Government Spending Hurts Lower-Income Americans

The Tax Policy Center (TPC) has a new analysis showing 43% of Americans won’t pay federal individual income tax in 2013, down from 47% in 2009. Rightly, the analysis clarifies that almost all Americans pay something in taxes, via the payroll tax for Social Security and Medicare; federal taxes on alcohol, cigarettes, airline tickets, etc.; or state and local taxes.

TPC says the number of people paying the individual income tax rose “thanks to an improving economy and the expiration of temporary Great Recession-era tax cuts.” What TPC doesn’t say is that its analysis also identifies one of the most contradictory and flawed aspects of the federal tax system. Consider:

The bottom 43% of earners will pay very little in taxes, outside of payroll taxes. In 2009,  Congressional Budget Office data showed roughly 40% of households effectively do not pay any federal taxes outside of payroll taxes. Thus, federal government programs funded by non-payroll taxes – including but not limited to education, food stamps, national defense, border security, federal worker salaries, and National Parks – will be paid for by the top 57% of earners in 2013.

This creates a system where many voting Americans do not see their paychecks shrink as government spending increases. It’s no wonder President Obama overwhelmingly won the votes of those making less than $50,000 per year. He promised the benefits of spending, claiming the consequences would be felt by everyone else.

At first glance, lower-income Americans aren’t impacted much by the current tax code. The tax burden falls heavily on the rich, and poor Americans are subsidized by those taxes.

Reality is very different. It is actually the poor who are most harmed by the current tax code. They may get “free stuff,” but are first to be laid-off in a bad economy and last to be hired during recoveries. It is the poor who see their careers damaged by debt-driven weak economies, and they will suffer the most in retirement when the Social Security and Medicare Trust Funds are exhausted.

From 1979 through 2009, the effective federal tax rate of non-wealthy Americans dropped considerably. At the same time, America’s debt exploded and the tax code multiplied in size and difficulty. It stands to reason that simplifying the tax code would lead to a healthy economy, upward economic mobility, and less dependency on politicians to make ends meet.

Once lower-income Americans have more skin in the tax side of the game, the ability of politicians in Washington to manipulate them to justify spending collapses, and real economic freedom becomes a possibility for all Americans.