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Who Doesn't Pay Taxes And Why
Mitt Romney is in a bit of hot water for comments he made during a closed-door fundraiser about the 47% of Americans who don’t pay federal income taxes.
I’m generally pretty sympathetic to people saying stupid things in closed-door fundraisers, but the whole flap raises an interesting question: Is it really true that 47% of Americans pay no federal income tax? And who are these people? And do they believe that they are victims entitled to health care and housing?
How many people don’t pay federal income tax in the US?
Lots of people. The 47% stat is accurate, as long as you only count federal income taxes. (More than 85% of Americans under 65 pay either income tax, federal payroll tax, or both—and almost all Americans who own land and/or buy things pay state and local taxes.)
Who are these people?
Many elderly people who live off social security pay no income tax (social security benefits are only taxable if your total income is over $25,000 a year). Only about 25% of Americans over the age of 75 pay federal income tax, but it’s important to remember that most of them did pay federal income tax when they were working.
Also, many young adults pay no income taxes, because they are full-time students or have very low incomes. You can see a chart here that shows that about 30% of 18-year-olds pay federal income tax, while over 65% of people in their 40s do.
People living in poverty are also unlikely to pay federal income taxes. A married couple filing jointly making under $18,700 annually pays no income taxes. But it’s worth noting that in 1996, 99.5% of all nontaxable returns came from people making less than $30,000 a year. Today, that number is closer to 76%.
The fastest growing segment of Americans who pay no tax are those who earn between $75,000 and $100,000 each year. As explained here, there’s been a 12,000% increase in nontaxable returns in this income category thanks to middle income tax cuts and tax credits introduced by both George W. Bush and Barack Obama.
Romney’s central mistake is imagining the data as static. In 2000, for instance, I paid no federal income tax. This doesn’t mean that I am a drain on the system: In fact, I have paid lots of federal income tax in other years. 2000 just happened to be a weird year, because I had a lot of health care expenses and not very much income.
This is the case for most Americans: Romney’s comments implied that the same 47% of Americans pay no federal income taxes every year. In fact, the members of that 47% are constantly changing as people age into and out of the work force.
Do these people believe that they are victims entitled to health care and housing?
The most incendiary remark Governor Romney made was, “There are 47% who are with him, who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care of them, who believe that they are entitled to healthcare, to food, to housing, to you-name-it.”
In fact, the number of Americans who feel the government should provide health care and food to those in need is much higher than 47%. 76% of Americans (including a majority of Republicans) favor medicaid, the program that offers health care to the poor. A majority of Americans also believe medicare, the program that offers health care to the elderly, is worth its cost. And more than three quarters of Americans support the federal food stamp program that provides food to low-income and elderly people.
David Cutler: Hey Republicans! Stop Misusing My Medicare Study!
by David Cutler
Supporters for the Romney-Ryan approach to Medicare have a new talking point. They say a new study by “three liberal Harvard economists” proves that the plan’s competition will reduce health care costs without harming beneficiaries. But the study doesn’t say that.
And I should know. I’m one of the economists who wrote it.
The Hoax of Entitlement Reform
It has become accepted economic wisdom, uttered with deadpan certainty by policy pundits and budget scolds on both sides of the aisle, that the only way to get control over America’s looming deficits is to “reform entitlements.”
But the accepted wisdom is wrong.
Start with the statistics Republicans trot out at the slightest provocation — federal budget data showing a huge spike in direct payments to individuals since the start of 2009, shooting up by almost $600 billion, a 32 percent increase.
And Census data showing 49 percent of Americans living in homes where at least one person is collecting a federal benefit – food stamps, unemployment insurance, worker’s compensation, or subsidized housing — up from 44 percent in 2008.
But these expenditures aren’t driving the federal budget deficit in future years. They’re temporary. The reason for the spike is Americans got clobbered in 2008 with the worst economic catastrophe since the Great Depression. They and their families have needed whatever helping hands they could get.
If anything, America’s safety nets have been too small and shot through with holes. That’s why the number and percentage of Americans in poverty has increased dramatically, including 22 percent of our children.
What about Social Security and Medicare (along with Medicare’s poor step-child, Medicaid)?
Social Security won’t contribute to future budget deficits. By law, it can only spend money from the Social Security trust fund.
That fund has been in surplus for the better part of two decades, as boomers contributed to it during their working lives. As boomers begin to retire, those current surpluses are disappearing.
But this only means the trust fund will be collecting from the rest of the federal government the IOUs on the surpluses it lent to the rest of the government.
This still leaves a problem for the trust fund about two decades from now.
Yet the way to deal with this isn’t to raise the eligibility age for receiving Social Security benefits, as many entitlement reformers are urging. That would put an unfair burden on most laboring people, whose bodies begin wearing out about the same age they did decades ago even though they live longer.
And it’s not to reduce cost-of-living adjustments for inflation, as even the White House seemed ready to propose in recent months. Benefits are already meager for most recipients. The median income of Americans over 65 is less than $20,000 a year. Nearly 70 percent of them depend on Social Security for more than half of this. The average Social Security benefit is less than $15,000 a year.
Besides, Social Security’s current inflation adjustment actually understates the true impact of inflation on elderly recipients — who spend far more than anyone else on health care, the costs of which have been rising faster than overall inflation.
That leaves two possibilities that “entitlement reformers” rarely if ever suggest, but are the only fair alternatives: raising the ceiling on income subject to Social Security taxes (in 2013 that ceiling is $113,700), and means-testing benefits so wealthy retirees receive less. Both should be considered.
What’s left to reform? Medicare and Medicaid costs are projected to soar. But here again, look closely and you’ll see neither is really the problem.
The underlying problem is the soaring costs of health care — as evidenced by soaring premiums, co-payments, and deductibles that all of us are bearing — combined with the aging of the boomer generation.
The solution isn’t to reduce Medicare benefits. It’s for the nation to contain overall healthcare costs and get more for its healthcare dollars.
We’re already spending nearly 18 percent of our entire economy on health care, compared to an average of 9.6 percent in all other rich countries.
Yet we’re no healthier than their citizens are. In fact, our life expectancy at birth (78.2 years) is shorter than theirs (averaging 79.5 years), and our infant mortality (6.5 deaths per 1000 live births) is higher (theirs is 4.4).
Why? Doctors and hospitals in the U.S. have every incentive to spend on unnecessary tests, drugs, and procedures.
For example, almost 95 percent of cases of lower back pain are best relieved by physical therapy. But American doctors and hospitals routinely do expensive MRI’s, and then refer patients to orthopedic surgeons who often do even more costly surgery. There’s not much money in physical therapy.
Another example: American doctors typically hospitalize people whose diabetes, asthma, or heart conditions act up. Twenty percent of these people are hospitalized again within a month. In other rich nations nurses make home visits to ensure that people with such problems are taking their medications. Nurses don’t make home visits to Americans with acute conditions because hospitals aren’t paid for such visits.
An estimated 30 percent of all healthcare spending in the United States is pure waste, according to the Institute of Medicine.
We keep patient records on computers that can’t share data, requiring that they be continuously rewritten on pieces of paper and then reentered on different computers, resulting in costly errors.
And our balkanized healthcare system spends huge sums collecting money from different pieces of itself: Doctors collect from hospitals and insurers, hospitals collect from insurers, insurers collect from companies or from policy holders.
A major occupational category at most hospitals is “billing clerk.” A third of nursing hours are devoted to documenting what’s happened so insurers have proof.
Cutting or limiting Medicare and Medicaid costs, as entitlement reformers want to do, won’t reform any of this. It would just result in less care.
In fact, we’d do better to open Medicare to everyone. Medicare’s administrative costs are in the range of 3 percent.
That’s well below the 5 to 10 percent costs borne by large companies that self-insure. It’s even further below the administrative costs of companies in the small-group market (amounting to 25 to 27 percent of premiums). And it’s way, way lower than the administrative costs of individual insurance (40 percent). It’s even far below the 11 percent costs of private plans under Medicare Advantage, the current private-insurance option under Medicare.
Healthcare costs would be further contained if Medicare and Medicaid could use their huge bargaining leverage over healthcare providers to shift away from a “fee-for-the-most-costly-service” system to a system focused on achieving healthy outcomes.
Medicare isn’t the problem. It may be the solution.
“Entitlement reform” sounds like a noble endeavor. But it has little or nothing to do with reducing future budget deficits.
Taming future deficits requires three steps having nothing to do with entitlements: Limiting the growth of overall healthcare costs, cutting our bloated military, and ending corporate welfare (tax breaks and subsidies targeted to particular firms and industries).
Obsessing about “entitlement reform” only serves to distract us from these more important endeavors.
Selling the Store: Why Democrats Shouldn't Put Social Security and Medicare on the Table
Prominent Democrats — including the President and House Minority Leader Nancy Pelosi — are openly suggesting that Medicare be means-tested and Social Security payments be reduced by applying a lower adjustment for inflation.
This is even before they’ve started budget negotiations with Republicans — who still refuse to raise taxes on the rich, close tax loopholes the rich depend on (such as hedge-fund and private-equity managers’ “carried interest”), increase capital gains taxes on the wealthy, cap their tax deductions, or tax financial transactions.
It’s not the first time Democrats have led with a compromise, but these particular pre-concessions are especially unwise.
For over thirty years Republicans have pitted the middle class against the poor, preying on the frustrations and racial biases of average working people who can’t get ahead no matter how hard they try. In the Republican narrative, government takes from the hard-working middle and gives to the undeserving and dependent needy.
In reality, average working people have been stymied because almost all the economic gains of the last three decades have gone to the very top. The middle has lost bargaining power as unions have shriveled. American politics has been flooded with campaign contributions from corporations and the wealthy, which have used their clout to reduce marginal tax rates, widen loopholes, loosen regulations, gain subsidies, and obtain government bailouts when their bets turn sour.
Now five years after the worst downturn since the Great Depression and the biggest bailout in history, the stock market has recouped its losses and corporate profits constitute the largest share of the economy since 1929. Yet the real median wage continues to fall — wages now claim the lowest share of the economy on record — and inequality is still widening. All the economic gains since the trough of the recession have gone to the wealthiest 1 percent of Americans; the bottom 90 percent continue to lose ground.
What looks like the start of a more buoyant recovery is a sham because the vast majority of Americans have neither the pay nor access to credit that allows them to buy enough to boost the economy. Housing prices and starts are being fueled by investors with easy money rather than would-be home buyers with mortgages. The Fed’s low interest rates have pushed other investors into stocks by default, creating an artificial bull market.
If there was ever a time for the Democratic Party to champion working Americans and reverse these troubling trends, it is now — forging an alliance between the frustrated middle and the working poor. This need not be “class warfare” because a healthy economy is in everyone’s interest. The rich would do far better with a smaller share of a rapidly-growing economy than a ballooning share of one that’s growing at a snail’s pace and a stock market that’s turning into a bubble.
But the modern Democratic Party can’t bring itself to do this. It’s too dependent on the short-term, insular demands of Wall Street, corporate executives, and the wealthy.
It was Bill Clinton, after all, who pushed for repeal of Glass-Steagall, championed the North American Free Trade Act and the World Trade Organization without adequate safeguards for American jobs, and rented out the Lincoln Bedroom to a steady stream of rich executives.
And it was Barack Obama who continued George W. Bush’s Wall Street bailout with no strings attached; pushed a watered-down “Volcker Rule” (still delayed) rather than renew Glass-Steagall; failed to prosecute a single Wall Street executive or bank because, according to his Attorney General, Wall Street is just too big to jail; and permanently enshrined the Bush tax cuts for all but the top 2 percent.
Meanwhile, over the last several decades Democrats have allowed Social Security taxes to grow and its revenue stream to become almost as important a source of overall government funding as income taxes; turned their backs on organized labor and labor-law reforms that would have made it easier to form unions; and then, even as they bailed out Wall Street, neglected the burdens of middle-class homeowners who found themselves underwater and their homes worth less than what they paid for them because of the Street’s excesses.
In fairness, it could have been worse. Clinton did stand up to Gingrich. Obama did get the Affordable Care Act. Congressional Democrats have scored tactical victories against social conservatives and Tea Party radicals. But Democrats haven’t responded in any bold or meaningful way to the increasingly concentrated wealth and power, the steady demise of the middle class, and further impoverishment of the nation’s poor. The Party failed to become a movement to reclaim the economy and our democracy.
And now come their pre-concessions on Social Security and Medicare.
Technically, a “chained CPI” might be justifiable if seniors routinely substitute lower-cost alternatives as prices rise, as most other Americans do. But in reality, seniors pay 20 to 40 percent of their incomes for healthcare, including pharmaceuticals — the prices of which are rising much faster than inflation. So there’s no practical justification for reducing Social Security benefits on the assumption inflation isn’t really eating away at those benefits as much as the current cost-of-living adjustment allows.
Likewise, although a case can be made for reducing the Medicare benefits of higher-income beneficiaries, as a practical matter their savings are almost as vulnerable to rising healthcare costs as are the more modest savings of middle-income retirees. “Means-testing” Medicare also runs the risk of transforming it into a program for the “less fortunate,” which can undermine its political support.
In short, Medicare isn’t the problem. The underlying problem is the sky-rocketing costs of health care. Because Medicare’s administrative costs are a fraction of those of private health insurance, Medicare might be part of the solution. Medicare for all, or even a public option for Medicare, would give the program enough clout to demand health providers move from a fee-for-service system to one that paid instead for healthy outcomes.
With healthcare costs under better control, retirees wouldn’t be paying a large and growing portion of their incomes for healthcare — which would alleviate pressure on Social Security. I’m still not convinced a “chained CPI” is necessary, though. A preferable alternative would be to raise the ceiling on the portion of income subject to Social Security taxes (now $113,600).
Besides, Social Security and Medicare are the most popular programs ever devised by the federal government, which is why Republicans hate them so much. If average Americans have trusted the Democratic Party to do one thing it has been to guard these programs from the depredations of the GOP.
Putting these two programs “on the table” is also tantamount to accepting the most insidious and dishonest of all Republican claims: That for too long most Americans have been living beyond their means; that we are rapidly approaching a day of reckoning when we can no longer afford these generous “entitlements;” and that prudence and responsibility dictate that we must now begin to live within our means and cut back these projected expenditures, particularly if we are to have any money left to invest in the young and the disadvantaged.
The truth is the opposite: That for three decades the means of most Americans have been stagnant even though the overall economy has more than doubled in size; that because almost all the gains from growth have gone to the top, most Americans haven’t been able to save enough for retirement or the rising costs of healthcare; and that because of this, Social Security and Medicare are barely adequate as is.
Paul Ryan’s House Republican budget takes on Medicare, but leaves Social Security alone. Why should Democrats lead the charge on either?
The Republicans are already slashing help for the young and the disadvantaged. Democrats shouldn’t succumb the lie that the elderly and young are in competition for a portion of a shrinking pie, when in fact the pie is larger than ever. It’s just that those who have the largest and fastest-growing portions refuse to share it.
We are the richest nation in the history of the world — richer now than we’ve ever been. But an increasing share of that wealth is held by a smaller and smaller share of the population, who have, in effect, bribed legislators to reduce their taxes and provide loopholes so they pay even less.
The budget deficit “crisis” has been manufactured by them to distract our attention from this overriding fact, and to pit the rest of us against each other for a smaller and smaller share of what remains. Democrats should not conspire.
Needy children should be getting far more help, better pre-school care, better nutrition. Seniors need better healthcare coverage and more Social Security. All Americans need better schools and improved infrastructure.
The richest nation in the history of the world should be able to respond to the legitimate needs of all its citizens.