The Biggest Break of All – Zero Federal Income Tax
Business + Economy

The Biggest Break of All – Zero Federal Income Tax

iStockphoto/Vallarie Enriquez

Amid the yelling back and forth about how America should deal with its debt and deficit problem, two major debates have emerged. The first is whether the problem should be addressed via spending cuts or tax increases.

The sane answer is both.

Federal government spending recently surged over 20 percent of GDP, higher than it has been for most of the past century. Barring a massive surge in GDP growth, or huge reductions in social-program spending (Medicare, etc.), federal spending will remain too high to offset merely with tax increases. So spending has to be cut.

Tax revenue, meanwhile, is running below the bottom of its long-term range of 15 percent to 20 percent of GDP. So, barring truly massive spending cuts, which seem politically unfeasible, tax revenue needs to increase.

So, among those who acknowledge that the solution isn’t black and white —that spending will have to be cut and taxes will have to increase — the fight narrows down to what should be cut and who should pay more.

And the specific argument above who should pay more income taxes, as it has since time immemorial, boils down to:

    * Rich people (pick your definition), versus
    * Everyone else

In the past month, several billionaires have weighed in on the “rich people should pay more” argument. Warren Buffett, one of the richest men in the world, argued that it’s outrageous that he pays a lower tax rate than his secretary and said Congress should make him pay more. Charles Koch, meanwhile, argued that he pays a huge amount of taxes and that he thinks he can spend his money more efficiently than the government can.

I personally think billionaires can and should pay more. But that’s not the point of this article. While the billionaire argument continues to rage, there’s also the fight over the other side of the scale: “Everyone else.”

And one of the points made in this fight is the well-publicized fact that 46 percent of Americans don’t pay federal income tax.

That’s ridiculous, howl rich people and their defenders. Everyone should pay tax. Why should half of the country get some of their government services for free?

And you know what? They’re right. It is ridiculous. What’s more, it’s hurting the country. But not for the reasons you think.

Conservatives frequently throw the “46 percent” statistic around and suggest that half the country pays NO taxes. This isn’t true. The 46 percent pay payroll taxes, sales taxes, state taxes, and other taxes. But they don’t pay federal income taxes. And they should.

Why? Not because this will suddenly balance the budget. It won’t.

Everyone should pay income taxes because we’re all in this together. And no one in this country should get something for nothing.

People pay a lot more attention to the decisions they and their representatives make when they have some skin in the game. They care about what their money is spent on. They understand, in a way that folks who pay nothing don't, that you can't just have everything they want (unless they're willing to pay for it). They feel personally insulted and injured when the government squanders their money, the way it has squandered so much money over the past decade (bank bailouts anyone?).

Just as important, they become active members of — and contributors to —the system, not members of a class of people who benefit from services paid for by others.

The current system, in which only half of the country pays the federal bills for everyone else, has contributed to the “us vs. them” environment in which class warfare is increasingly taking hold. This runs counter to the iconic promise of America, which used to be based on the success and breadth of the middle class. Although there will always be arguments about who should pay more, the fact that almost half the country pays no income tax isn't helping.

But no, no, no, say the folks who defend the fact that 46 percent of Americans don’t pay federal income tax. Of those 46 percent, half are “elderly.” And a third of the non-elderly make less than $20,000 a year.

That’s true. But they still should pay something.  Not a huge amount. But something.

For the poorest Americans, even a few hundred dollars a year would go a long way toward changing the debate from “us vs. them” to just “us.”

And it might — might — make rich people a bit more willing to pay a bit more.

Americans are at their best when they are working together to solve a common problem. Our current debt-and-deficit problem is a common problem, as is the debate over how much spending should be cut (and what) and how much taxes should be increased (and how).

We need the whole country to pitch in and solve that problem. And one good step in the right direction would be to broaden the tax base so that everyone is paying something.

UPDATE: I’ve gotten lots of smart feedback already on this argument. The most persuasive case against it is the argument that, when one looks at total taxes paid, it’s clear that everyone is already paying something. I still think that it’s the federal income tax that most people focus on when they think about paying their tax bill and that everyone should pay something.