An Income Tax Tipping Point

It’s easy to cut income taxes for the poor. It’s easy to say that the poor have enough burdens in life and we should spare them the burden of income taxes. People who are well off can afford to make up the difference. That’s an easy argument that our politicians love to make.

It’s also easy to raise income taxes on the rich. It’s easy to show how much more disposable income they have relative to the poor and middle class. It’s easy to highlight billionaires and their low income tax rates and make it sound like they are representative of all wealthy people. Regardless of how much the rich pay in taxes, it’s always easy to say they don’t pay enough.

In short, politically speaking, it’s just so easy to demonize the rich and raise their income taxes as well as empathize with the poor and cut their income taxes or absolve them from paying income taxes at all. It’s easy. What’s not so easy is to acknowledge the reality that we face when government spending exceeds revenue. It’s not easy to ask everyone to contribute to the system.

An Endless Cycle

This process of demonizing the rich and steadily decreasing the income taxes on the poor is an endless cycle. Every time a politician proposes income tax policy changes, we shift a little more burden to the rich and a little less burden from the poor. The process is deceptively simple, accumulates over time, and has damaged our politics.

When politicians of either party raise income taxes, they shift the tax brackets upward so that those who made enough last year to pay taxes won’t have to pay any taxes next year. It’s an incremental change that only affects a small number of individuals, but it inches up a little bit every time they change our tax policy.

When Republicans cut income taxes, they make deals with Democrats to get the lower tax brackets in exchange for shifting up the lower tax brackets. Once again, people who paid taxes before no longer have to pay taxes because the lowest threshold is slowly moved up. It’s still incremental, but it happens every time the tax brackets are adjusted.

In a nutshell, if income taxes go up, more of the poor are moved off the tax rolls; if income taxes go down, more of the poor are moved off the tax rolls. This is also referred to as “heads I win, tales you lose.” The cycle repeats itself until we’ve now reached a point where more than 40% of income earners pay zero income tax. (According to the IRS, in 2010 40.9% of all tax returns owed no income tax at all.)

Living Off the Minority

And that’s when a tipping point is reached. As the cycle proceeds, someday more than half the people pay no income taxes and a minority will pay the lion’s share. The majority begins to live off of the hard work and earning power of a minority.

Politicians are so used to helping the poor and so afraid of the charge that they are helping the rich that we are unable to spread the tax burden across the population. Even when it becomes a necessity, we will be unable to fix the problem that has been created. It’s shown itself in the current election with Democrats charging that Romney’s plan to “broaden the tax base” is just a way of increasing taxes on the poor.

And the charge is correct! We have been cutting taxes for the poor and middle class for so long, that we have a lopsided system that needs to be corrected. That will mean raising taxes on those near the bottom. But we got to this point by steadily shifting the burden away from the poor and the middle class, so there simply is no other way to fix the problem of everyone not paying their fair share.

Tax Everyone Who Isn’t Poor

Let’s stop relying on easy arguments and be more realistic. 40% of Americans are not poor. If the poverty line means anything, it’s worth noting that fewer than 15% of Americans live below the poverty line. That leaves 25% of those paying zero income taxes above the poverty line. If the poverty line is our definition of “poor,” then 25% of people who aren’t poor aren’t paying income tax. This is intolerable.

So let’s agree that we won’t tax the poor. We will not assess an income tax on the 15% of Americans below the poverty line. If we can agree not to tax the poor, can our politicians also agree that it’s necessary to tax everyone who isn’t poor? We can still have a graduated system with higher tax brackets for the highest income earners, but everyone who isn’t poor must pay something.

The Free Ride is Over

Politicians got us into this mess by playing class politics, steadily shifting people off of the income tax rolls, and steadily shifting the burden of government on to the rich and upper middle class. I’m no defender of the wealthy, but it’s obvious to anyone willing to acknowledge reality that our income tax system is lopsided.

The free ride is over. We’re near a tipping point where the majority begins to live off the minority, and we excuse nearly half of all Americans from paying into the system. Government services are for everyone; our government is for all the people and by all the people. It’s time we all wake up and stop the political gamesmanship. A trillion here and a trillion there and pretty soon we’re talking about real money.