Last month GOP presidential nominee Mitt Romney took a hit for slandering "the 47 percent" -- that near majority of Americans "who are dependent upon government, who believe that they are victims, who believe that government has a responsibility to care for them, who believe that they are entitled to healthcare, to food, to housing, to you name it." The people "who pay no income tax."
Romney's rant about nonpayers has been roundly attacked (at least by liberals) for being misleading, incomplete, and insulting. And to be fair, it was all those things -- not to mention politically damaging once it escaped the embrace of a sympathetic audience.
Still, there's something important, even legitimate, about Romney's complaint. Nonpayers are in fact a problem for the tax system. Not because they are slacking, mooching, or otherwise shirking their responsibilities. As critics have pointed out, many so-called nonpayers are actually paying quite a bit in taxes, just not federal income taxes. Rather, income tax nonpayers are a danger to the fiscal component of our social contract. First and foremost, the income tax is a revenue tool, designed to raise the money that keeps the wheels of government turning. But it also plays a symbolic role in U.S. society. And ultimately, it's that symbolic role that makes the fiscal function possible.
An Old Complaint
People have been griping about nonpayers for decades. Andrew Mellon, Treasury secretary for most of the 1920s, was probably the most articulate. In the face of strong congressional pressure to narrow the income tax by raising personal exemptions, Mellon dug in his heels.
"As a matter of policy, it is advisable to have every citizen with a stake in his country. Nothing brings home to a man the feeling that he personally has an interest in seeing that government revenues are not squandered, but intelligently expended, as the fact that he contributes individually a direct tax, no matter how small, to his government," he wrote in 1925.1
Liberals objected immediately. "Surely the Secretary of the Treasury can not intend, with a stroke of his mighty pen, to expatriate 96 per cent of us," wrote the Omaha World-Herald.
We pay taxes on our coats, on our shoes and socks, on our hats, on our shorts and underwear, on the food on the breakfast-table, on the materials of which our homes are constructed, on the furniture in them, on the vehicles we ride in, on the amusements wherein we seek surcease -- on practically everything, indeed, that we have and do. Do not these payments entitle us to feel equally with Mr. Mellon, that we have a stake in our country?2
The liberals were right, of course (much as today's liberals are right when they make a nearly identical point about Romney's 47 percent, albeit pointing to a different set of taxes paid by the nonpayers).
But Mellon had plenty of defenders, too. "Any movement toward freeing larger numbers of our population from the obligation of supporting to some extent the Federal Government in a tangible, conscious manner would be inconsistent with the sound development of representative government," said L.R. Gottlieb of the National Industrial Conference Board.3
Mellon's comments came during a congressional drive to make the income tax -- already a narrow levy on something like 5 percent of the total population -- narrower still. Most Democrats were keen supporters of the plan, eager to further insulate Middle America from this rich man's burden.
But not every liberal agreed. Some champions of the income tax were uneasy with proposals to narrow it. They insisted the tax needed to stay reasonably broad if it were to survive as a permanent element of the federal tax system (not a foregone conclusion in the mid-1920s).
"A tax system as vitally important as is the income tax should apply to a respectable number of persons," said Rep. Cordell Hull, a legislative father of the modern income tax.4 An excessively narrow tax targeted at the nation's economic elite would be vulnerable to conservative counterattack.
Hull lost that debate, and his fellow Democrats forced Mellon to accept major exemption increases as the quid pro quo for major rate cuts, especially in the upper brackets.
Liberal economists, however, were quick to take up the argument for broader income taxes, arguing that exemption cuts would enhance tax consciousness. In 1934, for instance, economists in Franklin Roosevelt's Treasury declared themselves champions of a broader tax base. "With respect to a lowering of the exemptions, it should be noted that this action would have the advantage, from our point of view, of increasing the number of direct taxpayers and thereby the number of persons having a conscious interest in government," they wrote in one key study. Broadening the tax would "lessen its narrow class, or undemocratic character."
Bear in mind that such comments came from a cohort of vigorous fiscal liberals, recruited to Treasury as part of an effort to define the New Deal's fiscal agenda. Those same economists excoriated regressive excise taxes and supported higher tax rates for the upper brackets of both the income and estate tax.
But those liberals also believed that tax consciousness was its own reward -- a fiscal virtue worth pursuing, even if the end goal was more federal spending, not less. Even Roosevelt himself embraced the idea, albeit somewhat tentatively. The income tax should be extended "a little bit," he told reporters in the late 1930s. "It wouldn't bring in much revenue, but it does give added responsibility of citizenship."5
A Conservative Agenda?
Such comments notwithstanding, tax consciousness, and broader income taxation generally, have almost always been yoked to a conservative, small-government agenda. As Princeton economist Paul J. Strayer observed in 1940, "one of the most common beliefs is that an increase in tax consciousness will develop a sense of political responsibility and prevent the masses from favoring excessive expenditures with the belief that they will be able to pass the burden to the wealthy."6
And indeed, "there is little question that the lower the exemptions under the federal income tax, the greater the number of citizens who will be made directly aware of the cost of the federal government," Strayer concluded.
But Strayer questioned whether lower exemptions would actually lead to lower spending. "The reaction of the taxpayer is unpredictable and may result in greater rather than less expenditure," he wrote. "Another possibility is that if the mass of the voters were to be made tax-conscious they would demand the repeal of the tax." In other words, tax consciousness might weaken the electorate's fiscal self-discipline, not bolster it.
Such worrisome possibilities seemed reasonable to Strayer, and they seem reasonable today, too. But they are hardly a foregone conclusion. On the other hand, another benefit of broader income taxation seems all but certain: It would make taxpayers happy.
Strayer made exactly that point. The British tax system had notably lower exemptions than its U.S. counterpart. But "interviews with officials in the British administration indicate that their low exemptions are not of much practical significance except as they make the persons in the higher brackets feel better about their heavy burdens" -- an observation Strayer made almost in passing, and chiefly to underscore the limited utility of broadening the income tax. But his point was important, at least potentially.
Happy Rich People
Taxpayer morale is vital to the overall health of the tax system. Many left-leaning observers acknowledge that when they complain about tax avoidance by rich individuals (like, say, former Bain employees running for president). That sort of tax behavior undermines faith in the fairness of the overall tax system, they say.
But nonpayment at the bottom of the income scale might have similar corrosive effects on tax morale, at least among the 53 percent still paying income taxes. After all, the income tax is not simply a tool for raising money. It's also a shared burden, an expression of communal responsibility. Paying it is more than a financial transaction between individuals and the IRS -- it's a rite of citizenship.
In taking Romney to task for his comments on the 47 percent, Washington Post columnist Ezra Klein observed that the income tax is "still our most famous tax." Indeed it is. But that's precisely what makes nonpayers a problem.
A Big Deal?
Unfortunately (at least for Romney), it's not clear how big the problem actually is.
According to a recent poll by Fox News, 79 percent of Americans think everyone should pay some amount in federal income taxes, "even if it is as little as one percent of their income." So symbolism counts, at least when it comes to taxpaying.
Or maybe it doesn't. A Washington Post survey, conducted the same week as the Fox poll, found only 39 percent insisting that everyone should pay something. Why the disparity? Because the Post question began by pointing out that "many people who don't pay income taxes are senior citizens on Social Security, people on disability, or students, the unemployed, and the working poor."
Apparently, a little context can go a long way toward neutralizing the issue. But if history is any guide, Romney is on to something with his complaints about nonpayers. He may not say it well, and it may not resonate with all Americans, but it does touch on powerful questions of participation, citizenship, and shared responsibility. If Romney finds a better way to talk about it, his now-infamous complaints about the 47 percent might prove a help, not a hindrance, in his race for the Oval Office.
1 "The Fight Over the Little Fellow's Tax," Literary Digest (Oct. 31, 1925), at 10-11.
2 Quoted in Philip H. Love, Andrew W. Mellon: The Man and His Work 150-151 (1929).
3 House Ways and Means Committee, "Revenue Revision, 1925," at 106.
4 Ways and Means Committee, "The Revenue Bill of 1926" (H.R. Rep. No. 1), at 35. See also Roy G. Blakey, The Revenue Act of 1926 410 (1926).
5 Roosevelt, Complete Presidential Press Conferences, vol. 13, 423-424.
6 Paul J. Strayer, "The Proposal to Tax Small Incomes," L. & Contemp. Probs. 171, 178-179 (Spring 1940).
END OF FOOTNOTES