TAXES AND THE POOR
Friday, October 12, 2012
CHRISTOPHER E. BERGIN
President and Publisher
C. EUGENE STEUERLE
Executive Vice President
SCOTT A. HODGE
Director of Federal Tax Policy
Center on Budget and Policy Priorities
Universit of Pennsylvania Law School
Committee for Economic Development
The Aspen Institute
The Brookings Institution
Multistate Tax Commission
Internal Revenue Service
JOSEPH J. THORNDIKE,
Multistate Tax Commission
P R O C E E D I N G S
MR. BERGIN: Good morning, everybody. Thank you for coming. Welcome to the latest in Tax Analysts' series of discussions on key issues in tax policy and tax administration. Today's topic is Taxes and the Poor. I'm Chris Bergin, the president of Tax Analysts, which is the nonprofit publisher of Tax Notes, Tax Notes Today, State Tax Notes, Tax Notes International, and many other fine print and online products on federal, state, and international taxation. We are in our 10th year of public discussions on tax policy.
If you are new to our discussions, let me say it's great to have you here. Let me also just take a moment to explain our process today. I will open things up with some brief remarks to introduce our topic. I will then introduce our distinguished panel of speakers. Each of them will address aspects of our topic. After that, we will open up the discussion to all of you, and we encourage all of you to participate. Whether you are seated at the table or just a bit away from it, just wave and I'll find you.
We are streaming audio of this event on our website, and we will post both the audiocast and a transcript there. For the people listening on the audiocast, we have several handouts today. They will be posted to our website following the conference. We are also tweeting this event as we try to reach more people beyond this room through social media, so for all media purposes, we are on the record. For that reason, when I recognize you, please tell us who you are. Also, please speak into a microphone. For those of you away from the table, we have handheld mikes that we will quickly get to you. I will moderate the discussion, and we will end promptly at 11:00.
Now, onto the subject at hand, Taxes and the Poor: What the poor pay, what they should pay, and why. When I opened our last conference in June, which was about the other end of the spectrum, taxes and the rich, I began by thanking President Obama, former President Clinton, and several others for highlighting that topic in the couple of weeks just before our event. Well, what do you know? Here we are again. For this conference, I again find myself with a need to express a debt of gratitude, this time to Governor Romney for his comments about the so-called 47 percent, the nearly half of Americans who, he says, don't pay taxes but mooch off the government for their every need. The governor could not have possibly teed this up any better.
To be fair though, I should also thank President Obama for keeping Romney's comment in circulation, if it was only for his own political gain, although recently he seems to have moved on to Big Bird. All kidding aside, Romney's comment about the so-called 47 percent goes to the heart of what we want to discuss today.
If your experience is anything like mine, you can't get too far into a discussion about taxes without hearing someone say, usually with a little bit more of resentment, that "half of Americans don't pay taxes." Well, it's true in a typical year about 40 percent of Americans don't pay federal income taxes, either because they don't make enough money or because we reduced their tax liability to zero by offering them a variety of credits, some of which, like the earned income tax credit, are refundable, which means the government writes these households a check. But, of course, as we'll surely hear today, most of these taxpayers still pay Social Security and Medicare payroll taxes as well as a slew of state and local taxes. Then again, when people think about taxes, they tend to think about income taxes, and the federal income tax, in particular. That's the tax that many think finances their government. For better or for worse, that's what they think.
So, the fact that about 40-something percent of Americans -- it varies year to year -- don't pay federal income taxes begs an important question: Should everyone pay at least some income tax as an obligation of citizenship? Some people think so. They say that Americans need to have what they call "skin in the game". That is a stake in how government operates, and they can only have that stake in government if they help pay for it. That's fine, but the implications of that position for tax policy and tax politics are pretty profound.
If we decide that everyone needs to pay at least some federal income tax, it seems to me that means that everyone would be a net taxpayer. But as I mentioned earlier, some people not only don't pay income tax, they get a check from the government in the form of a refundable tax credit. They are net tax receivers. So, to make everyone a net taxpayer, we, presumably, would have to take away all of those refundable credits, often worth thousands of dollars, from the lowest income working Americans. For the purposes of ensuring that everyone pays at least $1 of income tax, we'd be taxing some people into poverty.
Now, coming at this from the tax politics angle, do we really think our politicians would be interested in pushing a tax increase for almost half the voting population? Personally, I don't see it, so the stakes of this issue are quite high for millions of struggling families all over America.
To examine this issue from multiple sides, we have an absolutely terrific panel today, and I'm going to introduce them in the order in which they will speak. C. Eugene Steuerle is an institute fellow at the Urban Institute; David Brunori is the executive vice president of operations at Tax Analysts; Scott A. Hodge is president of the Tax Foundation; and Chuck Marr is director of federal tax policy at the Center on Budget and Policy Priorities. We thank all the panelists for being here. I'm sure we'll have a spirited debate, and I promise I won't interrupt, which I watched a lot of last night. Gene, you want to get us started?
MR. STEUERLE: Thank you, Chris, and let me say that it's always an honor for me to work with the people at Tax Analysts. I think it's among the organizations with the highest degree of integrity, honesty, forthrightness, and I think if we had one-tenth of the organizations in this town that had those qualities that, Chris, you and your colleagues have, I think a lot of our government problems would go away.
I'd also like to mention that when it comes to headlines, we have to be careful. And I think any headline on taxes and the poor is liable to be misleading. I'll give you some examples from some other headlines, not necessarily related to the poor, just to give you an idea. One headline said, "Something went wrong in jet crash, experts say." Another one said, "Kicking baby considered to be healthy." Another one said, "Stolen painting found by tree." And one of my favorite, "Reagan wins on budget, but more lies ahead." (Laughter) So, I want to make six quick points in the very brief time I have.
The first one I want to make is you really can't talk about issues like taxes and the poor or taxes and distribution without talking about spending. I think it's among the most misleading of all the analysis we do. We do it at the Tax Policy Center. All of us do it, but in point of fact, it's very incomplete.
The second issue that I want to raise is just to go over recent history. A quick summary is both the poor and the rich have done fairly well, but given that we're so unwilling to pay our bills, the middle class don't do too badly either because we're just not paying the taxes we need to pay our bills. I've got some data on the current distribution of the tax burden. I've got some data on who pays no tax. These data all come from my colleagues at the Urban-Brookings Tax Policy Center -- provide a little data on the distribution of changes if you would actually go over the fiscal cliff, which my colleagues also presented.
And then finally, I want to make just a brief comment about what's really missing from the current debate, which gets us a bit back into both tax and spending, and that's the lack of any attention to things like job subsidies or to issues like education, which are issues that have more to do with moving on an opportunity front. I won't go too far into that because we're talking mainly about taxes today.
So, my first quick point on taxes and spending: It just doesn't make sense to talk about distribution of the tax burden without figuring out what happens to spending. And in point of fact, it's not just the press. And we academics who mistake -- even some of the academic textbooks mistakenly do define this issue very poorly. So, if you try to define the progressivity of the tax system without figuring out what's going on with spending, it's just misleading. Most so-called regressive taxes, and here I'm using the traditional tax definition of a tax that has a higher rate on lower-income people than higher-income people, most progressive taxes actually support redistribution. A classic example of this, at least by intention, is the Social Security tax which is regressive by the tax definition, and yet it's believed that it redistributes to people. And, in fact, it's regressive by the spending definition because the higher income people get more benefits than the low-income people. The problem, for those of you who are a little more academic, is that one measure of progressivity for a tax is we do by proportionality. The measure of spending, we usually measure by absolute dollars.
Another case in which we really messed up the issue of taxes and spending is, of course, with the earned income credit, so we have distributional tables where we add in the EITC, and then we go to the tables. In the budget, we find out that most of the earned income credit is actually an outlay, and this, of course, affects, as I'll discuss in a second, these issues of who pays no taxes. Do you count the earned income credit as an outlay or as a tax cut? We actually do both, and we actually formally do both in the budget.
This, by the way, I would say, poses a dilemma when we get into the political debate between Republicans and conservatives because my view is that, in general, in a modern government where most spending is redistributive, any time you actually move for smaller government you probably, at the end of the day, you're going to redistribute less. And that makes it very difficult to end up having a reasonable debate. Now, the Republicans are sort of in a trap because they went to pretend like they're not going to redistribute less if they have smaller government. But the Democrats are similarly in a trap because they want to argue that the only way that they can achieve redistribution is by having these very progressive taxes. And if you look at the history of the growth of government in the modern era and how we finance redistribution, it has not been through more progressive taxes. It's been through the growth in flat taxes such as Social Security taxes and value-added taxes, which means you actually hit the middle class. Democrats don't want to play that game. They both walk around this issue all the time, and I don't think they actually fully understand it.
Now, if you look at actually what happened in recent history, I have some data, and I have a handout. I'm not actually going to force you to look at that. If you want to, you can look at the data, but I realize we have some people on audiocast, and I don't want to talk in a way that they can't look at the data. But the bottom line, if you look at the data, there are tables there by the Congressional Budget Office on what's happened to the distribution of the tax burden over the last several decades. And what you'll find, especially if you count the earned income credit, is that the poor end up doing OK and that the very bottom, in fact, they face negative tax rates if we count the earned income credit. They weren't in that situation before. You also find that the rich, especially the very rich, the people in the top 1 percent or so, also do fairly well. That means the middle class actually end up, over that long period of time, having a slight increase in their share of the burden.
It's not very much, but even that's a little misleading because we've reduced taxes so much, we're not paying our bills. They came out OK, too. Now, that's also misleading because we at the Tax Policy Center, you at Tax Notes, the Joint Committee on Taxation, we all present these distributional tables, but anytime we run a deficit that's simply a tax or burden on future generations, we don't show that in the tables. And so, all of this is misleading.
The big winners, the really big winners, are the people, especially the people who are middle-aged and older. Chris, you and I and others, we're the big winners. We're not paying our bills. We're shoving all those burdens off to future generations. But you can look at that history and you'll see how it actually plays out over time. We could talk about it later. I can explain why, when you add together bracket creep and AMT bracket creep and the decline of the value of the personal exemption and 47 other things over time, how this played out over time. Some moves were progressive, some regressive. The actual changes in taxes, we usually debate, are only a small part of what has happened over time.
There's also a table in there on the current distribution of the tax burden. The income tax burden is fairly progressive if we measure it by shares, but again, I remind you that a significant portion of government is not paid for by the individual income tax. It's paid for by other taxes, and it's paid for by borrowing from China and other people.
Another set of tables that I presented and provided you has to do with this issue of who pays no tax. It turns out the 47 percent number that's widely cited actually is another Tax Policy Center number. Governor Romney likes to quote the 47 percent number. He doesn't necessarily like to quote the Tax Policy's estimates on whether you can actually cut rates by 20 percent and do enough base broadening. But that number is our number, but it's a number we have mixed feelings about being out there because it's so misconstrued. If you look at the data, again, that I provide in the charts, you'll find that there are a whole series of reasons why people, 47 percent of the population, at least in the height of the recession, pay no tax. Part of it was the recession. Part of it is counting the earned income credit not as a spending item, but, in fact, as a tax reduction. A significant amount of it actually comes from the elderly not paying any tax, and, in fact, if we count who pays no income and no Social Security tax, actually the elderly dominate the non-elderly poor in terms of who pays no tax. That's largely because Social Security benefits, for most people, are not subject to tax.
We also have a set of tables that I provided you on the distribution of changes from the fiscal cliff. And just to remind you on the fiscal cliff, the fiscal cliff involves the end of the Social Security tax break. It involves an increase in the alternative minimum tax. It involves changes in the top rates for those over $250,000. It involves low- and middle-income recision of tax breaks such as the expansion of the child credit. It involves the health tax that's actually going to be implemented at the beginning of January. It involves the estate tax. It involves a bunch of extenders, and it involves the stimulus as well. So, when we look at that altogether, you actually see that if you actually go off the fiscal cliff, it actually ends up with slightly higher burdens on the top and on the bottom. It's mildly progressive, probably by the tax definition. I'm not saying we can do it or it makes any fiscal sense, but we've done the distributional analysis for you.
My final point is missing from the current debate. It seems to me as you walk through all this, if you accept my notion about looking at taxes and spending, we're debating too much, you know, what's happening to small, actually moderate changes in taxes for particular income groups. We really want to figure out where government is going as a whole and how we actually should be allocating those revenues to different things.
One item that bothers me greatly is this administration has probably done the least of many recent administrations, and certainly the Republicans are not offering anything here either on the jobs front. If we want to move to a world where for low-income people and poor we want to encourage them, we want to provide them opportunity, we should be thinking about expansions of things like their earned income credit. Not necessarily for the people getting it now, but particularly for those people who were totally left out of the welfare system and the subsidy system for jobs, which is often low-income males.
I'd also say that if you really care about this, we really need to start talking about opportunity for the poor. That means moving to issues like education and actually how we provide opportunity. And another $10 in your pocket is good for increasing consumption, but if we really want to provide opportunity for poor, we need to extend the debate there. I know we don't have time to go through that today, we're talking about taxes, but that's where the discussion, I think, ought to lie. Thank you.
MR. BERGIN: Thanks, Gene, very much. David.
MR. BRUNORI: Good morning. Thank you, Chris. It is really an honor to be here, especially with this very distinguished panel. For the record, I'm a state guy, and I look at this issue of taxing the poor from a slightly different perspective. But it's relevant certainly to the current debate, because we talk about the 47 percent a lot recently not paying taxes. And yet that 47 percent, all Americans have a pretty large role in financing state and local governments. Last year, the states spent over $2 trillion, and somebody has to pay for that.
And the truth is state tax systems are decidedly regressive. The best study that I know of was done by ITEP, the Institute on Taxation and
Economic Policy, in 2009, found that the poorest 20 percent of Americans paid on average 10.9 percent of their incomes in state and local taxes, but the wealthiest 1 percent paid just 5 percent. So, that's the definition of regressivity if you're only looking at it from a tax angle and not on an expenditure side as Gene said.
There's a ton of research on this, including some great work done by the Center, showing that the poor pay more in relative terms than the wealthy to finance state governments. And, to be sure, many states rely on mildly progressive -- although in a couple of states more than mildly progressive -- income taxes, but they rely more heavily on sources of revenue that, in my opinion, hammer the poor. States rely, for instance, on sales taxes for about a third of their tax revenue. Sales taxes are great, but they're regressive, and they're all the more regressive because we do not tax most services. We don't tax intangibles. We don't tax real property. Basically, we don't tax the stuff rich people buy a lot. So, the tax ends up being much more regressive, but I don't want to talk about sales taxes, because we've beaten it to death over the last 50 years, and I'm not sure anything is ever going to change.
What I want to talk about is something that is rarely discussed in the context of the poor at the state and local level, and that is excise taxes. Excise taxes often represent an effort to tell people how to live and influence behavior, but they're also money grabs. And they're money grabs from poor people. By the way, I believe they violate every principle of sound tax policy, neutrality, fairness, et cetera. State governments raise about $140 billion, about 20 percent of their total tax revenue, from excise taxes. The big three, of course, are tobacco, booze, and gasoline. But legislators, and I have to tell you, mostly Democrats, are always thinking of new excise taxes: Soda taxes, fat taxes, proposals in a half-dozen states to tax ammunition. There's a federal excise tax on tanning salons. These taxes are unfair.
Now, excise taxes have a legitimate role to play when you're paying for externalities. But I submit that we do not impose excise taxes to pay for externalities, and I believe there's very little correlation between the amount of excise revenue we collect and the purported external costs of using tobacco, alcohol, gasoline, much less soda, fatty foods, ammunition, or artificial suntans. I don't think there's a correlation between what we collect and those externalities, certainly not an intentional one.
We use horribly regressive excise taxes for general funding for public services. I'll give you a couple of brief examples. Chicago Mayor Rahm Emanuel released his budget. It's calling for higher cigarette taxes and higher amusement taxes, which are basically excise taxes on people who go to the movies. Massachusetts Gov. Deval Patrick a couple of weeks ago called for higher cigarette taxes to pay for transportation services. There's a proposal in Missouri to raise cigarette taxes by 73 cents a pack. Half the money will go to colleges, about 40 percent of the money is going to go to K through 12 education for teacher salaries, and 10 percent for smoking cessation. But since the tax would be designated for salaries, I'm thinking the teachers are probably not hoping for a lot of smoking cessation. In fact, I mentioned this to my boss the other day, if I was a teacher in Missouri, I'd be handing out cartons of Lucky Strikes to the kids.
Virtually every cigarette tax increase in recent years has been earmarked, to some extent at least, for some laudable social goal unrelated to smoking. There will be efforts to raise cigarette taxes in about 30 states this year; they won't all pass. But we're not going to pretend they're about externalities. They're about maximizing revenue from poor people. Let's remember that.
Unfortunately, there's been a lot of talk in recent years to increase alcohol taxes, as well at the state level. State alcohol taxes have traditionally been very low, except in the Bible Belt where they try to discourage sinning and in tourist states where they try to export their tax burdens. But states need money, and that's where they're going to look for money in the coming year and without any regard to principle, by the way. And, stunningly, there's growing evidence that states are diverting their gasoline taxes to general fund spending.
So, excise taxes are regressive, but the only thing more regressive at the state level is using gambling to fund government, and that has been the trend in the last two decades. Liberals and conservatives agree that gambling is a great way to pay for government, certainly better than taxes. You see, gambling is not only regressive, it's addictive, it's morally questionable to a lot of people. It's basically the perfect pillars upon which to build a public finance system: Regressivity, addiction, morally questionable. Lotteries last year raised about $20 billion.
Taxation of casinos raised another $10 billion. That does not include revenue sharing from the casinos on Indian reservations. The money's always earmarked for education and other good things like veteran services in some states, homeless shelters, school lunches, and other things that are apparently not important enough to use real taxes on.
Now, if you don't think gambling is regressive, by the way, you haven't been in a 7-Eleven on a Friday night. Poor people gamble. Rich people don't because, well, they're rich. They don't gamble. There are about 100 studies that show the unfairness of paying for government through games of chance. Don't get me wrong, I don't care if people gamble. That's your business. I just think it's a horrible way to pay for government on the backs of people who gamble and I don't think there's anything more cynical or hypocritical in our public finance system. I really don't.
And sometimes we get the best of both worlds. Illinois Gov. Pat Quinn, who's a champion of the poor and the dispossessed and a liberal darling, he wants to double the cigarette tax in Illinois. Why? Because he wants to close their deficit. Now, the Republican comptroller of the state, who's a pretty conservative lady, said she'd back the governor only if it was accompanied by an expansion of gambling, including a casino in Chicago, and she'd back him. So, that's the best of all worlds. We'll get more cigarette taxes and more gambling revenue.
The reliance on excise taxes, I believe, in gambling is a result of two things. One, I think that it's partly the fault of conservatives who have been largely unwilling to increase broad-based taxes on income sales and property, so there's this automatic move towards other things. But I think the real problem often comes from the left, because I think liberals are often willing to do anything, no matter how unfair in this case, to raise money. And let's not kid ourselves, regressive taxes at the state level represent a massive transfer from the poor to the middle class, because really what we're doing is we're moving from poor people to public service unions and construction companies and all the things in the middle of the spectrum, and it is not fair to the poor. So, I think liberals are, ironically, often drivers of regressive tax policy, because they're willing to settle on virtually any revenue at times. And I hope that my liberal friends in the room will take that to heart.
I'm going to stop there, but I wanted to remind you all that the giants of public finance going back hundreds of years have lamented the use of excise taxes, certainly in a general funding sense, because they distort markets and are grossly unfair. I think it was Adam Smith who said that excise taxes were the devil's work. And the poor would be better off if more of us thought that way.
MR. BERGIN: Thank you, David. Scott.
MR. HODGE: Thank you, Chris. I appreciate Tax Analysts hosting this, because this is an issue, and I'm speaking specifically on the nonpayers, that is really not getting a lot of honest discussion from either side of the aisle, and I'm hoping that we can have that. You know, today we have more Americans off the income tax rolls than at any time since 1940, when the income tax became sort of a mass tax applied to virtually every worker, as many of you historians will know. Before 1940, the income tax was largely applied to largely upper-income people, and vastly most of the Americans had no contact with it. In 2010, 58 million tax filers, about 41 percent of all filers, paid no income taxes after taking their credits and deductions. That's about 50 percent more nonpayers than we had at the end of the Clinton administration, and about three times the percentage of nonpayers that we had when the Great Society began in the mid 1960s. And when we add in the millions of people who earned some income, but not enough to file a tax return, that's how we get up to about half of all American households who pay no income taxes.
I will step forward and say that I think having so many people off the tax rolls is a very bad thing, for a whole lot of reasons. I think certainly when you're running trillion-dollar deficits, having half of all Americans not contribute to the cost of government is fiscally irresponsible. Secondly, I think it's bad for democracy to have so many Americans with no skin in the game and no real connection to the basic cost of government. And I think it's bad for the IRS to be an extension of the welfare state in managing all kinds of social programs that we've now thrust upon it over the past 20 years. I think it's dangerous to have more than half of all Americans getting more back from government than they pay in taxes. And based on some research that we've done recently, I think that it's very troubling that the growth of nonpayers is linked to not only higher spending, but a growth in the national debt.
Despite Romney's very, very clumsy statements about the 47 percent, neither side of this debate really wants to talk about it honestly. Republicans don't want to talk about nonpayers because a lot of it goes back to programs that they started. It was, after all, Milton Friedman who really gave us the earned income tax credit. It was the Contract with America that gave us the $500-per-child tax credit. It was George Bush who doubled down on the child credit and made it refundable and started a whole host of other programs through the tax code that have now rippled through and litter the code today.
Democrats, on the other hand, either ridicule the issue or want to dismiss it, because it undermines their narrative that the Bush tax cuts benefitted only the rich, and it blunts their efforts to make the tax code even more progressive. And they bristle when you talk about people having no skin in the game. I know, because I've been witness to that many times, and I've testified before Senate Finance.
On the issue of progressivity, let's set out a few benchmarks here. According to economists at the OECD, the United States has the most progressive income tax system of any industrialized country. The top 10 percent of households in America pay a larger share of the income tax burden, and here they're talking about both income and payroll taxes, than do their counterparts in any other industrialized country while the poor in American have the lowest income tax burden of any industrialized country. And according to the most recent CBO report on taxes and incomes, the income tax system today is more progressive than it has been in the last 25 years. Sure don't hear that in the media. Indeed, CBO's data shows that the bottom two quintiles have a negative effective income tax rate, while the middle quintile is almost at zero. And so it's no wonder that the top quintile, the top 20 percent, pays 94 percent of all income taxes. We don't hear that much. But, as most of you know, the tax code has always protected the poorest citizens, but the growth in tax credits over the last 20 years has turned the IRS into a superagency engaged in policies as diverse as delivering welfare benefits and subsidizing the manufacture of energy efficient refrigerators. Despite what you hear from others, like the Tax Policy Center, nonpayers are not just the poor and elderly. Come on, half of all America is not poor and elderly. Although here's the cheap shot, after four years of Obama, maybe they're all poor. But honestly speaking, the nonpayers are now moving up into the ranks of the middle class. Here is some data. In 2001 just 3 percent of filers earning between $40,000 and $50,000 a year were nonpayers; in 2010, 20 percent. In 2001 just 1 percent of those earning between $50,000 and $75,000 were nonpayers; 10 percent today. Ten years ago, .3 percent of those earning between $75,000 and $100,000 were nonpayers. Now it is 3.4 percent. This is a growing class in the middle class, not just the poor.
And the root cause of this, as we show in the handout that I have and the recent fact book, the chart book that we have just published is this growth of tax credits, both nonrefundable and refundable tax credits. The total value of these tax credits today is $224 billion a year.
Now, to put that in perspective, if those were one single government program, they would be the fourth largest government program, or domestic program, in the budget. They would be fourth only to Social Security, Medicare, and Medicaid. That is how fast and large these credits have grown in just the last few years. And the value of refundable tax credits alone now exceeds the value of all of the tax expenditures in the corporate side of the budget, more than $100 billion a year going to people who pay no income taxes. And the IRS is not equipped to be a manager of social programs.
If you look at the inspector ieneral reports, it is replete with findings of fraud and improper payments. The EITC has a fraud and error rate of over 25 percent, about $15 billion a year, and that has been a constant over the last decade or so. The IG has found billions of dollars of improper payments in the HOPE credit, the plug-in vehicle credit, the child credit, the first-time home buyer's credit, and the list goes on.
We need to get the IRS back to its primary measure of simply collecting the nation's taxes and not being an extension of the welfare state.
Now, I do want to take a minute to expand on Gene's remarks about the need to look at both sides of the budget. Because surely, low-income people do pay some other taxes besides income taxes. Or if they don't pay income taxes, pay cigarette taxes, gas taxes, and so forth. But you do have to look at both sides of the ledger, and we have done so. In fact, the Tax Foundation first looked at the balance between what people pay in taxes and what they get in government benefits back in 1967. We looked at it again in 2007 and a more recent report in 2009. Each of these studies shows that the combined federal tax and spending policies are very progressive and very redistributive. In fact, the 2009 study shows that when you combine these two systems together, they redistribute more than $824 billion a year from the top 40 percent of Americans to the bottom 60 percent, which means more than half of all Americans are getting more back from government than they are paying in taxes. In fact, this was confirmed by a recent CBO report that shows that more than 60 percent of American households get more in transfer income than they pay in all federal taxes, not just income taxes. In fact, the forgotten middle class gets $2.14 worth of transfer income for every dollar that they pay in federal taxes.
And we looked at a more recent study looking at the relationship between the growth of nonpayers and the growth of government. Because I think we all worry to some degree about a fiscal illusion, in that when people perceive the cost of government being zero, they will demand more of it. And, well, we begin to see evidence of that.
We find that when you look at the growth of nonpayers and the growth of government, there is a very strong correlation between the growth of nonpayers and the growth of transfer spending. In fact, for every percentage point increase in nonpayers, we find that transfer spending increases by $11 billion. And what that means is that the growth of nonpayers over the last 20 years is associated with more than $200 billion worth of higher transfer spending today. And we found a very strong correlation between the growth of non-payers and the growth of the national debt. So, not only are the non-payers perhaps costing the treasury lost revenues, but their growth is leading to higher spending and more debt.
Now, what do real Americans think of this issue? Because all we hear is the chattering class here in Washington. In 2009 we polled. We did a nationwide poll and we asked people, what do you think of the fact that so many people pay no income taxes? Sixty-six percent of adults thought it was unfair that some people pay no income taxes, and they thought people should pay at least something toward the basic cost of government.
A more recent poll conducted by Fox News released just a few weeks ago found that 77 percent of respondents thought that everyone should pay income taxes even if it is just 1 percent of their income. And that it was a universal opinion across incomes, demographic profiles, political and ideological groups. This is a universal belief by all Americans.
And the way I interpret this is that most people see government as a giant potluck. And if you are going to come and eat at the table, you ought to bring a casserole, but not everybody feels that way. It is Chuck's turn.
MR. BERGIN: Thank you, Scott. Casserole.
MR. HODGE: It is a Midwest term. I got it. I just had to explain it to Gene.
MR. BERGIN: Chuck?
MR. MARR: Thank you. Thank you, Scott. So we have been at this issue for a while and it is obviously coming to a head now. But if we think back, it started with the lucky duckies.
Right? And then somehow, I think Scott sort of forgot that ducks have feathers and he made it skin in the game. And then we went to the freeloaders. And then it must have been at some -- I don't know. It must have been a book group. All the folks started reading this bad novel, and we got moochers and we got Congressman Ryan turning that into makers and takers. And then folks on TV always have to go one step further. I saw a prominent conservative the other day on national TV, called the people parasites -- the 47 percent are parasites. And so I just want to step back a little bit and talk before going point by point on some of those things Scott said about who these people are, what they have in common, and what they have at stake.
And if you look at the 47 percent, there is little padding, because about a fifth of these people are old people. Right? This is grandma at home who gets Social Security, Medicare. Another fifth are students in college, disabled people. But the core really are these 60 percent of people who are the takers. Right? They are really the group that really the folks are going after. And who are these people? Well, about 2 million of these takers are construction workers who get up everyday and actually make things. Another 2 million work in factories.
The Post had a great picture of a 47 percenter -- I don't know if she was, but probably sort of a typical 47 percenter last week -- with a story on the weather. And maybe if it had been a story about the sun, she would have been home in her hammock. But here you had this woman sort of dodging the rain, and she was going from her shift at Macy's to night school. OK? She is one of the 4.5 million people in the retail sector who are in this 47 percent.
And I don't know if any of you have relatives that are in nursing homes, right? My mother was in a nursing home once. And I just got to tell you, I never thought of the woman who got her dressed in the morning as a parasite. Right?
My son and I were in a restaurant last night. We go every week. Waiters come bring us food, wonderful people. I never thought to teach him to look down on these people. These are the moochers, right? The 3.5 million people who work in restaurants who are part of this 47 percent. So these people are what we are talking about. What do they have in common, this 60 percent? They all get up every day and they work and they do their best.
Now, Scott says they are nonpayers, right? He sort of glosses right over the fact. He is talking about one tax that he singles out. Now, as Gene mentioned, they pay payroll taxes, and they pay payroll taxes at a higher rate. Yes, they get benefits. That is the social compact that we have here, right? Young people pay for old people. And when the young person who is 30 becomes 75, yes, she will get Medicare. She needs a hip, she may get a hip. But right now, out of her paycheck, money is taken out to pay for the woman now who needs the hip. She pays for that.
Same way, Social Security. Those people getting those checks who are living each month on that check rely on that check. That money is coming from those retail clerks, so they are payers.
And, you know, David did a great job on state and local taxes, but excise taxes, I mean, think about an executive and a janitor that travel the same distance to work. The gasoline tax, the excise tax is a much bigger burden for the janitor because he has a smaller paycheck. And he is paying the same amount to pay for gas, so he is paying.
So if you put it all together -- I have a chart in here. If you take federal and state taxes together, our tax system is not very progressive. The bottom 20 percent pay about 17 percent of their income in taxes, overall taxes. You know, that is not a small amount. It is significant.
So they work, they pay taxes. But what else unites this group? For a lot of reasons, you have had the collapsed economy. That has generated a tremendous increase in the supply of labor around the world. You have technological advance. You have declines of unions. You have decisions on the minimum wage. For a lot of reasons, these people do not make a lot of money.
And if you look at some of what we expect -- I have a chart here on what the Labor Department -- I don't know if Jack Welch will question these numbers, but the BLS have projections of job growth over the next decade. Five of the largest occupations with the largest job growth -- retail sales, home health, personal aid care, food preparation, laborers -- they make less than $25,000 a year. Right? I will bet folks in this room spend $25,000 on just one kid to go to high school, one kid. These people live on that all year-round for everything that they have to buy.
So if you put it together, hard work, they pay other taxes. They don't make a lot of money. That is why we have these tax credits. Right?
The EITC is a tremendous success. And the genius of its success is that it combines heretofore the values that liberals and conservatives emphasize. Right? Liberals, do-gooders, want to help poor people. Right? Conservatives, personal responsibility. Right? These are what these credits are all about.
To me, the saddest part of Gov. Romney's comments were that he says these people, they don't take personal responsibility. The EITC is all about personal responsibility. That is why it is there. Right? It encourages people to work and it rewards work, and it works. It has been tremendously successful. Right? It lifts millions of people out of poverty. It encourages them to work. It gives them more dignity in a country that thrives on work. It rewards work. It encourages work. It is an insurance policy, right? When the economy goes in the tank people fall from the middle class, and the EITC helps catch them.
And we are seeing now more and more research, exciting research, that it actually helps -- the money actually helps the kids in school. But also there is hope here that it sets off a virtuous cycle of work that the next generation may actually work more. And so, this is what is at risk. Right?
If we take Scott's skin in the game, we want to turn the income tax into a poll tax, that everybody has to pay a little bit. Right? What happens? Those credits, they are gone. Over-night, 9 million people in poverty. Right? And we should be talking about what Gene is saying. We have a crisis with low-income men. We should be expanding these things to these people. Right? Not cutting off the families that get it now, 9 million. That would be a very sad day. I will stop there for now.
MR. BERGIN: Thank you, Chuck. I am going to open it up for comments, questions, suggestions.
MR. HANKIN: My name is Steve Hankin. I am a retired tax attorney. What I would like to point out and ask a question about is, it seems that all of the speakers have started from a presumption of these notions of progressive taxation and regressive taxation. And I submit to you: These are very distortive concepts.
When you go to a hardware store, does anybody ask you how much income you are making in order to determine what price to charge you? Do they look at your moral character to decide that you should pay less taxes? That is essentially what we are arguing for when we look at this progressive and regressive taxation. We are essentially interjecting those kinds of things.
I would say that with the government, the primary role of government is to raise revenue for government services. In other words, it is pretty much like going to the hardware store. You are getting a service. The fact that government plays these other roles, I think even the most socialist person probably admits that the primary role of government is for basic services for things that benefit everybody equally as opposed to these redistributed-type services. So my question to you is basically why does everybody start from these notions of accepting this idea of progressive and regressive when they are obviously -- they just throw a cloud over all this? I would like you because you have the closest to my views and I would like to hear what you have to say.
MR. HODGE: Well, I don't start from that premise. I do realize that the tax code has always been progressive. But I do worry that we have a growing class of Americans who are disconnected from the cost of government and a shrinking group of people who are paying all the nation's bills. And I really think that that is a recipe for disaster, not only from a financial position for the government, but also from a social basis. I really think that that's the seeds of social discord when you do have, as John Edwards would say, two Americas: Taxpaying America and nontaxpaying America. I mean, he got the signs flipped but the concept was the same.
MR. HANKIN: But that doesn't really address squarely my question.
MR. HODGE: Well, what I mean, what do you want me to say? I mean, I like the flat tax. I mean, I think that, you know, if we had a 19 percent flat tax with as minimal deductions as possible that would be the ideal income tax system.
MR. HANKIN: I guess what I wanted you to say was that you agree that these concepts distort the argument and that everybody accepting them as a premise is really part of our problem of discussing tax issues.
MR. HODGE: Oh, we combat tax policy from different perspectives. There is a perspective that the tax code should be used to equalize incomes, to solve social inequalities, and I think it's a very poor tool for that. I mean, as I said, the OECD finds that we have the most progressive income tax system among industrialized countries. Ironically, we also have the fourth highest amount of inequality among industrialized countries. So either the income tax is a poor tool for solving inequality or we have inequality irrespective of having the most progressive tax system. I don't know the answer to that.
MR. HANKIN: Thank you.
MR. SANCHIRICO: Yes. My name is Chris Sanchirico. I'm from the University of Pennsylvania. And I have a question. I don't mean to gang up, but I think I have a question for Scott.
MR. HODGE: Sure.
MR. SANCHIRICO: On this idea of skin in the game, which I think is a, you know, sort of a very punchy phrase with a kind of penumbra of positive connotations and I just want to make sure I understand which ones apply here and which ones don't apply here.
So there are fairness aspects to saying people should have skin in the game. Let's put those aside and let's look at the incentive meaning of having skin in the game and how it applies and may not apply here. So it seems to me that you have skin in the game when your situation is positively correlated with the group situation. Things go better for the group, things go better for you. Things go worse for the group, things go worse for you. So it's about change, whether your situation changes the way the group's situation changes.
So, for example, if you don't care -- your example was you may have fiscal illusion, you don't care. You're never going to pay any more in tax or get anything less, so you don't care, so you'll vote for new transfer programs. It doesn't affect you. You have no skin in the game.
But it seems to me that you can have skin in the game if, when things go badly, you have to pay more, or you could have skin in the game if you're not paying anything right now and if things go badly you might have to start paying more -- paying something and you can have skin in the game if you're currently getting something from the government on that. And if things go badly you may get less.
So it seems to me that having skin in the game is actually not related at all necessarily to whether your baseline is that you're currently paying a positive amount of tax. It has to do with if this other transfer program is enacted, will you be worse off or better off? That is to say, will you get less in the EIC if some other transfer program is enacted? And if that's the case, then you have skin in the game, also.
MR. BERGIN: I don't usually jump in here, but just to recognize what's in the room. I'm wondering if my children have more skin in the game than anybody else because we're spending more than we're taking in and that's a reality that I don't -- you brought it up, but --
MR. HODGE: Yeah, we're all takers because the government is borrowing 40 cents out of every dollar that is -- I mean, we're taking from the kids is what, you know, I'm saying.
MR. BERGIN: So they have skin in the game, but they don't get to vote?
MR. HODGE: No, no, not now.
MR. BERGIN: I'm going to go to Joe.
MR. MINARIK: OK. Thank you, Scott. Let's face reality. You're going to get a lot of comments here.
MR. HODGE: OK.
MR. MINARIK: First thing I do want to tell you, I agree with you on one point --
MR. HODGE: Oh, good.
MR. MINARIK: -- when you made the reference to the fact that under President Obama almost everybody is going to be poor or elderly. I mean, speaking for myself under this administration I became elderly, so, you know, you're definitely on the mark there.
I do have a couple of reactions that are not quite so positive on your presentation. One is, you could see it in your chart, but in your oral presentation you made comparisons between, I believe it was 2000 and 2010, in the number of persons who are not taxable, drawing the inference that there is a trend going on. Looking at the Tax Policy Center numbers, one of the things that I found most striking is how cyclical that number is. An enormous jump in the number of people who are not taxable under the income tax between 2006-2007 and 2008-2009, with a projection that going forward that number is going to decline. So in other words, it is not clear to me that there is that much of a change in the circumstance so much as we are just in a very bad patch, which I think we all know. And as people's incomes fall, the number of people who fall into that category of negative taxes is going to increase.
A second area where I would question an inference that you drew was in talking about, and you were careful to say, an association between the number of people who are non-taxable and the amounts of money paid in transfer payments.
MR. HODGE: Right.
MR. MINARIK: And also the change in the debt. Again, an economic cycle that increases the number of people who are non-taxable is also going to increase the number of people who receive outlay transfer payments and also will be associated with a very bad budget outcome if you're in the kind of economy we are now, which is going to result in a rise in debt.
What I'm then interested to see myself and I can't do the research, but I'd love to see if somebody has done it, some correlation between the change in the number of people -- the introduction of refundable tax credits is really what it ought to be and voter turnout among people who receive refundable tax credits. And my guess is that from everything I've seen about a rather abysmal number for voter turnout in this country, there ain't no correlation there and, in fact, voter turnout is, unfortunately, low.
If you're going to have a free-standing requirement that everybody pays at least a dollar or 1 percent, I've got a couple of observations on that. One, as an economist, if I threw a poll and asked people what do you think about the United States imposing tariffs on imports to protect U.S. employment and jobs, I am sure that I would get a very strong positive response from the U.S. population.
I suspect that you and I would both agree that that would be a poll that we would hope that our leaders showing leadership would refuse to respond to. Whereas I think you're drawing the inference that if people think that everybody should pay at least 1 percent of their income that that would be a good thing. I worry about the 82-year-old widow in the walk-up cold-water flat. We're asking for 1 percent of her income which is probably not going to be such a good thing.
When we introduce the earned income tax credit there are a couple of points that I think are worth considering. One thing that I heard at that time was that there was an issue of tax return processing. And this actually relates more and I'm a little bit off topic here. The Internal Revenue Service spent a lot of money processing returns that had $1 of tax liability, figuratively speaking.
If you imposed a requirement that everybody had to pay a dollar relative to where we are now, the impact on the deficit would be minimal. You're not talking about something that's going to solve the problem. You would be creating a problem for the Service because they'd have to process a lot of pieces of paper on which the return would be very small.
So thinking about it as a budget issue I have some doubts myself. Also, at the time of the consideration of the earned income tax credit, my recollection is, and this is a little foggy in my memory as I did say I have become elderly under this administration, but my recollection is that at the time there was a thought of kind of two alternative policies. One was this refundable tax credit and the other was an increase in the minimum wage.
The concept was to make work pay. The realization was that people were earning lower wages and you wanted to make sure that they had a reason to go to work. As the alternatives were considered, the notion of an increase in the minimum wage, particularly in the early 1970s, in a time when we had relatively rapid inflation, was thought to be not a very attractive thing to do because you would be increasing employer cost. So the notion was, well, hey, rather than attempting to improve the return to labor for people who have not an awful lot of human capital to take in the market and imposing that on the private sector we'll socialize it, and we'll do it as a society.
If we don't have the earned income tax credit, and we throw that onto the low-income population and we say, 'Is there a problem with making work pay,' are we going to respond to that now by increasing the minimum wage? And would we think that that would be a good thing on grounds of inflation and also on grounds of employment?
Just one final -- I'm talking too much -- just one final thought about the question of progressive taxation. One might have arguments about whether progressivity and taxation is or is not a good thing. Another way to express that, which I have seen in just about every public finance textbook that I've ever read and maybe you will argue I've read the wrong ones, is the notion of taxation according to ability to pay.
And to many of us the link between whether taxation should be progressive and the outcomes that we see in the tax system that we have now has been the notion that we ought to put the burden of taxation where so much of what we spend benefits everybody: National defense, parks, the administration of justice, all sorts of things that are spread to everybody. It is only reasonable and fair to say that those who have earned the most from the society pay a somewhat higher share of the cost of maintaining it.
The notion that taxes are what we pay for a civilized society and the protection of property, the administration of justice, arguably national defense, benefit those who have more property. Maybe it's not unreasonable to think that those who have done the best out of this society ought to help to provide those services for others and also to some extent an education, in physical capital, provide a ladder up for everybody else. And I'm going to stop talking and I'll try to be quiet for the rest of the proceedings.
MR. HODGE: On that last point, we've had a lot of internal debates and when we were doing our physical incidence analysis we had a very, very rigorous debate on how to allocate public goods. Do you do it on a per capita basis or do you do it on this ability to pay? We actually did it both ways.
My feeling is, against this ability to pay notion, is that if the bar -- to be rather crude -- if the bomb drops on Omaha, then both Warren Buffett and his secretary are equally harmed, no matter how much they pay in taxes or how much they benefit from national defense. So there you go.
And I just wanted to point out the chart that I handed out about the growth of nonpayers to speak to your point about the cyclical nature of it and certainly there is some. In 2009-2010, also, with the expansion of Making Work Pay and some other credits -- but a lot of this really started in the modern, in 1986 with the expansion of the standard deduction personal exemption. And then it, of course, increased. So there has been a consistent upward trend in nonpayers since '86 irrespective of all the cycles, the economic cycles, that have happened. So this is not an event that is just suddenly sprung upon us -- I've heard this term before -- but it is something that has been a trend since at least '86, and I think we do need to have a discussion.
As I said earlier, the tax code has always protected the poorest among us. But we need an honest debate, at what level should you pay income taxes for the basic cost of government? It should not be an accidental or ad hoc decision, as it is now, because of the accretion in growth of these sorts of tax credits and policies. It should be a specific national policy, rather than something that's accidental. And then I think that's part of the problem.
MR. BERGIN: All right. Let me jump in here. There's a lot of people who want to get in --
MR. HODGE: Want to attack me?
MR. BERGIN: We need to give -- no. We need to give Scott a break here. One, two, three, four. How is that? Five.
MR. BRUNORI: Chris.
MR. HUDDLESTON: Six.
MR. BERGIN: Six. Okay.
MR. WEINBERGER: Two quick comments.
MR. BERGIN: Try to keep it quick so we get everybody in.
MR. WEINBERGER: I'm Bob Weinberger from the Aspen Institute. Two quick comments and Scott doesn't have to respond, but it goes to some of the things he said.
One is the use of the term "nonpayers" and "skin in the game." Most of the people we're talking about in the 47 percent are not non-payers. They pay tax. It's withheld from their earned income. Then they get a refund and the refund maybe makes them net nonpayers, but their subjective experience, in terms of skin in the game, is no different than most other taxpayers. They may be nonpayers in a net sense, but they're not nonfilers. They file an income tax return and, like 75 percent of the people who file an income tax return, they get a tax refund.
They may not even know that an earned income tax credit is built into that tax refund, but their subjective experience is pretty much the same and, therefore, I would argue that they subjectively feel that they have as much skin in the game in filing their tax return as does another taxpayer who may end up with a net tax liability, but still get a refund.
The second point is on refundable credits. I believe refundable credits are a terrific way to deliver government benefits. If you take a look at the earned income tax credit, it has a take-up rate of about 85 percent. Compare that to food stamps, which are administered by a bureaucracy and have a take-up rate of approximately 50 percent, or children's health insurance, which is about two-thirds take-up rate.
So one of the benefits of using the tax system where so many people are already filing a tax return annually as a delivery mechanism is you get a tremendously higher penetration and take-up rate of those people who are eligible for the benefits are actually getting them. Now, there are issues associated with that in terms of compliance and so forth, but in net terms, the cost of the bureaucracy is saved. The cost of administering the earned income tax credit is less than 1 percent as compared, say, to food stamps --
MR. HODGE: Not including --
MR. WEINBERGER: -- which might be as high as 13 percent.
MR. HODGE: Not including --
MR. WEINBERGER: Even if you --
MR. HODGE: -- the fraud rate.
MR. WEINBERGER: If you include the noncompliance rate, which is errors as well as fraud, and it's tremendously complicated so a lot of them are errors --
MR. HODGE: Right.
MR. WEINBERGER: -- your net --
MR. HODGE: And 75 --
MR. WEINBERGER: -- terms -- your net is not very much different. It's approximately the same. So here are two ways of delivering a government benefit. You can have it done through the tax code or you could set up a working family's tax administration --
MR. HODGE: Well, we have TANF.
MR. WEINBERGER: -- which will cost a certain amount to administer, have a lower error and fraud rate, but a cost of administration, which is probably going to net out the same but not have as high a take-up rate. So, again, there are tradeoffs in the various factors between compliance, takeup, and administrative costs that have to be recognized. But the use of the tax system as a way of delivering these benefits when a person is filing a tax return every year is actually a very efficient means of delivering the benefit.
MR. BERGIN: All right, 2? You got a mic?
MS. RICHARDS: Hi, I'm Kitty Richards. I'm here as a private citizen. I wanted to talk a little about the international comparisons because I think they're really instructive when you bring all of the pieces together. When you look in isolation at the federal tax system, things look very progressive in the United States. But most of the countries that we compare to run twice their GDP, twice as much GDP through the tax system and government spending as we do. They do not have a federalized system that pushes more and more services onto much more regressive taxes. They have VATs, but they use them to fund extensive social safety nets that we don't have. In addition, none of them have the kind of income and equality that we have, and none of them have the kind of poverty that we have. And you say that as though look, it's not working, but, in fact, we're just not taking nearly the steps that these other countries are to address these problems, including regulatory steps that I think you would not support in lieu of tax steps, right? They have job security, extensive training programs, very high minimum wages, and safety nets to catch the people who fall into unemployment. So I think that looking at other countries is extremely instructive, what the whole package can look like when you really take all of these things into account.
In addition, I just wanted to make a comment as part of the younger generation. I'm a high-income twentysomething with an infant child, and I do not wish that I paid less in taxes. My family pays a lot in taxes. I would be happy to pay more. What I would like to see is high-quality daycare available to my child the way it is in France. And I'd like to know that the woman who provides that daycare is also able to care for her children in a high-quality fashion. And so using these appeals to "skin in the game" and "who are the payers" and "young people are really getting the short end of the stick" as a reason to cut these programs I find really offensive.
MR. BERGIN: Belle?
MS. SAWHILL: I'm Belle Sawhill from Brookings, and I agree with Chuck that the EITC and some of the other refundable credits have been very, very successful. But I'm trying to think about what happens as part of tax reform, which I think we will clearly have in the next couple of years, and whether or not these refundable credits can survive. One possibility is that they do survive, but we do a lot of base broadening in other ways. We may also want to simplify them. I've been surprised there hasn't been much discussion this morning about the fact that we've got a lot of different kinds of credits and personal exemptions and so forth at the bottom that clearly could be simplified and make the administration simpler and reduce these errors and improve compliance and so forth. So would I love to hear some comments about that.
I was a little surprised, David, by the strength of your views about excise taxes. I have been hoping, although I realize it's not terribly realistic, that as part of tax reform we will talk about a carbon tax to deal with energy and climate change. Are the externalities not large enough to warrant that in your view? I'm just surprised in general. I mean when you think about obesity and you think about the kind of healthcare costs it's going to impose on society, how can you be against soda taxes? So I thought you were just too quick to say the externalities do not warrant this kind of reliance on excise taxes.
So what about simplifying these refundable credits and can they survive tax reform. And are all excise taxes really so bad or is a carbon tax not an excise tax; it's something else? I don't know what you call it.
MR. BRUNORI: Chris, may I?
MR. BERGIN: OK, quick please.
MR. BRUNORI: I'll be quick. Excise taxes -- my problem with excise taxes is this, and fat taxes, the obesity issue, is the perfect example because we have seen numerous governors and legislators propose -- the First Lady, I think, even proposed soda taxes, for instance, because we want to fight obesity. Well, if that's the case, why aren't we taxing cannolis or kids who are sitting in front of Nintendo machines -- I'm dating myself; I'm not even sure they make Nintendo machines anymore -- sitting in front of computers all day or not outside playing ball or whatever. The target on this tends to be very sharp, and it doesn't necessarily -- in the case of soda taxes I'm convinced that will have no effect on obesity whatsoever, no more than Mayor Bloomberg's limits on how big of a soda you can buy when you go into the movie theater because there's lots of other factors.
MS. SAWHILL: I thought there was evidence that cigarette taxes had reduced smoking amongst the young.
MR. BRUNORI: No, no, no. Cigarette taxes most definitely reduced smoking on the young, which you might say is a good thing. I, myself --
MS. SAWHILL: I would, yes.
MR. BRUNORI: I, myself, am not young so I can smoke if I want to smoke. And my view is I don't think we need the government to tell me that. But even cigarette smoking, if you look at the amount of money that comes in for cigarette smoking and you look for every state -- probably except Missouri -- and you look at the cost of -- just take Medicaid costs associated with smoking -- there's a pretty good argument that the cigarette taxes surpass the medical costs that the government spends. Now it is opposite in many respects with alcohol. The externalities for alcohol are probably higher than the externalities associated with alcohol use, but there are historical reasons for that.
As far as the carbon tax is concerned, I'm ambivalent.
MS. SAWHILL: By the way, there's a whole new rationale for soda-type taxes, sin taxes, whatever, which is that it comes out of behavioral economics and the notion that we don't always act or behave in our own self-interest and we need a little nudge from the government. I think that argument, along with externalities, is pretty strong for doing more than we do right now without going down the slippery slope to tax Nintendo games and so forth.
MR. BERGIN: OK, Gene? Chuck, I'll get -- moment.
MR. MARR: OK, sure.
MR. STEUERLE: I just want to insert a couple of facts and then I want to say one thing, which partly agrees with this argument about -- which I think is basically an argument of how visible the government should be, but we shouldn't pick and choose just particular items to look at.
The first factual thing -- Scott sort of made allusion to TPC, picking at its data, and implying that it was only the poor and the elderly who didn't pay taxes. We run the data for everybody. The Tax Foundation uses our data. The Center on Budget and Policy Priorities uses our data. I was a deputy assistant secretary under Ronald Reagan. The current head of TPC was head of the Joint Economic Committee, the Republican staff director. We are not a Democratic or Republican organization. We put out the facts, and those are the facts. You look at the data, which I cited on who pays no Social Security and income tax, that it's largely the elderly and it's largely those who do get refundable credits and are poor. But in point of fact if we're going to show these data, Scott too, you shouldn't just show a chart on refundable tax credits. You should show a chart on the elderly because they are an important part of this story. So part of my concern is this argument about who doesn't pay tax is correlated with the issue about what you want to do for refundable credits, which is a legitimate debate, but they're not the same thing. They're correlated in the overlap, but let's decide which one we're going to talk about. So that's fact issue number one.
Fact issue number two, Belle, you raised this issue about what's going to happen in the EITC. And actually the child credit, which, by the way, in this chart for non filers grew a lot under George W. Bush as well because there was an increase in the child credit. You and I worked on that as well together at various times. The child credit is not indexed for inflation. The EITC's not indexed for wage growth. In point of fact, you will see over time a decline in the number of people who are not only not paying income tax, but these as a share of the total budget are among these things that are on the chopping block relative to other things already, independently of other things that will go on.
The third factual issue I want to get at is how many people used to not pay tax. Scott has a really good chart that he drew from SOI data on percent of filers who don't pay tax. But it also turns out if you go back to these early years, World War II and after World War II, a lot fewer people even filed. And in point of fact, I've run the data on this. It's partly the decline in the personal exemption over many years after World War II that basically threw all sorts of families with children onto the tax rolls; whereas before the personal exemption, if you had a family of four you were basically nontaxable at about median income. So I'm not saying we necessarily want to go back to that era, but part of that was part of the debate. And that's also an interesting part of the debate, too, because Ronald Reagan became converted on the issue of personal exemption. I know because I was heavily involved in that because he saw how it was increasing dramatically the taxes on families with children relative to other payers.
So finally I want to get to what I think is the issue. It's not the elephant in the room. It's already been there, but maybe it's -- I don't want to mix my metaphors -- split out. It's the question of whether you want more visible government. And there I think the issue about whether people should see, say on their tax return -- Joe Thorndike actually raises this issue. You might want to jump in here -- should people see what they're paying for government and what they're getting for government, and a great deal of what people both get and what they pay is hidden. For instance, certainly the Tax Foundation would agree with me that the extent to which we have all these extraordinary number -- and I believe you would, too, David -- all these extraordinary number of business taxes that are hidden excise taxes, gross receipts taxes. People don't know this, but the general sales tax is a small portion of the excise taxes that states pay. It's a little more visible than the other ones. Those things should be made much more visible. And if we do make government more visible, I actually agree that probably the public would probably be more conservative in their thinking about what they're asking from government. And I think that that is a legitimate issue. I just would not -- only on the income tax and on the tax credits as part of that issue. I think that's a perfectly valid and legitimate issue to raise.
MR. BERGIN: Great. Steve? I'm working my way around you. I'll get to you, both Joes.
MR. ENTIN: Thank you very much.
MR. BERGIN: Please tell us who you are.
MR. ENTIN: I'm Steve Entin, and I was with Gene at the Reagan Treasury and I'm now with the Tax Foundation. We've been asked what the poor pay, what they should pay, and why, but we seem not to have done much with what they earn, what they should earn, and why. The burden tables we look at ignore the impact of the tax system on potential output and growth and jobs and pretax incomes. I think that's a shame. Tax reform seems to be more about rearranging the deck chairs on the Titanic by patching up the income tax instead of shifting to a more pro-growth tax system that is more neutral between saving and consumption and investment and consumption. So I ask the question, what is more important? Lowering a $200 or $500 tax liability with some sort of refundable credit or increasing that family's pretax income of between $2,000 and $5,000 by moving to perhaps a progressive consumption-based tax rather than a progressive income tax. Workers are, indeed, facing more competition from abroad in a globalized economy, and that means our workforce needs to have more capital to work with and more training to work with it. And for that we need to stop beating up on capital formation because it's capital formation that raises the capital-labor ratio, productivity, and wages. The EITC is a way of sort of correcting the market's wage assessment of people's marginal product, but is it the government's job to do that or should the private sector be boosting wages by raising capital formation? The EITC does help people who want to enter the workforce and just start out working when it's being phased in. But as you work your way up, we take it away, and we take it away in a way that raises your tax rate on incremental income. There's more income hit in the phase-out range than in the phase-in range. You put that into a labor market model you get a reduction in work hours, not an increase. You do get a difference in who does what, but it's not necessarily a good thing the way it's designed. It's not the case that making everyone have some skin in the game requires raising taxes on the lower income to the point where their net take from government is now negative instead of positive. It means putting some of the social programs on the HHS budget and sending people a check under those programs, but leaving the tax code to raise revenue so that when tax rates go up to pay for such programs people see that the tax is going up. It's a matter of visibility. We're probably handling these programs in the wrong manner.
Henry Simons admitted that a progressive tax system to redistribute wealth would hurt GDP. And I think it was Irving Fisher who said well, why don't we have a progressive consumption tax instead? It wouldn't be so much damage. We ought to be thinking about that. Perhaps we should be reading from a pure public finance text and more business finance text and we might get some idea as to how to change the tax system so there'd be more jobs and higher wages. We should not be taxing the poor, not because it's fair not to tax them, but because it's a kindness. They really can't afford it. But income is not manna from heaven that just falls on the place beneath them. The people with the sharpest elbows and biggest shovels go out and get too much of it. Income is produced. Property is produced. It's not somebody simply has it. And fairness suggests a flat tax, but kindness suggests the poor be relieved of it. I don't think that's the right definition of fairness to say that somehow it's fair that they have an entitlement not to see the cost of government.
Now I do want to say something about the excise taxes. I did a paper on the cigarette tax being in excess of the externality. A lot of these things have no calculation of the externality. It's just that it must be there; let's tax it. There was a cartoon strip awhile back, The Colonials. I was very fond of it. I grew up near Plymouth, Mass., and the preacher went in to complain to Gov. Bradford, "I have inveighed against sin, I have preached against sin, I have cajoled against sin, but the people will sin." And Gov. Bradford gets a glint in his eye and says, "Then by Jove we'll tax it." Whether the Pilgrim fathers would have sworn on a pagan deity or not, his objective was not to stamp out the sin but to profit from it. And I have some sympathy that that is a distorting tax that we should probably get rid of. The most civic-minded New Yorker is sometimes described as the chain-smoking alcoholic driving his gas guzzler down to the off-track betting parlor. That's not the right kind of tax either. We need a neutral tax that doesn't beat up on capital formation, that raises productivity, and raises wages. And that's how you raise wages, not by increasing the EITC. And with that I'll shut up. Thank you.
MR. BERGIN: Thank you, Steve.
MR. BRUNORI: Chris, may I? I wanted to just say one thing that Steve hinted on in response to Belle a little bit. I know people in state revenue departments who when are asked to -- economists mostly -- when asked to raise cigarette taxes, it is net revenue that they're looking at, right? So we can raise the cigarette tax by X percent a pack to maximize revenue. We know some people will quit, but we're not going to raise it enough -- we don't want too many people quitting. And I think that's a problem.
MR. BERGIN: Joe?
MR. HUDDLESTON: Joe Huddleston, Multistate Tax Commission. I'd like to make a couple of points. But before I do I'd like to be just a little bit trite here because I want to go back to something that I believe is very serious that Gene pointed out at the beginning and touched on again. And my point would be that while we don't always get what we pay for, we do always pay for what we get. And the question that we seem to touch on, but skip right by, is really the point that Gene made at the very beginning; that we must tie both expenditures to revenue and we seem to only give lip service to that because the discussion on expenditures is one that we could have, should have, but don't have in the macro sense. Because I believe that the people sitting around this table and in this room could develop a fairly fair, relatively simple tax structure to pay for what we get if we knew what we were buying. In the general and national sense, we almost never know. So there's a lot of frustration, a lot of anxiety, about paying taxes for stuff that we never know what it's going to be. As Kitty Richards was pointed out about earlier, she'd be happy to pay additional taxes if we went to child care or child credits because it's directly related to something that she can understand and affects her on a daily basis. I'm going to give David a little bit of grief here because in the sense that he wants to abuse or wants attack excise taxes, I'll tell you that the people on the ground out there around the country are much more enamored with the concept of excise taxes and always have been whether they're sales or excise taxes because they directly relate to something that they understand, that they deal, that they either get a benefit from or they see the purpose of that tax. Almost all of these taxes are driven for a specific purpose for a specific expenditure. Whether the revenues ultimately get used for that or not is probably another question altogether, but they're very easy to understand -- a cigarette tax, a gasoline tax to help with roads, any sort of tax like that is generally far more popular, far more popular, than an income tax is on any basis. And if you ask people to vote on whether or not they wanted to have a broad-based sales tax or whether they wanted to have a personal income tax, we wouldn't have a personal income tax without regard for the regressivity of the structure.
Now what I would suggest to you is that where we began to look at the issues that we all have in a very thoughtful manner about how we tax ourselves. I would suggest to you that it's not as complicated as we would have it be. And there are reasons why it is as complicated as it is. One of the points that was made here about excise taxes, that our financial keepers in New York and London and around the world don't like excise taxes, there's a really good reason for that. There's also a good reason why governments don't like excise taxes as a matter because they're not a trustworthy revenue stream. You can't bond against them very well. It's very difficult to utilize excise taxes, but the public in general likes those kind of taxes. And what you find is that where we identify how we're going to spend our money, people step up to the plate. People find reasons why they want to pay for the services they receive. But if they don't know what those services are and if they don't understand how those revenues are going to be spent, it's a huge problem.
MR. BERGIN: Thanks, Joe. Chuck.
MR. MARR: Yeah. I just want to come back, Scott mentioned it a couple times, I think it's inaccurate on his mention of trying to undermine the EITC with this notion of fraud. And I just want to make two quick points, and one is that it's not fraud in the EITC, it's error and it's mistakes, and a lot of it flows from the complexity of families.
A lot of them, you know, you have situations where you have divorced parents, a mom and a dad, and a lot of times it's a question of who gets the credit. And the error doesn't actually count that if you have a credit that goes $2,000 over here and it could have gone over here, if it goes to the wrong person, it's kind of his error, but really it could have gone to the dad and it would have been legal. So it's very much overstated.
But I think second is, obviously it's easier to target, you know, working for people, but we hear all this talk on the high end that, you know, we can't raise taxes at the top because of small businesses, right? There's a tremendous amount of pandering to small businesses. But if you think about the tax gap and where the sort of fraud and where the sort of money is not collected, this is the prime example, right?
I mean, if you think about it, sole proprietors actually report less than half of their income to the IRS. Now, that's not because of complex families, right? That's cheating. And it's a much, much, much larger issue, much bigger dollars, much higher rate than these credits are. But, of course, you know, that doesn't get talked about, you know. I'm waiting for the Tax Foundation to get on that one. But it is a much larger problem and I think it's very misleading. It's accurate to say fraud in the EITC, but it's also very misleading to talk about that and ignore really where the money really is and where the --
MR. HODGE: Well, I'd be delighted to send you the link to the inspector general report in which I got that citation because it's not me saying that there's fraud in the EITC, it's the Inspector General and --
MR. MARR: It's just errors, Scott. It's errors, Scott.
MR. HODGE: They called it fraud, and they said that these refundable credits are a magnet for paid preparers in many respects that prey on these things. And they were very specific about it, okay. So this is coming from the Inspector General --
MR. MARR: What about the 47 percent of the sole proprietors, the small businesses?
MR. HODGE: In fact, I find it sad that -- this is according to the Tax Advocate -- 75 percent of those people who get the earned income tax credit have to pay a paid preparer to do their tax return. That's really a shame. You know, that tells me that there's something wrong with --
MR. MARR: They'd be better off to get rid of the credit and just not have to go to the preparer? And how about the small businesses, what do we say about those?
MR. HODGE: What are you saying?
MR. MARR: That 47 percent of sole proprietors don't report -- their income is unreported by half.
MR. HODGE: I don't know where that comes from.
MR. MARR: The IRS.
MR. HODGE: I can tell you that those --
MR. ENTIN: If it were true, we need better enforcement out of the IRS, but raising the tax rate will simply make people try even harder to evade it.
MR. BERGIN: Back here.
MS. BUX: Hi, my name is Elizabeth Bux. I work for the chief counsel of the IRS and I just want to address a couple of these things, not necessarily -- don't take this as the word of the organization, this is what I have seen personally. All this stuff about error and fraud and things with the EITC, yes, there is some error, there is some fraud. There are gangs out of Florida that do this as a way to make money. We're working on that. I don't want everyone to think that this money is just going out the door and nobody is doing anything about it. There is a lot of effort going into stopping these things.
The amount of refunds that are getting frozen and takes care of, it is getting better. There is a lot -- tax administration is not an easy thing to do. I understand that. I want everyone to, I guess, understand that there is fraud and error and problems in any tax system, in any way of doing it, in all of these countries, not just in our country and our system, but in all countries and all systems. You will have problems with the nonpayers and nonfilers and people who say that they are the sovereign state of themselves and they don't have to listen to anybody's authority. These things happen.
I guess for my two cents, I would like to say that when you actually see how people are paying taxes, how things are coming in and going out the door, when you sit there and see how the EITC is being used, where it's going, how people are getting access to it, it's hard to say let's get rid of this in its entirety. It's hard to say that these people don't need it. It's hard to say when you see the people that it's not important. You know, something has to be done.
Clearly the system has issues and things need to be changed. But I think we all have to keep in mind that there are people and there are reasons and that every side of this, everybody has a side and everybody's side needs to be heard.
MR. BERGIN: Thank you. Joe.
MR. THORNDIKE: I want to offer what's sort of a --
MR. BERGIN: This is Joe Thorndike.
MR. THORNDIKE: I'm sorry, Joe Thorndike with Tax Analysts. I wanted to offer sort of a sympathetic critique for the liberal objections to this 47 percent number and to the whole question of nonpayers more generally. I think the inclination is to respond to a lot of data about why this number is a bad number or why we shouldn't pay attention to it or it's misleading, and I actually agree with almost all of those numbers. And I don't agree with Scott in general and his interpretations of it. But I do think that it's a mistake for liberals to just dismiss this issue as unimportant because it's not a new issue. People have been complaining about the non-payer thing for 100 years and I don't think it's going away.
And if you'll forgive me for making a historical point, it's basically what I do, if you like the income tax and you think this is a good way to raise money and you like progressive taxation for better or for worse, I do, I think you should be worried about the non-payer issue because I think it is a threat to the income tax and, more broadly, to progressive government.
So my point here is simply that the income tax has been most secure politically in those periods where it's been broadest, and it has been more imperiled and weak when it's been narrowest. Now, you have to reach back a long way to make this point most clearly. But it was in the 1920s, for instance, when the income tax was very narrow and Democrats were arguing long and hard to make it narrower still and heavier on the rich, but taxes still were imperiled in that period. It's not really secure within the fiscal system or within the American government more generally. But it gets a lot more secure after World War II, when the tax gets much broader, and it funds this huge expansion of the federal government.
So if you're progressive and you like big government, and I'm mostly progressive and I mostly like big government, then I think that the income tax is something you want to preserve, and you want to preserve its political status.
And so I think that the question, is it economic -- there's sort of economic issues here about whether this 47 percent number is real. But politically, the issue of nonpayers is definitely real. And if you go back and you look at the poll data stretching back for decades, it reappears over and over and over again.
Now, Scott quoted the Fox number, the Fox poll recently. There was another poll from The Washington Post that came out like almost the same week in which they said, hey, how do you feel about non-payers given that most of them are old or poor or whatever, and the numbers dropped precipitously when it's explained to them. So that's a good argument to have, people explaining why this number is lousy.
But I do think still it's a mistake to simply dismiss it out of hand. Americans care about this number, it means something to them. And I think that the liberals have to really deal with that in some meaningful fashion because they risk losing a great revenue tool thanks to the disenchantment of the people who are actually paying it.
It matters what the payers think about the nonpayers. We can wish that it didn't. We can argue that it shouldn't. We can say all this stuff. But the reality is that it's not going away just from the argument. We have to pay attention to the attitudes of the actual payers.
I wrote a thing for Tax Notes this week called "Soak the Poor to Make the Rich Happy?" And it's a little snarky, but I mean it seriously. We have to do something about this. Now, you know, it's not easy to solve, the EITC being the biggest problem to deal with in this if you want to preserve the EITC or something much like it. But I do think that it's incumbent upon liberals to take this issue seriously and not just dismiss it as a misconception.
MR. BERGIN: That's a good point, Joe.
MR. HUDDLESTON: Yeah, I just wanted to follow up in that I agree largely with what Joe just said about the income tax. But I think it's important in that context to keep in mind that taxes are really layered across our federal republic, and that if it's important to you that everyone have skin in the game, it's important to remember that everyone does have skin in the game already.
Everyone is paying all these excise taxes that David doesn't like. And everybody is paying in most states a transaction-based sales tax. So governmental services carry from the ground up. They start where you live with your local taxes and services and they build up to the national level. Everyone has skin in the game.
MR. BERGIN: Here, here. Elliott.
MR. DUBIN: Hi, Elliott Dubin, Multistate Tax Commission. One question I have for you, Scott, is, to get all the liberal do-gooders, the bleeding hearts and everything, this is a good question. If you did away with this refundable earned income tax credit, I mean, the low-income people face marginal tax rates much higher than we do. What happens to their labor support? Who's going to mow your lawn? Who's going to cut your hair? Who's going to do all those low-wage occupations? It doesn't pay to work. What happens?
Remember, this is the difference. You don't want to raise the minimum wage. You certainly don't want to increase welfare expenditures. What are these people going to do? Actually some of them will become truck drivers driving cigarettes from North Carolina to New York because the demand for cigarettes is not as inelastic as Mayor Bloomberg thinks it is. But other than that, what happens to their labor support or what do you think would happen, which is important, right?
MR. HODGE: Well, I'll agree that in the scale of good and bad welfare programs, the EITC is the better of them because you do have to work to get it, unlike TANF, which apparently now you don't, and other programs. To that extent, it is better than all the alternatives.
I do think that people are inclined to work irrespective of whether or not they get a refundable check from the IRS, which tends to come at the end of the year anyway. And, you know, there are so many factors in that that I think it's hard to even answer that. I think that people will still cut my hair irrespective of whether they're getting a refundable check back from the IRS. And for the guy that mows my lawn, you know, he is not reporting his income anyway, according to Chuck, so.
MR. MINARIK: And we're collusive.
MR. HODGE: And I'm happy about that because I don't have to file a 1099.
MR. BERGIN: As David constantly points out to me, the guy who mows my lawn is this guy. Steve.
MR. ENTIN: When I first bought my house, there was some rubbish at the backyard and I hired someone to come in with a truck to take it away, and we were chatting, he asked me what I did. I said I work with the Treasury Department. When it came time to pay him, I said do you want a check or cash, and he looked at me and said, "I'll take the check." If I hadn't told him I worked at Treasury, I think I could have gotten away with paying him cash. But in any event --
MR. MINARIK: Scott, tell him you work at the Treasury Department.
MR. ENTIN: A couple of points, a broad-based sales tax, say, perhaps in Texas, is a different thing from a discriminatory selective excise tax which hits one product. Having said that, some taxes are sometimes presented as user fees. The gasoline tax goes for the road. It's an extraordinarily imperfect tie between what I pay and how much I drive and how much I do damage to the road with the weight of my car. But never-minding that, there's a sort of excuse there.
But we've chopped up the tax system more broadly. The payroll taxes go for Social Security, OK. Now, yes, I'm paying them, but that doesn't mean I'm paying for the cost of a bigger Justice Department or a bigger Education Department or a bigger Defense Department. So that part of the government, to me, looks like a free good.
Now, I do pay taxes at the state level. But how does that price out for me what the federal government is doing for me? It doesn't. Nor is it the federal government's role to offset regressivity of the state tax systems. People are voting for their state representatives. Let them worry about that and let Washington do what's best for growth here and we're not doing that. So a skin in the game is not just -- you're paying some taxes somewhere so you must realize that all of these new government proposals for growing Education Department, Transportation Department, the train in California, whatever is going on in the world, these things are still not being priced out properly when we have some people not paying the taxes that go for those things that they may be voting for.
We do see other countries with much higher taxes and much higher shares of GDP going through their governments. We weren't much different from Europe in the 1950s and '60s, but then they took off. At least they used VATs instead of something worse. But they did grow their governments. And that's when their growth rate slowed relative to ours. That's when we pulled ahead. That's when our unemployment rate went from higher than theirs to lower than theirs for almost 30 years. And we now have 15, 20, and 25 percent unemployment rates in Europe.
People should, if they want daycare, have lower taxes, keep more of their money, and go and buy their own daycare. It's better than running it through Washington, where we take a big slice of it and not give much back and also distort the entire production system in the process.
MR. BERGIN: Gene. Thanks, Steve.
MR. STEUERLE: Well, Steve makes me come back to an issue that I keep raising as to the tax definition of progressivity leads to a fairly conservative and smaller government. And most people don't understand that and I think it's because of the early history of the income tax.
The early history of the income tax was larger government. The '10s, the '20s, and the '30s came along with the -- not '20s and '30s, but at least through the wartime, came along with the adoption of these very progressive taxes and very high rates at the top.
And then once we sort of got these maximum rates at the top, the rest of the government expansion sort of came along about taxing more and more people and flattening the tax rate, not making it more progressive, but flattening it by adopting value-added taxes in Europe. You're talking about expansion in Europe. Europe's expansion did not come from increases in income taxes. They came from constant increases in value-added taxes and some indirect sort of social insurance types of taxes.
The U.S., the biggest growth in government, first came at the state and local level after World War II, it didn't come from the feds, and then it came from the Social Security tax here. So if you want smaller government, you actually want to have a fairly progressive tax. And what people ignore, they look at what happens at the top, but when you have the flip side of a progressive tax, when you're not taxing much at the bottom and in the middle, you're not collecting revenues.
So if you actually want to raise tax and go towards a flat tax, I would suggest that you're probably going to end up with larger government. Now, that may be a good thing. I'm never too far against it. I just want to be clear how a very progressive tax system by the tax definition really limits the revenues you collect. And the attempt to tax people at the bottom is an attempt to raise revenues.
Now, will they then be a little more careful at the bottom? They might be. But it's not at all clear whether you're going towards a flatter type of tax system and pulling in the poor is going to get the smaller government. It might get more visible as a government and it might deal with some of the issues that Joe raised and that might be a good thing, but I wouldn't necessarily hope that raising taxes on the poor -- that raising taxes is a route to smaller government.
MR. BERGIN: Any of the panelists?
MR. HODGE: I'll just have one final comment. I think there are two issues here that need to be reiterated. One, do we want the IRS to be an extension of all other federal programs and delivering and managing programs versus buying a hybrid vehicle, you know, replacing the windows in your house, adopting children, and so forth? I think that these are jobs or responsibilities that are ill-suited for a tax collection agency. And I think that by doing so we're blurring the lines between what government does on the spending, more programmatic side and then on the tax collection side.
But then just to follow up on Gene's point, we keep getting away from the fact that there are two sides of this coin and that government is highly redistributive through this, both the tax but ultimately the spending side of the budget. And while David is concerned about excise taxes at the state level, when we looked at all spending and all taxes at all levels of government, government is still redistributive, that even the poor, even though they may, at least at the state level, be paying a higher percentage of their income, when you factor that in, they're still getting more back from government than they're paying in taxes. And nowadays about 60 percent of Americans are getting more back from government than they're paying in taxes at all levels. Those are the numbers, and we have to keep that in mind and quit focusing just simply on one side of the ledger.
MR. BERGIN: Give you the last word.
MR. HANKIN: OK.
MR. BERGIN: Oh, Chuck, get rid of this.
MR. HANKIN: Back to the "skin in the game" comment that you made, about that there are cycles that may be there for either -- that more people will file -- will pay taxes as the economy increases. I think that's right, but you have to look at the overall from, you know, those last 70 years, and it's pretty clear the overall trend, putting aside these intermediate trends, is that less and less people are having to pay taxes. And the point that I want to make is that I believe that politically -- the issue is most important politically, because a democracy can't exist where a greater, greater portion of the people have no skin in the game. And to add to your point, I think that it's not just the number of people that don't have skin in the game now, but it's clear that the long-term trend is that more and more people will have no skin in the game. That's the nature of the system, that as more people don't pay taxes more people will demand that they don't pay taxes.
MR. BERGIN: Chuck.
MR. MARR: Yeah, just briefly on Scott's point on redistribution. I think that you need to keep in mind that the highest-income people, 1 percent of the people, have about 19 percent of pretax income, and after all this redistribution Scott talks about, they're left with 17 percent. And that 17 percent -- the top 1 percent has an income that's larger than the, what, 47 percent have.
MR. BERGIN: Joe.
MR. MINARIK: To answer the question, basically, as I -- my memory is two big changes in refundable tax credits. One was the creation of the EITC, which has subsequently been increased. The second is the 1997 law, which put into place the refundable child credit. So, those two steps are done. Then you get to this decade with no changes in the law. If my memory of the Tax Policy Center numbers is correct, the number of taxpayers was zero or negative tax liability between 2006-2007 and 2008-2009 increased by more than 10 percentage points. That's what -- then you were down in the very high 20s and all of a sudden you're into the 40s, and at that point you've got a lot of people attracted to it. It is -- there is a trend issue. It has to do with all the things we talked about in terms of making work pay. But there is also a very strong cyclical component at this time, which I think has helped to make this issue a priority --
SPEAKER: Uh-huh. There's another tax --
MR. BERGIN: Two last quick comments.
I've got somebody in the audience here.
MR. McBRIDE: William McBride with the Tax Foundation. I would just say there was a change in the law in 2009. There was the Making Work Pay credit, which existed 2009-2010. That was a major contribution to this sudden increase in the nonpayers, and it has gone away and been replaced by the payroll tax cut. But this is essentially a similar policy. So, this is driven, step by step, by policy changes.
SPEAKER: Mm-hmm, yeah.
MR. WEINBERGER: Just a quick point, again, on nonpayers. With respect to the earned income tax credit, a person is not permanently on the earned income tax credit, and there are studies that go over time that suggest that many people who may, for a short period of years, receive the earned income tax credit as a refundable credit, move on in the workforce, move upwardly mobile, and end up, over time, being net taxpayers. So, it's a mistake to just look at a single year in a person's life. If you look at a lifetime experience, these are not necessarily net recipients; they are, in many cases, the majority of cases, net taxpayers.
MR. BERGIN: Thank you. This has been a terrific conversation. I really appreciate it all.
As always, I love these things, because I learn a lot, but I refuse to admit that I'm elderly. (Laughter)
However, young lady, you reminded me of something, and thank you for being here. When I was younger, several of my older colleagues said, "Well, you may believe in a progressive tax system now, but you won't when you have a family and you have a car and you have a mortgage." And they were wrong. I still do. And people ask me why, and I think it's the way I was raised. I may not be right, but at least I'm consistent, because I still believe as you do.
Thank you, audience, you were terrific. Thanks to this panel. Thank you, everybody.
(Whereupon, at 10:56 a.m., the HEARING was adjourned.)
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