million non-filers, and non-payers already total 93 million –  41% of voting age adults.

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Obama’s Estimates – Make that 49%
Not Paying Federal Income Taxes

Obama says (on his web site) that he will give tax credits up of $1,000 per family ($500 per individual) that will  “completely eliminate income taxes for 10 million Americans”.  And, he says that he will “eliminate income taxes for 7 million seniors making less than $50,000 per year.”  [6]

Taking Obama’s estimates at face value,  the incremental 17 million that he intends to take off the income tax rolls will push  the percentage of non-payers close to 49% of voting age Americans  — within rounding distance to a majority. [7]

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And, Obama’s estimates are probably low,
so make the number 55% (or higher) 

Since Obama’s basic proposal is for tax credits  ($500 per person or $1,000 per family) – not  simply deductions from Adjusted Gross Income (AGI) — they will have a multiplier impact on the amount of AGI that tax filers can report and still owe no taxes.

For example, a childless married couple that files a joint return can currently report about $17,500 in  Adjusted Gross Income (AGI) and owe no income taxes. [8]

Under the Obama Plan,  that couple’s zero-tax AGI is bumped up to $27,500 since their new $1,000 tax credit covers the 10% tax liability on an additional $10,000 of AGI.  And, married couples filing jointly can keep adding about $10,000 to their zero-tax AGI for each qualifying dependent child that they claim. [9]

click table to make it bigger

Based on the 2006 IRS data, approximately 25 million tax returns were filed that reported AGI less than  $27,500 (the post-Obama zero-tax AGI) and required that some income taxes be paid.  [10]

Assuming that 45% of those were for couples filing jointly, they represent  over 22 million adults.  For sure, these 22 million will  come off the tax rolls —  and they alone will be enough to create a non-taxpayer majority (51% of voting age adults),

click to make table bigger

And, there are more folks being pushed off the tax rolls.  About 4.7 million childless individuals earn less than $13,750  (the post-Obama zero-tax AGI for childless individuals), and currently pay some Federal income taxes.   This group will shift  to non-payer status.

So would several million joint filers who can take advantage of the Child Tax Credit to report more than $27,500 and not pay Federal income taxes.

And, some portion of the 7 million Seniors that Obama says will have their taxes eliminated — that is the Seniors couples earning more than $27,500 (but less than $50,000) — and Senior individuals earning more than $13,750 (but less than $50,000).

So, post-Obama, the percentage of non-taxpayers will  easily exceed 55% of voting age adults — a solid majority.  It won’t even be close.

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The Bottom Line – Why You Should Worry

An income tax paying minority of voting age adults isn’t just a possibility. Under Obama’s plan, it’s a virtual certainty.  Based on the hard numbers, Obama’s plan will create a new majority — a powerful voting block: non-tax payers. UH-OH.

Again, for those in the emerging majority that won’t pay any income taxes – or may even be getting government checks for tax credits due – the deal is almost too good to be true.  To them, Obama’s  plan must make perfect sense.  Count on their perpetual support for the plan.

But for those in the new minority, watch out if the new majority decides that more government services are needed, or that  $131 billion in income redistribution isn’t enough to balance the scales.

The Tax Foundation — a nonpartisan tax research group – has repeatedly warned that  “While some may applaud the fact that millions of low- and middle-income families pay no income taxes, there is a threat to the fabric of our democracy when so many Americans are not only disconnected from the costs of government but are net consumers of government benefits. The conditions are ripe for social conflict if these voters begin to demand more government benefits because they know others will bear the costs.”  http://www.taxfoundation.org/research/show/1111.html

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Sources & Notes

[1] The Census Bureau reported 217.8 million people age 18 and over; as of July 1, 2003.
http://www.census.gov/Press-Release/www/releases/archives/population/001703.html 
http://www.census.gov/popest/national/files/NST-EST2007-alldata.csv

[2] The IRS reported 138.4 million personal tax returns filed in 2006.
http://www.irs.gov/pub/irs-soi/06in11si.xls

[3] The IRS reported that in 2006, approximately 45% of filed returns were by married couples filing jointly (i.e. 2 adults per return); 55% for individual filers (including ‘married filing separately’ and ‘head of household’).  http://www.irs.gov/pub/irs-soi/06in36tr.xls

[4] Calculation: 138.4 million returns times 1.45 (adults per return) equals 200.7 million adults represented on filed returns

[5]  http://www.irs.gov/pub/irs-soi/06in01fg.xls      http://ftp.irs.gov/pub/irs-soi/06inplim.pdf

[6]  http://www.barackobama.com/issues/economy/#tax-relief

[7]  Analytical note: 93 million plus 17 million equals 110 million divided by 225 million equals 49%.

[8]  Analytical note:  $17,500 less a $10,700 standard deduction, less 2 exemptions at $3,400 each, equals taxable income of zero – so no federal income taxes are due.

[9] Analytical note:  $27,500 less a $10,700 standard deduction, less 2 exemptions at $3,400 each, equals taxable income of $10,000, which at a 10% rate is a $1,000 tax liability that gets offset by the $1,000 Obama credit, reducing the tax liability to zero.

This entry was posted on October 28, 2008 at 7:59 am and is filed under Economics, Government & Politics, Taxes. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.