Wednesday, September 19, 2012

Romney and the 47%

by Michael Roberts

So Mitt Romney has really put his foot in it.  He tells a private audience of high-paying Republicans that 47% of Americans do not pay federal income tax and these people will “vote for the president no matter what”.   The 47% are apparently spongers on the state and taxpayers.  These spongers “believe that they are entitled to health care, food, to housing, to you-name-it… and the government should give it to them.”

Where do we start with this tirade by the multi-millionaire Republican presidential candidate?  It has already been revealed that Romney paid only 13% of his annual income in federal taxes, way less than the average for most Americans of around  30%-plus.  He managed this with the tax avoidance tricks that the very rich can find, using their accountants and lawyers.  But, of course, he is no sponger.

There is nothing new in the revelation that 47% of American households pay no tax.  These are data for 2009 and so have been known for several years.  Actually, the figure is 46% as of 2011 and is up from 38% in 2007, for the obvious reason of the effect of the Great Recession on wages and employment.  But what the figure really tells you is that there are large numbers of people in America who are poor.  About half of the non-payers are too poor to pay federal income tax.  An American household with two children earning less than $26,400 a year would pay no federal income tax because tax allowances would erase the liability.  The other half of nonpayers are mainly old people and very low income working families, the unemployed, the disabled, war veterans, students, etc.

They receive special tax credits for their age or children etc, and many of these measures were introduced and increased by the last Republican administration under George W Bush!  These tax credits were promoted by the Republicans because the benefits accrue much more to higher income households in reducing their tax burden.  But it does mean that many lower income households pay no federal tax as a result.

Another irony of all this is that many of these ‘spongers’ on the federal government actually vote Republican.  The very poor generally don’t vote at all.  Fewer than half of all American adults in households who pay no federal income tax voted in 2008, but of those that did, 37% voted for John McCain.  And more retired Americans, many of whom pay no federal income tax, voted for McCain than Obama.

The other thing is that, while there may be 46% of American households not paying federal income tax in 2011, that does not mean that they do not pay taxes to the state.  First, most pay payroll taxes (social security contributions) if they are working, to the federal government.  According to the Congressional Budget Office, when that is added in, there are only 10% of American households that do not pay any federal taxes.  The payroll tax is a real burden on poor working families because tax credits do not compensate for these payments.

Second, nearly everybody pays state and local taxes, as well as sales taxes whenever they buy something.  These taxes are also generally ‘regressive’, in that a higher proportion of income of low-income households goes towards these taxes than for richer households.  The average American middle-income households earning  about $35,400 to $52,100 a year (by the way, that’s way less than what Romney considers as middle-class, apparently $150,000 a year!)  would pay around 14% in taxes (income, excise and payroll) to the federal and local governments.

The real story is not how many of the poor, old and disabled don’t pay one particular tax in the US; it is how little the very rich pay in taxes.  According to the OECD, the top marginal rate of personal income tax in the US is just 43%, less than the OECD average of 46% and way lower than in Europe.  Even more revealing is that the threshold for moving from the standard rate of tax for middle-income earners to the top rate is over eight times the average wage in the US compared to just three times for the OECD as a whole.  The top rate of income tax in the US does not kick in until you are very rich indeed, more than twice as rich as in the UK or Europe.  As a result, America’s big earners pay much less in tax compared to their peers in any other major capitalist economy.

According to the OECD, those with incomes one-third below the average pay 19.6% of their income in personal taxes and social security contributions in the US.  That’s the same as in Japan and slightly lower than in the UK.  But above-average earners in the US pay only 28.6% of income in these taxes, compared to 30.4% in the UK, and 43% in Germany.  Of all the major economies, only top earners in Switzerland, Spain and Japan paid a lower share.

And at the same time, incomes for the very rich in America have risen so much faster than for the average households or the poorer ones in the last 50 years.  Since 1965, the real mean household income for the top 5% of American households by income has doubled, rising at 1.52% a year.  For the middle quintile, it has risen just 20% (and has been falling for the last decade), or just 0.47% a year.  It’s pretty much the same story for the poor bottom fifth of income earners in the US.  The Economic Policy Institute found that since 1979, wages of the top 1% of earners rose 156% compared to just 17% for the bottom 90%.  No wonder the poor don’t pay federal income tax.

If we look at median household income (the typical ‘middle-class’ household), then in real terms, incomes have stagnated for 20 years and fallen in the last ten.  Real incomes are down nearly 5% since the Great Recession.  The share of income going to the middle-class (the middle 60% of earners) has fallen from 53% in 1968 to 46.5% now.  The so-called middle class is shrinking.  The gini coefficient for the US, which is a standard measure of inequality, is now at its highest level since records began in 1967.

All this shows that the US, like many other capitalist economies, does not have a progressive income tax system.  There is usually a threshold for starting to pay income tax, then a standard tax rate, and finally a top rate, fixed at some level.  There is no graduated rise in tax rates through income levels.  As a result, there are many countries like the US where a large proportion of households pay no income tax while the rich pay very little – Japan’s income tax system is very much like that of the US, as is that of Australia and Canada.  The personal income tax system is way less progressive than it should be, the tax base (ie the  number contributing) is small and above all the tax burden is very low for the richer households.  A proper progressive system would include more payers (if at a very low rate for the poorer households) and deliver much more tax from the richer households.  Back in the 1960s in the US, when the income tax system was much more progressive, only 16% of households did not pay income tax.  But then they paid much less in sales tax, state taxes and other taxes on spending, which are highly regressive.

The reality is that, contrary to the prejudiced and narrow views of Mitt Romney and his hedge fund friends, the American poor are not ‘victims’ of a benefit culture, where they expect handouts from the state without working.  In 1996, there were 12.3m Americans receiving monthly temporary federal assistance to pay for food and staying alive. Then the Clinton administration introduced the Personal Responsibility and Work Opportunity Act  that forced recipients to find work in order to receive benefits.  The number of recipients plummeted to just 4.3m in 2010.  But poverty did not fall: the official poverty rate in 1996 was 11%, it was 11.7% in 2010.  And unemployment did not fall to provide jobs – on the contrary it was 5.4% in 1996 and was 8.6% in 2010.  Stopping the ‘benefit culture’ simply meant no more help for the most destitute in American society.

And look at wealth, not income.  About 38% of the increase in total household wealth (property and financial assets) from 1983 to now went to the top 1% of Americans and 74% to the top 5%.  The bottom 60% have actually suffered  a decline in their wealth in the last 30 years!
Talking of wealth, Romney claims that he is a ‘self-made man’.  “I have inherited nothing,” he remarked, “there is a perception, ‘Oh, we were born with a silver spoon, he never had to earn anything and so forth.’   I have argued before, most very wealthy people did not become wealthy through their own efforts.  Most inherited wealth or were lucky.  Romney is no exception to my generalisation.  Romney did not become a multi-millionaire by starting with nothing.  He was the son of the CEO of AMC, who was a former governor of Michigan.  As Mitt’s wife, Ann, revealed in an interview discussing their students days together: “They were not easy years… but neither one of us had to get a job, because Mitt had enough of an investment from stock that we could sell off a little at a time.”  There’s nothing like having your dad’s wealth to fall back on.  Better than temporary federal assistance.

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