Op-ed on America’s Missing Taxpayers

October 14, 2005

Scott Hodge has an op-ed in this morning’s New York Sun. The topic? The growing number of Americans being pushed out of the tax system by various credits, exemptions and deductions in recent years, and what that means for tax reform.

Hint: it’s not good news for tax reformers. An excerpt:

For the first time in 20 years, Washington seems poised to overhaul the federal tax code. Americans are ready to support fundamental tax reform judging from their responses to the 2005 Tax Foundation Annual Survey of U.S. Attitudes on Taxes and Wealth conducted by Harris Interactive. A majority of American adults believe federal taxes are too high, the tax code is too complex, and the income tax system is unfair. A majority even support simplification even if it means giving up the deductions and exemptions they now enjoy.

The biggest obstacle to reform may not be the army of Washington lobbyists who will fight to protect those deductions and exemptions. The most serious obstacle to reform is the fact that America has become divided between a growing class of people who pay no income taxes and a shrinking class of people who are bearing the lion’s share of the burden.

Despite the charges of critics, the tax cuts enacted in 2001, 2003, and 2004 dramatically reduced the tax burden of low- and middle-income taxpayers and shifted the tax burden onto higher-income taxpayers. In 2004, one out of every three Americans who filed a tax return (42.5 million) had no tax liability after they took advantage of their credits and deductions, while millions more paid next to nothing. As a result, the top 20% of taxpayers — those earning more than roughly $71,000 in 2004 — now pay over 80% of all the income taxes.

The widening gulf between the “payers” and the “non-payers” poses a dilemma for tax reformers. Generally speaking, the goal of tax reform is to broaden the tax base while lowering tax rates. But how do you craft a tax reform plan that (1) doesn’t raise taxes on the 42.5 million Americans who pay nothing — and in many cases receive a refundable credit — and (2) doesn’t “cut taxes for the rich” who now pay everything? There is no easy answer.

Read the full piece here.

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