Actually, conservatives should favor even fewer people paying income tax

By Reihan Salam
September 20, 2012

The outrage over Mitt Romney’s extended off-the-record riff to wealthy donors about the fact that “47 percent of Americans pay no income tax” has shown no sign of dying down. As of now, this looks like the defining moment of his presidential campaign. In lumping together those who have no federal income tax liability with those “who believe the government has a responsibility to care for them,” the former Massachusetts governor gave new life to every crude caricature of conservatives as class warriors for the ultrarich.

But did off-the-record Romney have a point? Is it a problem that we have narrowed the federal income tax base, or is there a case that conservatives seeking to contain the growth of government should strive to make the income tax base even narrower?

In a 2001 interview with Nicholas Lemann of the New Yorker, Republican Senator Jim DeMint of South Carolina called the narrowing of the tax base “a major crisis in democracy.” Just months before the first Bush tax cut removed millions of households from the federal income tax rolls, DeMint warned that “the tax code will destroy democracy, by putting us in a position where most voters don’t pay for government.” DeMint’s dark premonition wasn’t enough to get President Bush to revamp his tax cut, but the idea has grown more popular among conservatives in the intervening years, hence Romney’s riff.

Critics of DeMintism point out that virtually all of the households that don’t pay federal income taxes pay other taxes, including payroll taxes and state and local taxes. Indeed, some pundits have declared that this is Romney’s saving grace: Hardly anyone in the GOP nominee’s 47 percent actually believes that he or she is part of the 47 percent.

The deeper problem isn’t that too few people are paying federal income taxes, as DeMint and Representative Michelle Bachmann and now Mitt Romney maintain. Rather, it is that most of the taxes we do pay, with the big exception of retail sales taxes, are quite stealthy. In the days before income tax withholding, taxpayers had to write checks to the federal government. Now, many taxpayers have a better sense of the size of their income tax refund than of what they’ve actually forked over to the federal government.

It turns out that the best way to address Romney’s underlying concern – that a large and growing number of Americans have lost sight of the real cost of government – might be to remove even more households from the income tax rolls and create a very visible new tax to make up the difference. That is why Republicans, Mitt Romney included, should give serious consideration to Michael Graetz’s Competitive Tax Plan (CTP).

Conservatives hate the idea of new taxes. But imagine if every time you bought a cup of coffee, it said on the receipt that you had also just paid a 12.3 percent consumption tax to the federal government. Instead of paying your taxes once a year, you would pay taxes every time you made a purchase. What better way to remind people of all of the money government spends, and all of the money government spends foolishly, than to make them pay for government several times a day?

That’s not all. Imagine also that the federal income tax only applied to income over $100,000 for married couples, $50,000 for single filers, and $75,000 for head of household filers. Households that earn less than this “family allowance” would be under no obligation to file a federal income tax return. In that case, the 12.3 percent consumption tax would pay for liberating millions of Americans from the IRS. According to a recent analysis from the Tax Policy Center, the tax policy rules in effect today will require 147,540,000 tax units to file taxes in 2015. Under Graetz’s CTP, that number would fall to 36,625,000.

Even those poor souls who still have to file under the CTP will benefit, paying a much-reduced federal income tax at a basic rate of 16 percent and a surtax rate of 25.5 percent on income above $200,000. These low marginal tax rates would improve work incentives for high earners far more than Mitt Romney’s proposed tax cut and would be an even bigger improvement relative to President Obama’s proposed tax increase for the top 2 percent of households. And though the CTP wouldn’t completely eliminate taxes on savings and investment, it dramatically lowers them, particularly for families of modest means.

One concern is that even with this radical shrinking of the income tax, poor families that spend the bulk of their income would pay more under a consumption tax. That is why the CTP includes a generous per-worker and per-child rebate that would be used to offset payroll taxes. These rebates would also serve as a replacement for the earned-income tax credit, which is the chief reason tens of millions of low-income households have to go through the hassle of filing income tax returns. The end result is that the tax burden under the CTP would be exactly as progressive as it is under today’s tax rules.

The CTP would strike a blow against the IRS’s intrusiveness, a cause all conservatives should cheer. And as Graetz explained to me, “by eliminating millions of people from the income tax, you’ll never get them back.” Once the inflation-indexed exemption is raised, “you’ll never get a politician to agree to lower the exemption from $100,000.” It has many other benefits as well. For example, while Mitt Romney has called for a 25 percent corporate tax rate and President Obama has called for a 28 percent rate, the CTP cuts the corporate rate to 15 percent. In one fell swoop, this would make the U.S. a far more attractive destination for foreign investment, reduce tax avoidance and be conducive to economic growth.

So why haven’t conservatives signed up for Graetz’s ingenious proposal? The big barrier on the right is the view that a consumption tax is a one-way ticket to socialism. While most states have retail sales taxes, the United States is one of a small handful of countries that does not use a value-added tax, or VAT. In Europe, VATs raise a huge share of government revenue, and the statutory rates tend to be very high. The worst thing about the European approach to the VAT, from a conservative perspective, is that it’s invisible. That is, consumers often have no clear indication of how much of what they’re paying is accounted for by the VAT. This is one reason why many European governments have hiked their VAT rates over the years – because taxpayers won’t know the difference. Anti-VAT conservatives fear that an American VAT would be susceptible to the same tendency to creep higher, indiscernibly.

But outside of Europe, the picture looks very different. Canada’s VAT, known as the GST, for goods and services tax, was 7 percent when it was first introduced in 1991. Since then, it has fallen to 5 percent. Although the GST remains extremely unpopular, it has played a crucial role in helping Canada shrink its yawning federal budget deficits. Moreover, the two decades since the introduction of the GST have seen Canadian federal spending and federal debt plummet as a share of GDP while the United States has gone in the opposite direction. That is an outcome all small-government conservatives should respect

There are, to be sure, huge obstacles in the way of Graetz’s Competitive Tax Plan, as he freely acknowledges. If a Republican gets behind it, we can expect Democrats to demonize it as a tax hike on the poor to fund income tax cuts for the rich, leaving aside the generous rebates and the family allowance. If a Democrat gets behind it, Republicans might wage war against the VAT as a diabolical foreign plot.

All the same, the CTP is the only realistic plan that will preserve progressivity while giving 100 percent of Americans the sense that they are bearing the cost of our federal Leviathan.

PHOTO: U.S. Republican presidential nominee and former Massachusetts Governor Mitt Romney pauses as speaks to reporters in Los Angeles, September 17, 2012. REUTERS/Jim Young

11 comments

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Just a little more jiggering with the tax code and this time we’ll get it right! Give me a break, pleaze.
Here’s why all the tweaking will fail. Most of the tax deficits are from those who truly pay no taxes whatsoever, the underground economy. A penny saved is 2 to 5 earned. The value of reducing taxes at every income level wastes an incredible amount of time and productivity, not to mention freedom. A truly single and flat tax is the only moral and honest high ground for any government and insists that each and every citizen be subjected to the exact same tax regime and treatment, period. The current inane tax “systems” are a product of fraudulent laws (crony capitalism) and various groups trying to rip off other groups while being managed by their political allies.
What is the matter with Equality and Freedom under the law? Anyone who argues otherwise is a mooch and/or has a politician as his henchman.

P.S. Graetz is a dope.

Posted by JP007 | Report as abusive

Reihan, you misunderstand, misappropriate and misrepresent Romney’s remarks.

He was talking about 3 different groups:
1. the “47%” and later in his remarks, “48%, 49%” — “who are with him” — Obama supporters
2. the different “47%” he referred to as “non-taxpayers”
3. the 10% or 15% who are independents and taxpayers

And just as he was about to explain how polling examines the Obama group, the tape was cut — by Mother Jones, Jimmy Carter IV or the bartender who made the tape. They unbelievably claim a machine malfunction, at precisely the critical moment. The media needs to challenge that attempt to use editing to twist the content.

Romney defined the Obama group as including those who are “dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it. That that’s an entitlement. And the government should give it to them. And they will vote for this president no matter what.”

Romney says these people aren’t open to his campaign messages. The non-taxpaying group was a second group it makes no sense to pitch to, because you can’t successfully pitch a lower-tax platform to those who already pay no taxes. People who can’t comprehend a Venn diagram are claiming this is the same group as the first group.

Then, showing he does understand Venn diagrams, Romney said his lower-tax pitch would most successfully go to the third group, the 10% or 15% who are independents and taxpayers.

So, in fact, Romney wasn’t offering an “extended off-the-record riff to wealthy donors about the fact that ’47 percent of Americans pay no income tax’ “. You are conveniently twisting the facts to suit your narrative.

Conservatives do favor fewer people paying federal income tax and indeed have made most of the cuts that have freed the working poor. But in 2012 the fact that group is 47% shows how poorly Obama has managed the economy and put so many into the poorhouse.

Posted by vocalmedia | Report as abusive

Separate issue.

Yes, the tax system needs a substantial overhaul, replacing all or most income-based taxes below Graetz-like numbers and implementing a national consumption tax.

Indeed, many favor a consumption tax replacing ll income taxes below a much higher income, say, $500,000.

Canada was an economic basket case before they implemented a national Goods and Services Tax in 1991. The 7% GST, which had exemptions for children’s clothing, books and few other items, replaced a 13.5% Manufacturers’ Sales Tax (MST) that had hurt exports and raised costs for domestic consumption. The GST saved Canada. Indeed, because it grows as an economy grows it can be a major tool for saving countries from bankruptcy. Since 1991, one government won office by promising to get rid of the GST, then didn’t, and a second, the current Conservative government, won in 2006 with a promise to reduce the GST by 2%, which it has done. In a number of provinces the GST has been “harmonized” with the pre-existing provincial sales tax creating the HST (Harmonized Sales Tax). This has reduced the bureaucracy needed to handle the taxes.

Reducing income tax to 10% with a U.S. GST-like tax of 10% would supercharge the U.S. economy.

Posted by vocalmedia | Report as abusive

@vocalmedia – so you were at the subject meeting of wealthy donors? you can personally vouch for what romney said? no one moved the words around to make a totally different message, ie “you didn’t make that”. we heard exactly what romney said and hoped would not reach beyond the room. the only time a republican gets in trouble is when they actually say what they think and let the rest of us in on their unbelievable hypocrisy.
four more years.

Posted by jcfl | Report as abusive

You misunderstand the conservative mindset.

For them only the rich (wealth creators) should be exempt from taxes, laws and regulation.

All that government stuff is for little people.

Posted by Dafydd | Report as abusive

I think most of those in Romney’s 47% income taxless class would not mind paying more taxes if it meant a healthier government and an economy that provided decent paying US jobs and if it prevented jobs from being shipped off shore. I also think most of them would be just as happy to ship the 1% class off shore instead of jobs. They are not a big part of the American tax base and they do not seem to support the trickle down theory but instead would rather shelter their money from taxes in off shore investments.

Romney also seems to have not known that these 47% tax class still pay a far greater share of their income to taxes than the wealthy do. They pay it in sales taxes, state and local taxes.

Posted by pec49 | Report as abusive

If Graetz really wants a progressive scale, he would not start out by putting a 12 or so percent charge on the purchases of even the poorest. When somebody making $40,000 a year has to buy a new stove, it is a big hit, but is not even noticeable to a person making $350,000. Notice that while Graetz scrambles around trying to appear progressive with his figures for the upper income set, he describes his plan as one which lowers their taxes. That amounts to saying the tax burden is shifted to the lower economic strata.

Posted by bcrawf | Report as abusive

One of the few details that Romney has disclosed about his economic policy is that he opposes removing the motto “In God We Trust” from our coins.

Posted by Leftcoastrocky | Report as abusive

No Representation Without Taxation!
wait a minute strike that…

reverse it.

Posted by notnews | Report as abusive

I’ll not quibble over the fact that VAT is different from a simple sales tax as they are both ultimately a sales tax. However, you chose to use the example of Canada to demonstrate the benefits of a federal sales tax because the budget deficit in Canada is under control. Had you used Europe for the same purpose you will have reached a different conclusion as Europe is mired in huge deficits. Therefore, I can conclude that sales taxes are not correlated with budget deficits.

Posted by Biscayne | Report as abusive

Regardless of the criticisms directed at the author of this post, one Reihan Salam, he at least has made an honest and fairly coherent proposal to remedy our chaotic tax situation. The income tax has indeed turned into a stealth tax. We do need a more visible form of taxation, regardless of whom it seems to favor. The problem with VAT is that it also is a stealth tax. Why not try a sales tax? See how it goes. It isn’t irrevocable. It works well here in the state of Washington. We don’t have an income tax, and we don’t need one.

Posted by nikacat | Report as abusive