RALEIGH — As just about everything that can be said about the national political implications of Mitt Romney’s “47 percent” moment has already been said at this point – William Voegeli and Rich Lowry have penned two must-reads on the subject – I’ll just say a word or two about why North Carolina conservatives and libertarians should make the case against big government with greater precision and persuasion.
While increasing dependency on government is a very real problem, with both economic and political consequences, it cannot be measured effectively by annual income-tax statistics. Taxation is a process, not an event. It occurs throughout the year, and throughout the years. If your lifetime income is around the national average, there will be times when you pay relatively little in income tax – due to low earnings, high mortgage or child-rearing costs, or spells of unemployment, for example – and times when you pay much more.
Moreover, income taxes are only one way that government takes your income. There are payroll taxes, sales taxes, excise taxes, property taxes, and various “business” taxes that end up raising the prices that households pay or reducing the income they receive. To distinguish between the federal level of government, where the income tax is the dominant revenue source, and the state and local level doesn’t really rescue the point, because the three levels are intertwined. For example, large chunks of state and local budgets are now funded either by federal income or gas taxes or by debt to be serviced by future federal taxes. And some spending often thought of as “federal,” such as unemployment compensation, is actually funded by taxes over which states have substantial control.
The fact of the matter is that federal taxpayers are also state and local taxpayers. While some households may shield most or all of a given year’s income from federal income tax by the use of deductions and credits, they will still pay lots of other taxes. Here is a rough breakdown of how the annual tax burden is distributed:
• The poorest 20 percent of American households pay an average tax burden of about 16 percent of their incomes. Only 4 percent goes to federal taxes, to be sure, but state and local taxes represent about 12 percent of their annual income.
• Lower-middle-class households pay an average tax burden of about 21 percent – 9 percent federal and 12 percent state/local.
• Middle-class households pay an average tax burden of about 25 percent – 14 percent federal and 11 percent state/local.
• Upper-middle-class households pay an average tax burden of about 28 percent – 17 percent federal and 11 percent state/local.
• The wealthiest 20 percent of American households pay an average tax burden of about 31 percent – 20 percent federal and 11 percent state/local.
As I have often pointed out, one important conclusion to be drawn from these data is that those who say our current tax code favors the rich over the poor are either misinformed or untrustworthy. Upper-income households pay about twice as much as a share of their income in total taxes as lower-income households do.
Another important conclusion, however, is that taxes are a significant cost to most families, not just to the top 50 percent of income-earners. If you factor in cash and in-kind welfare benefits, most poor households and many near-poor households have no net tax liability. But most middle-income households, including those well below the 47 percent threshold, would be net taxpayers even after accounting for transfer payments. They do, indeed, have a direct interest in a smaller, less costly, and more effective government – one that delivers better return for the dollar and leaves more dollars in the hands of households to buy the services they wish from among competing providers.
Moreover, only Marxists and their ilk assume that people vote according to some sort of rigid class interest. The rest of us should be more discerning about how human beings actually think. Plenty of people who are not yet affluent oppose forced redistribution of wealth. They either see it as morally wrong, or expect to be affluent someday, or both. On the other side, places like Manhattan, San Francisco, and Chapel Hill are full of wealthy people who vote for welfare-state politicians. Some are leftist ideologues, the limousine liberals who are more generous with other people’s money than with their own. Others cast their votes primarily on issues other than economics – on abortion rights, for example, or foreign policy.
In other words, it is empirically false that Democrats can’t win substantial votes among upper-income households and Republican can’t win substantial votes among lower-income households. Millions of wealthy people with high tax burdens voted for Barack Obama in 2008 and will do so again. Millions of people with relatively low incomes and tax burdens voted for John McCain, and will vote for Mitt Romney.
As advocates of liberty, one of our tasks is to explain why increasing government dependency is a bad idea not just for wealthy taxpayers footing a disproportionate part of the cost of the welfare state but also for those families trapped in the poverty cycle or reliant on government monopolies for education and health care. Another task is to help North Carolinians understand how much they pay in taxes at all levels – and how bad a deal they are getting for the money.
Neither task is aided by inelegant rhetoric.
Hood is president of the John Locke Foundation and author of Our Best Foot Forward: An Investment Plan for North Carolina’s Economic Recovery.