Thursday, February 23, 2012

February's Chart of the Month

From Scribe at the Heritage Foundation:

The scuttlebutt about almost half of all Americans not paying any income tax has been out there for quite a while now. And truth be told, I've always thought it was a little inflated. After all, there are legitimate reasons for being off of the tax rolls. There are young people, people in college, retired people, people on disability, people on unemployment insurance, etc. And there are--of course--people on welfare and/or other forms of government assistance.

But how many people, what percentage of the population, would fall into those categories? If we allow that thirteen percent or so of the population is retired and another twenty-seven percent or so is too young to work, employed in jobs that pay very little, and/or in school, that gives us around 40% of the population that wouldn't be paying any taxes. Kick in another ten percent that is out of work or on public assistance--for one reason or another--and we're at 50%. Everything's copacetic, right?

Unfortunately, my thinking here is deeply flawed. Note that if I was right, if 50% was a realistic number, then past history wouldn't make any sense. After all, how could the number have possibly been below 30% for so many years? U.S. demographics haven't changed that much.

What I am missing is right there on the chart: it shows "the percentage of the population not represented on a taxable return." That big chunk of young people and students I was including are--or should be--represented on taxable returns as dependents:
"One of the most worrying trends in the Index is the coinciding growth in the non-taxpaying public,” wrote Heritage authors Bill Beach and Patrick Tyrrell. “The percentage of people who do not pay federal income taxes, and who are not claimed as dependents by someone who does pay them, jumped from 14.8 percent in 1984 to 49.5 percent in 2009."
Excuse me for a moment while I silently say a curse word, or two...

Okay, I'm back. So is there anything else I'm missing? Carving out my earlier mistake leaves us with around 23% as a reasonable number for the non-tax paying public. And indeed, that's just about where things start on the chart. But what happened in the sixties to cause such a huge drop in the percentage? Vietnam? The Civil Rights Movement? JFK's tax initiatives (he lowered rates)? Nope, none of the above (well, maybe in small ways). Instead, it was a couple of basic things: inflation and economic growth.

Very simply, people got moved into higher brackets because of these factors. When the economy started to slow down, the trend reversed itself and the stagflation of the seventies made it even worse. Reagan's economy--predictably--reversed the trend yet again, as the economy hummed.

Then something strange happened: the economy really hummed through the nineties, but the percentage not paying taxes increased. Why? Simple, the government expanded entitlements and tax breaks (and the percentage of the population entering retirement on Social Security alone also increased). This should explain things:

Look at how this chart--starting around 1987--tracks with the first. Eerie, isn't it? We--meaning the government--started giving away the farm and, surprise, surprise, people came running to get a share. It's those nasty old incentives at work, once again. The giveaways are so significant as to dwarf the effects of the economy, by and large. And when the economy is bad--as it is now--the percentages not actually paying taxes can truly explode, especially given that so many in that group are receiving funds from the government.

It almost reads like a blueprint for a doomsday scenario...

Cheers, all.


  1. Strange how under that evil Bush that gave tax breaks to the rich, the number of non paying people significantly increased

  2. I was being sarcastic :)

  3. Yes, so was I. :)

    Because--as I've said before--Bush was no conservative, when it came to domestic politics.