vitalsignsblog

47% of Americans pay no federal income tax.

Sorry for the delay in publishing.  Personal issues took precedence over blogging.

On an earlier post, one comment wanted a more thorough explanation of this:

Lower marginal tax rates should be financed by broadening the tax base and closing arbitrary loopholes. This will raise tax revenues by making more people stakeholders in the process.

So, here goes.*

Our tax base needs to be broadened.  Currently, 47 percent of Americans pay no federal income tax.  Additionally, many large corporations pay little-to-nothing in the way of taxes, especially after rebates and subsidies are subtracted from the money they pay in to the tax system. (For studies on this phenomenon, I direct you here and here; many more are available.)

Two damning features emerge as a function of these facts.  The most straightforward economic distortion comes from the shifting of the tax burden.  Taxes are far from neutral; instead, they are used to incentivize certain types of behavior, irrespective of its market efficiency.

The presumption among most is that businesses favor laissez-faire capitalism because it keeps the government from meddling in corporate affairs.  Considerable anecdotal and quantitative evidence says this is not true. Capitalism implies competition, and competition means that some businesses lose.  Businesses are generally eager to support legislation that gives them a comparative advantage over their competitors.

Shifting the tax burden to distort its equity is one of the ways that businesses compete, and by crowding out true competition, we get less equitable outcomes.**

The more harmful feature of our tax system allowing so many free riders is the destruction of a stakeholder conception of democracy.  Democracy works best when citizens have a sense of involvement in the process.  By allowing certain groups to avoid paying into the tax system, we discourage them from taking part in that system.

Serious quantitative research indicates that people are happiest when they exercise some level of control over their environment.  Net tax payers are substantially more likely (by about 30 percent) to say that self-reliance is an important component of citizenship.  Indeed, if our goal with transfer payments is to make those on welfare self-reliant, paying taxes seems to be one way to encourage that virtue.

More to follow.

*Please note that my area of expertise is not tax policy.

**To be clear, I’m not advocating RAISING corporate taxes.  Corporations, in general, pay lots of taxes already.  I’m saying we should make the system more equitably distributed.