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Join the majority…

By Daniel M. Ryan
web posted April 12, 2010

It's not there yet, but it's close. According to a Yahoo! Finance story, close to 50% of American households paid no net income tax last year. Granted that the percentage was much higher than it otherwise would have been because of the severe recession, but the bump-up against a full majority is the cumulation of a long-term trend to get more low-income earners off the income tax rolls. Last year's 47% is likely to be followed by a lower percentage for this year, but the 50% milestone is in sight. An America where a majority pays no income taxes, net. An America where either none is withheld, or whatever is withheld is sent back as a refund, for a majority of households. An America where "Join the majority…" would have little to do with cigarette smoking or lack of. Or, for that matter, obesity or its lack.

Be A Non-Payer

Also from the article is the fact that the top 10 percent of earners are shouldering about 73% of the income-tax load. A solid majority of the income taxes paid are being borne by only a small minority of households.

Lefties may hate for me to point this out, but the Reagan tax reforms that quasi-flattened the income tax rate structure ended up making it more progressive. The Reagan Administration wasn't responsible for the current lopsidedness, but the Tax Reform Act of 1986 busted down the trees and laid down the aggregate that the Democrats have paved over. Had the Reagan rates still prevailed, it wouldn't have been "Progressive Highway" in fact but it still would have been as a potentiality.

On the lower end, the Earned Income Tax Credit was also expanded under Reagan in 1986. Once again, the foundation-building of "Hwy. Progressive" was done under old Ronnie. Another EITC expansion took place under President George H.W Bush, and there were further ones in 1993 and 2001. The obvious progressivity of the current U.S. income tax, though, was spearheaded by Reagan. Not that he's going to be credited for it anytime soon. In fact, given the meme-like speed at which that 47% figure's been reacted to, it's more likely that he'd take some blame for it.

Likely Consequences

If a majority of households end up being on the no-income-tax roll, its significance will be more symbolic than real. Anyone who earns more than a pittance will still have to pay payroll taxes. There are a whole slew of other taxes, many at the state level, which income tax non-payers still have to pay. We're likely to hear more about them if the above figure starts grating.

Although symbolic, it's still an important symbol. Most Americans associate "taxes" with the old Form 1040, even if the Internal Revenue Code has many cousins. The idea, in a democracy, that a majority be exempt from a very entrenched tax is bound to stir up qualms. Although inaccurate, it's very easy to label someone paying no income taxes as a "free rider." Put it together, and an image of the majority riding on the minority is not one that can be shaken off easily with the standard tax-moralizing boilerplate.

One possible consequence, although it necessitates schadenfreude that may trump good taxpayer sense, would be heavy support for a VAT tax at the upper ends of the socio-economic stratum. The "fair-share" boilerplate, not to mention the thinly-disguised "be grateful for what you get" boilerplate, can only be stretched so far. An outright majority could be the tipping point for someone to ask, "what about their fair share? Why is it zero?" These questions can be answered, but the questioners will not be assuaged if the questions are laced with schadenfreude. "Make the bums pay too!"

That consequence is unlikely. There's a healthy taboo in America that restrains people from leaning on the poor and near-poor, a product of sympathy for those not earning or receiving much. Part of this sympathy is empathy: many an upper-middle-class professional can relate to the plight of the working poor because said professional was both poor and working [studying, often hard-studying] in college. Even if that bond of sympathy is eroded, such calls would be stayed by prudence. "Don't tax your nose to spite his face."

Given the current set-up, another consequence is more likely. Some may see it as darker, but it avoids the above-described schadenfreude. A small minority footing a majority of the bill does invite that small minority to become more politically engaged. It takes a real political-pacifist streak to treat taxes paid as simply gone. Most citizens would wade in to the political process and try to direct the spending of the funds. A large taxpayer, whether motivated by magnanimity or venality, has more incentive to get involved in the disbursement end: petitioning, offering advice, lobbying. It's a given that the less self-seeking will win the greater influence. However, even the person demanding a bailout is still more likely to bull through the door than would the average Joe. Some Wall Streeters certainly did.

Some may see this kind of system as a kind of fascism. If so, then the impetus towards that fascism is the current income-tax system. The politico-economic incentives are almost embarrassingly obvious.

"If You Can't Beat 'Em…"

It would be trite of me to categorize the theme of Atlas Shrugged as "if you can't beat 'em, blend in with 'em," but there is that message inculcated therein. For most readers, the take-away is that it's okay to be concerned with one's own interests. There is a subset, though, which come away wondering if they too should go on strike by blending in with – joining - the working poor as Galt did.

The success secret behind the current progressive income tax is the fact that 'greedy' people are not really motivated by greed. For economic success in a market economy, greed is actually a poor motivator. Despite fantasies of unlimited wealth, real wealth is always limited. There's always a way to see how more could come. A truly greedy person with a little perceptiveness can see wealth acquisition as much effort expended for the same dissatisfaction. After the five-bedroom house, the six-bedroom house beckons. Why bother at all, especially when it's so durned hard to get the five-bedroom?

It's much easier to decide that all striving is for chumps and become a freeloader. Granted that the lifestyle is limited, but compensation can be found by chortling over the "suckers" who foot the bill for it. Content oneself with the thought that the rich, famous and powerful invite themselves into one's home through cable TV.

This set of values is twisted, and in normal times is rightly considered pitiful, but it's that kind of calculus that made a younger George Gilder proclaim that the root of capitalism is giving. In order to get some, you have to give some. In order to get more, you have to give more.

Regardless of its accuracy, Gilder tapped into an important truth: the rich and would-be rich are less motivated by greed than by achievement. Money is a way, if only one way, of keeping score. The achievement-oriented make for less aggressive taxpayers because the "score" (pre-tax income) counts too. They also make for less calculating taxpayers. Tax avoidance is part of the game, but it isn't treated with deadly earnest. A more calculating taxpayer, wondering if (s)he's the sucker of the process, might.

Given America's veneration of democracy, the sight of a majority of households paying no income tax might tip some people into wondering if it's better to "join the majority." Some may do so simply out of frustration or despair.

I'll grant that this last possibility sticking is a long shot. Whenever times had gotten tough, there was always a back-to-the-land movement that stirred city folk into trying their luck with homesteading. It never lasted, as the sweat equity was too much for all but a few of the new entrants. Almost certainly, the same disillusionment would set in to anyone who fancies joining the working poor. Something as simple as becoming a parent in that environment – something the tenement-residing John Galt never went through – takes the gloss off the nobility of poverty. The end result of any "back to the Rand" movement would be a wised-up appreciation of the obstacles the working poor really have to face.

The most likely consequence is the second one. There's no need for any kind of recondite thought to see that the major bill-payer tends to be heeded more by the payees. That's the direction that America's clearly heading now in the political sphere. ESR

Daniel M. Ryan is currently watching The Gold Bubble.

 

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