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The American Families Plan and the Future of the Mass Income Tax

Posted on Aug. 23, 2021
[Editor's Note:

This article originally appeared in the August 23, 2021, issue of Tax Notes Federal.

]

Lawrence Zelenak is the Pamela B. Gann Professor at Duke Law School.

In this article, Zelenak argues that enactment of President Biden’s American Families Plan would threaten the status of the federal individual income tax as a tax imposed on most of the population, and he explores the fiscal citizenship implications of an income tax system under which almost all adults file tax returns but only about half pay tax.

I. Setting the Stage

The federal income tax became a mass tax during World War II. In 1939 only 5 percent of Americans paid federal income tax or were dependents of income tax payers. At war’s end in 1945, drastic decreases in exemption levels had raised that figure to 74.2 percent.1 Although the coverage of the income tax has waxed and waned over the postwar decades, until the COVID-19 pandemic at least half of all American households had paid federal income tax each year. Only during the Great Recession of 2007 through 2009 was that taxpaying majority briefly threatened; the Urban-Brookings Tax Policy Center (TPC) has estimated that 49.9 percent of all tax units (counting both filers and nonfilers) had zero or negative income tax liabilities for 2008, and that figure was 50 percent for 2009.2

The income tax paying percentage of the population became a topic of national conversation during the 2012 presidential campaign, when Mother Jones posted on its website a video of Republican nominee Mitt Romney complaining to a May 2012 gathering of wealthy donors:

There are 47 percent of the people who will vote for [then-President Obama] no matter what. There are 47 percent who are with him, who are dependent upon government, who believe that they are victims, who believe that government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you name it. . . . These are people who pay no income tax. Forty-seven percent of Americans pay no income tax.3

In the ensuing national discussion, Romney’s defenders argued that it was important that most people pay income tax. They echoed a New York Times editorial from October 1945 — just after the end of World War II — making the fiscal citizenship case for a mass income tax during peacetime as well as wartime:

It is . . . important to have as wide an income tax as possible. It makes no difference whether the amount collected from those in the lower income tax brackets is a nominal sum. What is important is that the great majority of voters be kept aware at all times that they are making a contribution toward every dollar that the Federal Government spends.4

On the other side of the debate, liberal and moderate commentators — and even more than a few conservatives — offered several reasons why the 47 percent figure should not be viewed with alarm. Among those reasons were that:

  • the figure was only temporarily high because of the Great Recession;

  • the various provisions that resulted in households not owing income tax — including personal exemptions, the standard deduction, and the refundable earned income tax credit — were all good policy;

  • many people who did not pay income tax were still federal taxpayers, on net, once payroll and excise taxes were added to the analysis; and

  • many people who were not income tax payers in a single-year snapshot had positive income tax liabilities from a multiyear perspective.5

Although opinions differed on the merits of Romney’s concern, there was widespread revulsion — across the political spectrum — at Romney’s unveiled contempt for nearly half the population demonstrated in the video. Mostly because of that contempt (rather than because of disagreement with Romney’s position on the importance of mass income taxation), public opinion trended so strongly against Romney that he was compelled to confess error. After having defended his remarks for a few weeks, Romney appeared on Fox News to tell Sean Hannity, “In this case, I said something that’s completely wrong. . . . My life has shown that I care about 100 percent.”6 Although Romney could have drawn a distinction between his substantive position on the coverage of the income tax and his contempt for half the population, affirming the position while renouncing the contempt, he did not. Instead, he simply renounced everything — the defense of the mass income tax along with the contempt.

Reviewing the events of 2012 in 2014, I concluded that Romney’s contempt had become inextricably entwined with the merits of the case for imposing the income tax on a substantial majority of the population. As a result, if “some future Congress [were to] consider enacting legislation returning the nonpaying population to near or above 50 percent . . . that future Congress need not worry much about a negative public response to an increase in the nonpaying percentage.”7 That prediction is now being put to the test, and so far it is holding up.

It appears that pandemic-related tax relief legislation — especially the 2021 recovery rebates and the expansions (for 2021 only) of the EITC, premium tax credit (PTC), child tax credit (CTC), and child and dependent care tax credit (CDCTC) — will result in a nonpaying percentage well above 50 percent for 2021,8 and that enactment of the expansions of refundable credits proposed by President Biden in his American Families Plan (AFP) for 2022 and later years would permanently raise the nonpaying percentage to somewhere very close to the 47 percent figure decried by Romney.9 Yet nobody seems to care. Although the AFP has numerous and vocal critics on the right, the effect that enactment of the AFP would have on the income tax paying percentage is strikingly absent from the list of criticisms.

Section II of this article reviews the recent tax legislation that has reduced the income tax paying percentage for 2021, and the proposed legislation that would reduce that percentage in the coming years as well. It also reviews the rather scanty available information on the likely effects of enacted and proposed legislation on taxpaying percentages. Section III focuses on conservative critiques of the AFP, with an emphasis on what they don’t say — that the decreasing coverage of the income tax under the AFP is a cause for concern. Section IV considers reasons why the population coverage of the income tax should be of concern across the political spectrum, even if neither left nor right seems to care about the issue today. It also considers how the substance of the AFP proposals might be enacted without losing the fiscal citizenship virtues of a mass income tax.

II. Tax Paying Percentages, 2021 and Beyond

In March 2020 the TPC estimated that for tax year 2019 (the last pre-pandemic year), 43.3 percent of all individual income tax units (taking into account both filing and nonfiling units, but excluding dependents) would have zero or negative income tax liabilities.10 The TPC has not released comparable estimates for 2020 or 2021, but some notion of what they might look like for 2021 can be gleaned from a recent publication of the Joint Committee on Taxation. The JCT projects that in all six of the lowest-income categories (the highest of which is $50,000 to $75,000), average income tax liabilities will be negative, and (of course) average income tax rates in those income ranges will also be negative.11 Those six categories include 64 percent of all tax units, so if no tax units in those categories had positive income tax liabilities, and if all units in higher-income ranges had positive income tax liabilities, the income tax paying percentage for 2021 would be just 36 percent. It is not quite that simple, of course, because the $50,000 to $75,000 income range, with an average tax rate of negative 1.9 percent, undoubtedly includes many taxpayers with positive tax liabilities. Conversely, the next-highest income range of $75,000 to $100,000, with an average tax rate of positive 1.8 percent, surely includes some taxpayers with zero or negative tax liabilities. In short, the JCT 2021 projections do not directly address the income tax paying percentage question for 2021. Nevertheless, the JCT projections strongly suggest that the nonpaying percentage for 2021 will be well over 50 percent, perhaps in the neighborhood of 60 percent.12

In terms of tax law changes between 2019 and 2021 (as contrasted with pandemic-related changes in pretax incomes), the increase in nonpaying tax units from 43 percent to around 60 percent of the population is mostly attributable to five provisions, all of them effective only for 2021:

  1. the 2021 recovery rebates of $1,400 per person (phased out for higher-income taxpayers);13

  2. expansion of the CTC (to $3,600 for children under age six, and $3,000 for older children) and its full refundability;14

  3. expansion of the EITC for taxpayers without children;15

  4. expansion of the CDCTC (to a maximum amount of $8,000 for parents with two or more children) and full refundability of the credit;16 and

  5. expansion of the PTC.17

The president’s AFP proposal would not extend the recovery rebates beyond 2021, but it would extend the four other 2021 provisions responsible for the sharp drop in the income tax paying percentage.18 Understandably, even those who in normal times might be concerned about decreasing population coverage of the income tax have voiced no objections to exempting most households from the tax for the duration of a once-in-a-century (or so one hopes) pandemic. If one thinks it is important, for reasons grounded in fiscal citizenship, for a substantial majority of American households to pay at least a nominal amount of income tax, the crucial post-pandemic issue will be the population coverage of the income tax with the AFP proposals enacted but without recovery rebates.

As far as I have been able to determine, only one study has attempted to estimate that percentage. Treasury’s green book, although replete with revenue estimates for its various proposals, does not estimate the income tax paying share of the population if the AFP is enacted. And, with one exception, conservative critics of the AFP have attacked it on grounds other than its effect on the coverage of the income tax, and thus have not tried to estimate what that effect might be. The one exception is a recent study from the Hoover Institution, which concludes that the AFP would “remove 5 million households from the federal income tax rolls, further dividing the U.S. population into two separate groups: those who pay taxes and those who receive transfers financed by the taxes.”19 This is just a one-sentence aside in a 21-page paper otherwise focused on estimating the number of households that would be added to the “federal entitlement benefit rolls” by the AFP (6.2 million households) and decrying that effect. The Hoover authors do not seem to care much about the effect of the AFP on the income tax paying percentage, and perhaps for that reason offer no explanation of how they arrived at the 5 million persons estimate. In any event, the figure seems plausible enough, and it is the only such estimate we have at the moment.

Suppose, in a back-of-the-envelope sort of way, we take the 5 million figure from the Hoover study and use it to adjust the 2019 TPC estimates by moving 5 million tax units from the ranks of the taxpaying to the ranks of the non-taxpaying. That would mean 80,672,000 nonpaying tax units out of a total of 174,690,000, for a nonpaying percentage of 46.18 — less than a percentage point below the 47 percent figure that Romney had lamented in 2012. Moreover, this would not be a temporary drop in the taxpaying percentage in the midst of a huge recession or a pandemic; rather, it would reflect a legislative judgment that even in good economic times, only about half of American households should be required to pay any income tax. And yet this issue is conspicuous by its absence in the conservative litany of objections to the AFP.

III. Declining Percentages, Declining Concern

Although the 47 percent estimate first appeared in Tax Notes in June 2009, it did not go viral until early April 2010, when the estimate furnished the lead for an Associated Press story keyed to the fast-approaching tax return due date: “Tax Day is a dreaded deadline for millions, but for nearly half of U.S. households it’s simply somebody else’s problem.”20 This spurred numerous commentators — mostly, but not exclusively, conservative — to bemoan the declining coverage of the income tax.21 No one was more vocal than Tax Foundation President Scott A. Hodge. Hodge had been complaining for years that the income tax exempted too high a percentage of the population, and he used the 47 percent estimate as an occasion to restate his complaint:

The real issue is that millions of Americans no longer have any skin in the game and are becoming inoculated from the basic cost of government. To them, government seems free, and politicians can easily convince them to support more and more spending because someone else is going to pay the tab.22

Fast forward to 2021. One might expect that today’s Tax Foundation website would feature estimates of how greatly enactment of the AFP would decrease the taxpaying share of the populace, accompanied by commentary decrying that effect.23 If so, one would be disappointed. To be sure, the website includes estimates of various effects of the AFP, with an emphasis on deleterious effects — but nothing on this issue. The focus of the Tax Foundation’s analysis and critique of the AFP is on its effects on economic growth, jobs, and wages: “The funding choices in the American Families Plan come at the cost of reduced economic output, fewer jobs, and lower wages.”24 The analysis also includes conventional and dynamic revenue estimates for the AFP, both provision-by-provision and overall, plus an analysis of overall distributional impacts. There is nothing, however, about what percentage of Americans would still have positive income tax liabilities after enactment.

The situation is similar on the websites of other conservative think tanks. As noted earlier, the detailed analysis from the Hoover Institution of the effects of the AFP devotes almost all its 21 pages to the anticipated increase — to above the magic 50 percent level — in non-elderly households receiving federal entitlement benefits (as either refundable income tax credits or as nontax benefits).25 By contrast, it devotes just one throw-away sentence to the AFP’s anticipated effect on the income tax paying percentage.26

Perhaps the Heritage Foundation, with its own long-standing interest in federal tax-and-transfer policy, has weighed in where the Tax Foundation and the Hoover Institution have not? Actually, no. Heritage’s website features a highly critical analysis of the AFP by Robert Rector, but again the focus is not on taxpaying percentages.27 Rector’s concern is instead about the effect of the AFP on work incentives. He states that it would be the “second largest expansion [after Obamacare] of means-tested welfare entitlements in U.S. history.” He accurately characterizes the CTC proposal, with full refundability and without any earnings-based phase-in, as eliminating “all existing work obligations from the current childcare program.” His policy prescription is succinctly offered as “a simple solution: Work requirements.” Rector gives no indication that he has any interest in whatever effect the AFP might have on the income tax paying percentage.

Although it’s certainly possible I have missed something, or that something on the issue will appear from conservative think tanks in the next few months, I tried a thorough search of all the likely websites and found nothing on point beyond the aforementioned sentence in the Hoover Institution report. The contrast between 2010 and 2021 could not be starker. In 2010 the conservative commentariat viewed the 47 percent non-income-tax-paying estimate with dismay and alarm (even though the estimate was so high only because it was for the deep recession year of 2009). In 2021, faced with the president’s AFP proposals, which would produce something very close to the 47 percent figure in a non-recession year, the conservative commentariat gives every indication that it could not care less. The obvious explanation for the sea change is that 2010 was before the 2012 release of the Romney 47 percent video and the ensuing national debate on the coverage of the income tax, whereas the 2021 AFP proposal comes nearly a decade after the Romney video. Romney may have accidentally transformed objection to any reduction in the coverage of the income tax into a new third rail (touch it and you die) of American politics.

IV. Should We Care?

The natural reaction of advocates of progressive tax-and-transfer policies would be to welcome the developments described above. If there is no longer any political obstacle to imposing the federal income tax on only half — or even on less than half — of the population, it becomes that much easier for Congress to enact redistributive policies. If the income tax is the most convenient and efficient tool for making cash transfers to many or most American households, it should be good news that the “47 percent problem” no longer stands in the way. If, however, one thinks — as I do — that there is something to the notion of a mass return-based income tax as a promoter of fiscal citizenship, one will not be so quick to say good riddance to the 47 percent problem. The following discussion is addressed to anyone who shares with me the following two views: (1) that the federal income tax can and should play an important role in promoting fiscal citizenship, and (2) in terms of substantive tax-and-transfer policy, it may be desirable that in any given year most households receive net transfers from the federal government.

A. Tax and Fiscal Citizenship

In Learning to Love Form 1040: Two Cheers for the Return-Based Mass Income Tax,28 I set out at (hopefully not inordinate) length the case for the mass income tax as a promoter of fiscal citizenship. I refer the interested reader to the book for elaboration of the case, but a few quotations serve to suggest the basic argument. In an August 1941 letter to Robert L. Doughton, then-chair of the House Ways and Means Committee, President Franklin D. Roosevelt wrote:

The overwhelming majority of our citizens want to contribute something directly to our defense and . . . most of them would rather do it with their eyes open than do it through a general sales tax. . . . In other words, most Americans who are in the lowest income brackets are willing and proud to chip in directly even if their individual contributions are very small in terms of dollars.29

The following year Irving Berlin penned the song “I Paid My Income Tax Today” on the theme of fiscal citizenship: “Mister Small Fry, yes indeed / Lower brackets that’s my speed / But he [Uncle Sam] was glad to see me.”30

The idea of filing one’s return and paying one’s tax as ceremonies of fiscal citizenship did not disappear at war’s end. In a 1949 radio episode of The Adventures of Ozzie and Harriet, Emmy Lou, a neighbor girl, comments as Ozzie mails his tax return:

Oh, what a wonderful bit of Americana! There you stand by the mailbox, a patriotic smile on your face. Your heart cries out, “Take it, Uncle Sam! There’s a lot more where that came from!” No complaining, no grumbling, you’re eager and willing to pay your country its due. You’re 130 million Americans, Mr. Nelson!31

Although the episode gets a laugh out of Emmy Lou’s over-the-top enthusiasm, it also clearly endorses her understanding of the civic meaning of the income tax. Similarly, in no fewer than three sitcom episodes from the 1950s and early 1960s, recent immigrants to the United States remark on how proud they are to be federal income tax payers. For example, in a 1950 radio episode of Life With Luigi, eponymous Luigi writes a letter to his mother in Italy telling her about his contribution to federal revenues: “I’m proud to tell you that $1.56 is what I paid in.”32

Seemingly none of this matters much anymore, in our post-Romney-video world. But if one is sufficiently retrograde to think it should still matter, the question is whether it is possible to reconcile the fiscal citizenship virtues of a mass income tax with the redistributive substance of the AFP (or future proposals to broadly similar effect). I consider below three possible approaches:

  1. broadening the view to include other federal taxes, other years, or both;

  2. developing reasons why income tax return filing, rather than taxpaying, should be the key to fiscal citizenship; and

  3. if all else fails, simply not labeling transfer programs as part of the income tax (while retaining the economic substance of the programs, and possibly even retaining tax-return-based administration).

B. Broadening the View

Inspired in part by the great 47 percent debate of 2012, several studies in recent years have considered federal taxpaying status from multi-tax and multiyear perspectives. For example, the TPC recently estimated that, taking into account the combined burdens of the individual income tax and the payroll tax (but not the corporate income tax or excise taxes), if the AFP were in effect for 2022, average federal tax rates would be decidedly positive for all but the lowest quintile of the income distribution.33 Although enactment of the AFP might weaken the status of the income tax as a mass tax, it would not threaten the mass tax status of the combined income-payroll tax system.

I suspect, however, that this framing is destined to have little influence on popular understandings of who is a federal taxpayer, for two reasons. First, the framing is inconsistent with the way the two taxes are now and have always been presented to the public — as two separate systems. As long as the payroll tax is collected almost invisibly — without employees filing payroll tax returns or making any out-of-pocket payments — and as long as the payroll tax does not feature (in any major way34) on Form 1040, it will be an uphill battle to convince the public that for purposes of distributional analysis the two taxes should be considered together.

Second, this approach double counts payroll tax payments. The government has traditionally encouraged workers to think of the payroll tax as a form of retirement savings rather than as a true tax.35 Of course, that framing is not strictly accurate (current payroll taxes are used to pay benefits to current retirees, not to fund future benefits for today’s workers), but neither is it completely without foundation (one’s entitlement to retirement benefits is based on one’s lifetime earnings subject to payroll tax). In any event, to the extent that payroll taxes are being used to justify retirement benefits as a return on payroll taxes paid, it would be double counting to use the same payroll taxes to transform negative income tax liabilities into positive combined income-payroll tax liabilities. The popular understanding of payroll taxes as quasi-retirement savings is probably too deeply held (and too well founded) to permit the rhetorical use of payroll taxes to turn income tax liabilities from negative to positive.

The multiple year perspective has been extensively explored in the recent empirical literature. In an analysis covering four decades (1970 to 2010), Don Fullerton and Nirupama Rao found that over that period the average individual paid $142,534 in federal income tax and received $7,290 in cash benefits.36 Of particular interest for present purposes, they noted that “only those in the bottom 10 percent of income are net ‘takers,’ where their net tax over all observed years falls below zero.”37 The 10 percent nonpaying percentage is, of course, dramatically lower than the famous 47 percent figure resulting from a snapshot of a single year (2009) near the end of the 40-year sample period.

Also using a multiyear approach, but with fewer years taken into account, David Splinter reported a similar — albeit less dramatic — tendency for the nonpaying percentage to decline as the study period lengthens. He calculated the fraction of working-age adults paying no income tax in 2009 at 43 percent but found that that figure fell to 32 percent for a five-year period centered on 2009, and to 28 percent for an 11-year period also centered on 2009.38

Integrating the multiyear and multi-tax approaches, Bradley T. Heim, Ithai Z. Lurie, and James Pearce analyzed combined federal income tax and payroll tax liabilities over a series of rolling five-year windows (2001 through 2005, 2002 through 2006, and so on). They found that “20 to 30 percent [depending on the starting year for the five-year window] of those who paid no taxes or had a negative liability in a given year switched to paying positive tax on average over the next four years.”39

Of course, these studies are of past years, and so do not directly address who will have positive income tax liabilities from a multiyear perspective if Congress enacts the AFP as proposed. Nevertheless, they suggest that the fraction of the population with net positive federal income tax liabilities over a five- or 10-year period will remain comfortably above half after enactment of the AFP, even if the single-year fraction falls to near 50 percent. Although a multiyear perspective will probably never be as salient to the general public as single-year snapshots, it should go some distance toward assuaging concerns about the income tax remaining a mass tax. Moreover, this perspective is not subject to any critique comparable to the forceful double-counting critique of the income-tax-plus-payroll-tax perspective.

C. Return Filing, Not Tax Paying

The income tax may be in danger of becoming a tax that most people do not pay (in any given year), but Form 1040 is in no danger of becoming a form that most people do not file. The TPC has estimated that there were 174.7 million individual income tax units for 2019, counting both filing and nonfiling units.40 Although the TPC did not indicate the breakdown between filing and nonfiling units, a rough estimate of the number of nonfiling units can be made by combining the TPC data with IRS tax return data. The IRS recently reported that during fiscal 2020 it received 157.2 million individual income tax returns.41 The numbers are not strictly comparable because the IRS figure includes 2018 returns filed in fiscal 2020 and excludes 2019 returns not filed until fiscal 2021. Nevertheless, the two differences should roughly offset, indicating something in the neighborhood of 17.5 million nonfiling tax units in 2019. Thus, the tax return filing figure is something close to 90 percent.

With the income tax serving as the vehicle for the delivery of the AFP’s expanded refundable credits, there is no reason to expect enactment of the AFP to decrease the very high tax return filing percentage, regardless of how much it may decrease the income tax paying percentage. With the AFP enacted, almost all the population will participate in the income tax by filing a return. The cash bottom line on that participation will be a net tax payment for roughly half the filers, and receipt of a net transfer for roughly the other half. Even if the income tax is in danger of no longer being a mass tax, it is in no danger of being a mass tax-and-transfer system. If the fiscal-citizenship-enhancing virtues of a mass income tax require only mass participation in the income tax, the AFP poses no threat to those virtues.

The key to the argument that fiscal citizenship is furthered by filing a tax return and receiving a cash transfer as a result is that eligibility for the transfer depends on the filer having contributed to the common good in some way other than paying tax. This is perhaps easiest to see in the case of the EITC; EITC recipients fulfill an obligation to society by working to support themselves and their families, and the EITC recognizes and rewards their labors.42 If return filing memorializes income tax paying as an act of fiscal citizenship for those with positive tax liabilities, it memorializes work as an act of fiscal citizenship for EITC recipients. This view is consistent with EITC recipients’ own understandings of the credit, as reported in a leading interview-based sociological study. The study concluded that the EITC program is “fully consistent with American values, which depict work as proof of good citizenship.”43 The work-and-family connection would be similarly apparent in the AFP’s expanded and refundable CDCTC, so the same fiscal citizenship analysis applies to it.

Eligibility for an expanded and fully refundable CTC would not depend on earned income, so it calls for a different perspective on fiscal citizenship. In an era in which the United States’ birthrate has fallen below replacement fertility and is likely to remain there for the foreseeable future,44 and in which the strategy of increasing immigration to make up the difference is politically fraught, to have children is to make an invaluable contribution to the social and economic future of the nation (including to the long-term viability of Social Security). An expanded and fully refundable CTC would recognize and reward having and raising children as an act of fiscal citizenship. As with the other AFP credits, claiming the CTC by filing Form 1040 would increase the salience of the fiscal citizenship aspect of the credit.45

The major remaining AFP credit — the expanded PTC — can also be justified on fiscal citizenship terms, although perhaps not quite as convincingly as the other three. Tax return filers who purchase qualifying health insurance through a state or federal exchange contribute to the public good by ensuring that they will not have large uninsured healthcare costs, which costs would become burdens on governments, healthcare providers, or both. Again, filing Form 1040 memorializes the insurance-purchasing filer’s contribution to the commonweal and triggers the appropriate governmental recognition and reward.46

If the AFP also included a universal basic income (UBI), to be delivered through the return-based income tax, that would be more challenging to justify in fiscal citizenship terms than any of the AFP credits, for the simple reason that qualifying for a UBI by definition requires no behavior (beyond existence within the relevant jurisdiction) on the part of the recipient. The justification would have to be based on a conception of fiscal citizenship as “a reciprocal relationship involving rights as well as duties.”47 In earlier work, I have briefly sketched the outline of such an argument, as a way of understanding the EITC not as a reward for satisfying one’s fiscal citizenship obligation to work, but as a payment in satisfaction of one’s right to a decent standard of living if one does work.48 A similar rights-based approach might be applied to a UBI. But development of the fiscal citizenship case for Form 1040 filing as the vehicle for UBI delivery can await the appearance of a UBI proposal with a serious chance of enactment.

D. Making Transfer Programs Nontax

Suppose that, as 2012 recedes deeper into the past and memories of the Romney video fade, eventually it again becomes politically important to have an income tax paid each year by a large majority of American households. Suppose also that none of the approaches described above satisfy the popular mood — that it is not enough that most people have a positive combined income-payroll tax burden, or that most people have positive net income tax liabilities over five- or 10-year windows, or that those who do not pay income tax contribute to society in other ways (such as by working, or by having and raising children). Even in that situation, it might be possible to satisfy the demand for a mass income tax without changing anything of substance, by taking the crucial transfer programs — the refundable credits responsible for the low-income taxpaying percentage — out of the income tax.

A current example of this approach comes from none other than Romney, whose Family Security Act proposal calls for a “monthly cash benefit for families” of $350 ($4,200 per year) for each child under the age of 6, and $250 ($3,000 per year) for each child older than 5 but younger than 18. Rather than being refundable tax credits administered by the IRS, these benefits would be nontax payments “administered monthly through the Social Security Administration.” To be sure, the IRS and Form 1040 would be deeply involved, because the annual child benefit amounts would be subject to income-based phaseouts, and “any overpayments or underpayments would be reconciled through the IRS after filing year-end taxes.”

This is not merely substantively similar to President Biden’s AFP CTC proposal; it is even quite similar in its administrative details, except that the monthly payments would be sent by the Social Security Administration rather than the IRS. Apparently, that minor difference, along with the difference in official labels (the Biden CTC payments would be called tax credits, whereas the similar Romney payments would not), would suffice to keep the Romney child tax benefits from reducing the income tax paying fraction of the population. It seems that Romney, at least, still cares about the coverage of the income tax. One suspects he was careful to describe the proposed payments as outside the income tax so he would not have to answer questions about how to reconcile his proposal with his earlier insistence that a clear majority of the population be required to pay income tax.

After the 47 percent estimate went viral (and even before the release of the Romney video took the estimate somewhere beyond merely viral), some commentators suggested that if having a large majority of the population pay income tax is politically important, and if large-scale federal cash transfer programs are good policy, the only solution may be to forgo the advantages of tax-based administration of those transfer programs. For example, Eric Toder of the Urban Institute commented:

Perception matters. Tax wonks can argue until they are blue in the face that these programs are spending and that recipients of these subsidies are really paying positive taxes before getting their benefits. I totally agree with this logic, but it’s a tough sell. . . . So we may have to reconsider how we provide benefits to low-income and other households.49

Romney’s proposal suggests that policymakers may not be put to this difficult choice after all; it may be possible to label a program as nontax, to persuade the public of the aptness of that label, and still to have the IRS deeply involved in the program’s administration.

For that matter, it may not even be necessary to have the Social Security Administration send out the monthly payments. Suppose Congress changed nothing about the administration of the Biden CTC proposal — enacting it with the IRS in charge of both distributing the monthly payments and reconciling the monthly payments with the final correct payment amounts based on information from Forms 1040 filed after year-end — but declared that the payments were nevertheless not part of the income tax. After all, some non-income taxes — most notably the self-employment tax — are administered through Form 1040, yet the public seems to accept that those taxes are not conceptually part of the income tax.50 Under this ipse dixit approach to what counts as part of the income tax, any or all refundable credits could be removed from the income tax without changing either the substance or the administration of those benefits; the only thing that would change would be the income tax paying percentage of the population.51

Only by experimentation could Congress discover whether a public that cares about the coverage of the income tax could be mollified by mere changes of labels. For the moment (before Congress has undertaken the experiment), however, three points are worth noting. First, the idea would not be to pull the wool over the public’s eyes. Rather, the idea would be that symbolism matters for its own sake, independent of substance, and that changing the labels would change the symbolism.52

Second, in one significant respect the symbolic change might actually help the public to better understand the substance. A common criticism of an income tax paid by only an affluent minority is that under such a system most Americans would not have any “skin in the game” — meaning they would have no reason to object to income tax rate increases because they would not pay income tax in any event.53 In fact, the criticism is wrong. Suppose, for example, an individual with $40,000 of income has an income tax liability of negative $2,000, produced by the application of a 10 percent tax rate to $40,000 of income, combined with refundable credits totaling $6,000. If the tax rate were raised to 15 percent, the pre-credit tax would increase from $4,000 to $6,000, and the post-credit tax would be zero. Despite not having a positive income tax liability with or without the proposed rate increase, the taxpayer has a full $2,000 of “skin in the game” regarding the rate increase — as much “skin” as if the refundable credits did not exist. This important point would be much more salient if the $6,000 of transfer payments were not labeled as part of the income tax.

Third, although it is possible in a formal sense to move any credit out of the income tax by labeling alone, convincing the public of the appropriateness of that relabeling should be easier the less the credit resembles traditional tax credits. Thus, monthly CTC payments (both the payments in effect for 2021 and the proposed AFP payments in later years) are particularly good candidates for relabeling because they do not look very tax-like to begin with. On its own initiative, a few years ago the TPC unofficially removed the PTC from the income tax for purposes of its estimates of income tax paying percentages. Shortly before the PTC was scheduled to become effective in 2014, the JCT estimated the outlay cost of the credit (that is, PTC amounts exceeding pre-credit income tax liabilities) at $237.5 billion for 2014 through 2017.54 One might have expected a spike in the nonpaying percentage in 2014, with so large a refundable credit coming online in that year. Instead, the TPC predicted a slight decrease in the nonpaying percentage, from 43.3 percent in 2013 to 41.4 percent in 2014.55

As I explained in an earlier article, “The TPC decided that the [PTC] was so different in its substance and administration from other tax expenditures (even from other refundable credits) that it would be misleading to include the [PTC] in the analysis of the income-taxpaying percentage.”56 Indeed, the PTC was — and is — a very unusual sort of tax credit. Not only has it always been paid out monthly (like the current and proposed CTC innovations, but unlike other credits), but it is paid directly to insurers rather than to taxpayers themselves.57 There is no doubt, however, that it is officially part of the income tax and that the TPC’s treatment is at odds with the official labeling. Nevertheless, the TPC’s unofficial removal of the PTC from the income tax seems to have succeeded, in the sense that I am unaware of anyone having challenged that approach (beyond my own raised eyebrows in the earlier article). If private parties can succeed in unofficially taking provisions out of the income tax (for purposes of calculating taxpaying percentages) when the provisions have features not normally associated with tax credits, it should be even easier for Congress to do the same by official proclamation.

V. Conclusion

The argument of this article has had a certain Duke of York quality (“He marched them up to the top of the hill / And he marched them down again”). After observing that no one seems to be concerned about the effect that enactment of the AFP would have on the income tax paying percentage, it argues that people should be concerned. It then turns around, however, and argues that the fiscal citizenship virtues of a mass income tax could survive — and even flourish — following enactment of the AFP. The article’s march up and down the hill has not been pointless, however, because the fiscal citizenship virtues of a mass income tax will not automatically survive the AFP’s transformative expansion of refundable tax credits. Rather, advocates of the AFP will have work to do to protect and enhance the fiscal-citizenship-promoting character of the income tax. Advocates should acknowledge the AFP’s downward effect on the income tax paying percentage of the population. They should then explain how the United States would still remain a nation of taxpayers from both multi-tax and multiyear perspectives. They should also emphasize how the tax return filing process recognizes and rewards the civic contributions (especially paid labor and child rearing) of return filers even when their net income tax liabilities are zero or negative. Finally, AFP advocates should keep in mind that Congress could enact both the substance and the tax-based administration of the proposals without officially designating the programs as part of the income tax, and that there may be significant (and wholly legitimate) symbolic advantages to that approach.

FOOTNOTES

1 Lawrence Seltzer, The Personal Exemptions in the Income Tax 62, Table 9 (1968).

3 Mother Jones, “Full Transcript of the Mitt Romney Secret Video” (Sept. 19, 2012). The 47 percent figure cited by Romney came from a TPC estimate, published in Tax Notes during 2009, that in that recession year 47 percent of tax units would owe no income tax. Roberton Williams, “Who Pays No Income Tax?Tax Notes, June 29, 2009, p. 1583. After 2009 was over, the TPC revised the 47 percent estimate to 50 percent. TPC, supra note 2.

4 Editorial, “Taxes in a Democracy,” The New York Times, Oct. 17, 1945. For a review of the arguments offered by Romney’s defenders, see Lawrence Zelenak, “Mitt Romney, the 47 Percent, and the Future of the Mass Income Tax,” 67 Tax L. Rev. 471, 483-484 (2014).

5 For a review of those arguments, see id. at 481-483. For more detailed considerations of several reasons why non-income-tax-paying figures near or above 50 percent may be unobjectionable, see Section IV of this article, and Zelenak, Learning to Love Form 1040: Two Cheers for the Return-Based Mass Income Tax 27-35 (2013).

6 Philip Rucker, “’47%’ Remarks Were ‘Completely Wrong,’” The Washington Post, Oct. 5, 2012.

7 Zelenak, “Mitt Romney,” supra note 4, at 499.

8 American Rescue Plan Act of 2021, P.L. 117-2, sections 9601 (recovery rebates), 9611 (CTC), 9621 (EITC), 9631 (CDCTC), and 9661 (PTC).

9 For official descriptions of the expansions of the CTC, EITC, CDTC, and PTC included in the AFP, see Treasury, “General Explanation of the Administration’s Fiscal Year 2022 Revenue Proposals,” at 68-80 (May 2021) (under the heading “Support Workers, Families, and Economic Security”) (green book).

10 TPC, “Table T20-0119: Distribution of Tax Units With Zero or Negative Income Tax, by Expanded Cash Income Percentile, 2019” (Mar. 25, 2020) (showing 174,690,000 total tax units, including 75,672,000 nonpaying tax units).

11 JCT, “Overview of the Federal Tax System as in Effect for 2021,” JCX-18-21, at 40 (Apr. 15, 2021) (“Table A-6 (Distribution of Income and Taxes, and Average Tax Rates in 2021 (Projected))”).

12 The JCT projections also estimate combined income, employment, and excise tax liabilities and average tax rates by income ranges. Taking into account employment and excise taxes as well as income taxes, average tax rates are zero or negative only for income ranges covering the bottom 40 percent of the income distribution. Id.

18 Green book, supra note 9, at 68-80. The extension would be through 2025 for the CTC; the extensions for the other three credits would be permanent.

19 John F. Cogan and Daniel L. Heil, “The Impact of President Biden’s American Families Plan on the Federal Entitlement System,” Hoover Institution Economics Working Paper 21111, at 14 (June 28, 2021).

20 Stephen Ohlemacher, “Nearly Half of U.S. Households Escape Fed Income Tax,” Associated Press Financial Wire, Apr. 7, 2010.

21 For a review of the 2010 commentary, see Zelenak, “Mitt Romney,” supra note 4, at 474-477.

22 Hodge, “Why More Americans Pay No Income Tax,” CNN.com, Apr. 15, 2010.

23 After the Romney video and before Biden’s AFP proposal, the Tax Foundation had continued to complain about there being too few income tax payers. See, e.g., Robert Bellafiore and Madison Mauro, “A Growing Percentage of Americans Have Zero Income Tax Liability,” Tax Foundation (Mar. 14, 2019).

24 Garrett Watson et al., “Details and Analysis of Tax Proposals in President Biden’s American Families Plan,” Tax Foundation, at 1 (May 6, 2021). The authors estimate that enactment of the AFP would reduce GDP by 0.4 percent, gross national product by 0.6 percent, employment by 64,000 full-time-equivalent jobs, and wages by 0.4 percent.

25 Cogan and Heil, supra note 19.

26 Id. at 14.

27 Rector, “The Biden Child Allowance: Examining the Impact of Welfare on Work,” Heritage Foundation (Feb. 26, 2021).

28 Zelenak, Learning to Love Form 1040, supra note 5.

29 “Roosevelt and Doughton Letters and Morgenthau’s Note,” The New York Times, Aug. 3, 1941.

30 “Berlin Writes Song for Treasury, ‘I Paid My Income Tax Today,’” The New York Times, Jan. 26, 1942.

31 The Adventures of Ozzie and Harriet, “Income Tax” (originally broadcast Mar. 7, 1949).

32 Life With Luigi, “Income Tax Season” (originally broadcast Mar. 7, 1950). The other two episodes are Hey Jeannie, “Jeannie’s Income Tax” (originally broadcast Feb. 9, 1957), and The Bill Dana Show, “A Tip for Uncle Sam” (originally broadcast Jan. 19, 1964).

33 TPC, “Table T21-0069: Individual Income and Payroll Tax Provisions in the Administration’s FY 2022 Budget Proposal” (June 9, 2021). The table includes information on only combined income-payroll tax rates; it does not show results separately for each tax.

34 The payroll tax does make a few cameo appearances on Form 1040. See 2020 Form 1040, line 23 (requiring inclusion — from Form 4137, “Social Security and Medicare Tax on Unreported Tip Income” — of payroll tax on tip income not reported to one’s employer, and requiring inclusion — from Form 8919, “Uncollected Social Security and Medicare Tax on Wages” — of payroll tax not paid by one’s household employer), and line 31 (permitting a credit — from lines 10 and 13 of Schedule 3 — for excess payroll tax withheld for an employee with two or more employers). Also, the closely related self-employment tax must be reported on Form 1040 (line 23, imported from Schedule 2, lines 4 and 10).

35 For example, the Social Security Administration’s website formerly included a section for “kids and families” that stated that “since each worker pays Social Security taxes, each worker earns the right to receive Social Security benefits without regard to need.” Social Security Administration, “Frequently Asked Questions: How Does It Work?” (accessed Mar. 17, 2005).

36 Fullerton and Rao, “The Lifecycle of the 47 Percent,” 72 Nat’l Tax J. 359, 392 (2019). The analysis excluded payroll taxes, Social Security benefits, and unemployment insurance. It did, however, include cash benefits beyond just negative income tax liabilities, such as Aid to Families With Dependent Children (in earlier years) and Temporary Assistance for Needy Families (in later years). If cash benefits taken into account were limited to benefits conferred through the income tax, the excess of tax paid over benefits received would be even greater.

37 Id.

38 Splinter, “Who Pays No Tax? The Declining Fraction Paying Income Taxes and Increasing Tax Progressivity,” 37 Contemp. Econ. Pol’y 413, 418 (2019). In other words, netting positive and negative income tax liabilities for the five-year period, 32 percent of working-age adults had net negative liabilities. Applying the same method to the 11-year period, 28 percent had net negative liabilities.

39 Heim, Lurie, and Pearce, “Who Pays Taxes? A Dynamic Perspective,” 67 Nat’l Tax J. 755, 776 (2014).

40 TPC, supra note 10.

41 IRS, 2020 Data Book, at 4, Table 2 (June 2021).

42 For a fuller development of the fiscal citizenship case for the EITC, see Zelenak, Learning to Love Form 1040, supra note 5, at 32 and 68-70. In addition to the argument set forth here, that fuller development includes an argument that fiscal citizenship can be understood as “a reciprocal relationship involving rights as well as duties,” and that by making EITC payments the government recognizes the right of those who work full time to earn enough to support themselves and their families at a level of basic decency. Id. at 69-70.

43 Jennifer Sykes et al., “Dignity and Dreams: What the Earned Income Tax Credit (EITC) Means to Low-Income Families,” 80 Am. Soc. Rev. 243, 259 (2015).

44 Melissa S. Kearney and Phillip Levine, “Will Births in the US Rebound? Probably Not,” Brookings Institution (May 24, 2021).

45 The proposed advance payment of half of the credit (already in effect, on a temporary basis, for 2021) might weaken the perceived connection between Form 1040 and the credit, but filing Form 1040 would still be necessary to determine the correct amount of the credit and to receive the portion not paid in advance.

46 Under current law, the PTC is delivered largely through advance payments (directly to insurers). That practice would continue under the proposed AFP expansion. The points made in the preceding note concerning advance payments of the CTC also apply to advance payments of the PTC.

47 Zelenak, Learning to Love Form 1040, supra note 5, at 70.

48 Id. at 69-70.

49 Toder, “Was Don Alexander Right: Should We Stop Using the IRS to Run Social Programs?” Tax Vox Blog, Apr. 19, 2010. See also Zelenak, Learning to Love Form 1040, supra note 5, at 33-34.

50 The self-employment tax appears on line 23 of the 2020 Form 1040 (imported from Schedule 2, lines 4 and 10). For several other instances of the payroll tax appearing on Form 1040, see supra note 34.

51 The way the EITC is presented on Form 1040 tends to obscure whether an EITC claimant who receives a check from the IRS has a negative income tax liability or whether the check merely represents a traditional refund of overwithholding. See Zelenak, Learning to Love Form 1040, supra note 5, at 495. An interview-based sociological study of EITC recipients confirms that confusion and misunderstanding on this point is common. Sykes et al., supra note 43, at 243 and 257. Regardless of one’s views on the merits of this confusion — whether one thinks it is good or bad that many who have negative income tax liabilities because of the EITC believe they are income tax payers — this raises a different question from that discussed in the text. For the EITC, the public policy question is what — if anything — to do about some individuals being confused about their own taxpaying status; the question in the text is how to present national statistics on taxpaying status.

52 In this connection, it is clear that one can believe that most people should pay income tax, while also believing that most people should be net beneficiaries of government — in other words, that the overall effect of taxes and government spending programs should be to make most people better off, even as most people pay income tax. See Zelenak, “Mitt Romney,” supra note 4, at 488-494, describing three fiscal incidence studies, each concluding that the net distributional effect of all tax-and-spending programs was to transfer economic resources from the top 40 percent of the income distribution to the bottom 60 percent. In explaining the absence of public outrage over these findings, I noted, “Complaining that the government makes most people better off may not serve as an effective rallying cry against current policies.” Id. at 493.

53 See, e.g., Hodge, supra note 22.

54 JCT, “Estimates of Federal Tax Expenditures for Fiscal Years 2012-2017,” JCS-1-13, at 39 and 41 (Feb. 1, 2013).

55 TPC, “Table T13-0228,” supra note 2.

56 Zelenak, “Mitt Romney,” supra note 4, at 499.

57 For the rules governing direct payments of the PTC to insurers, see 42 U.S.C. 18082.

END FOOTNOTES

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