Mitt Romney, meet Ronald Reagan. The Romney-Ryan campaign labels the 47 percent of people who don’t pay federal income taxes as “takers.” But to President Reagan, the godfather of today’s conservatives, anyone who worked for a living was a maker, whether he or she paid taxes or not.
Reagan strongly supported the earned income tax credit (EITC), which sends checks to low-income Americans who work. Recipients of the EITC are, of course, among those who don’t pay income tax, but Reagan never regarded that as a problem. He once bragged that under his 1986 tax reform, “millions of working poor will be completely dropped from the tax rolls.” (Well, not quite: All workers pay payroll taxes.)
If what Romney really wants is to get more people to pay income taxes, there is a straightforward way to do it. Just eliminate the standard deduction and the EITC, and tax all of workers’ income starting from the first dollar they make, presumably starting at a low rate. The downside is that “there are people who are working now who would stop working,” says Jesse Rothstein, an economist at the University of California-Berkeley’s Goldman School of Public Policy.
For many low-skilled people with low earning potential, take-home pay after elimination of the standard deduction and EITC wouldn’t be worth the effort, Berkeley’s Rothstein says. It’s not necessarily laziness: For many, the cost of commuting to work, suitable clothing, child care and the like comes to nearly everything they would earn, if not more, says Rothstein. Romney is exquisitely sensitive to disincentives that face the rich; those that face the poorest Americans are far higher.
The bipartisan Domenici-Rivlin Debt Reduction Task Force plan would actually exempt more people from paying federal income tax–in the name of encouraging more people to work, and work harder. Phasing out the credit abruptly, as is done now, discourages people from earning more than the EITC threshold, which is around $45,000. The refundable earnings tax credit in the Domenici-Rivlin plan would apply to the first $20,000 of someone’s income and would be paid to all taxpayers, regardless of income, eliminating the threshold effect, says Loren Adler, a senior analyst at the Bipartisan Policy Center, the task force’s main backer. He estimates that the plan would increase the number of Americans not paying income taxes by about 2 percentage points, although he said the center has never attempted to calculate that figure.
If Romney wanted to get more Americans paying taxes without discouraging them from working, a simple trick would be to turn the earned income tax credit into a grant. Nothing would change except the accounting, but it might create the impression that the ranks of taxpayers had grown. That might set a difficult precedent, says Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities. Imagine if the home mortgage interest deduction were replaced with an annual check from the government to help people pay their mortgages. Suddenly a prized perk of the middle class would look a bit less defensible.
“The reason the earned income tax credit has been so successful politically over time is that it melds values that liberals and conservatives emphasize,” Marr says. It does, however, shrink the tax rolls. And to a new generation of Republicans, that appears to be anathema.
