The big complaint stems from two aspects:
- Some people have such low incomes that their deductions (same as your deductions, not different ones) totally wipe out their income tax liability.
- Some people have such low incomes from working that they benefit from tax credits that reimburse even more than they paid in from income tax payroll deductions. These credits include the Earned Income Tax Credit, Making Work Pay Credit, and Child Tax Credit. In many cases, these credits pay back even more than the person paid in social security tax and Medicare tax.
- Making Work Pay Credit is small, about $400, and is part of the stimulus to get more money in the pockets of most lower and middle class working people. I like it, but it wasn't meant to be long-term, but I'm not going to defend its continuation.
- The Child Tax Credit is a family-friendly support to low and middle income families that support children under age 13. Kids are expensive, and low income families struggle to support them. These tax credits make it a bit easier to stretch your $380 weekly paycheck to help pay your bills and still have some money left to buy your kids new shoes from a store instead of searching vainly for decent shoes that are the right size and not hideous looking from the Salvation Army thrift store. The Child Tax Credit maxes out at $1000 per child, up to $2000. Families making under, say, $25,000 yearly really need this extra help, but the credit has been extended to families making up to $110,000 a year to sweeten it for the middle class. If the credit should go, take it away from the top first, and maybe keep for the under $50,000 a year people.
- The largest target for the critics is the Earned Income Tax Credit. Here is potted history per Wikipedia: it started under President Ford. The amount paid out increased under Presidents Reagan, Bush 1, and Clinton. Reagan in particular expanded this credit (actually a subsidy) to make low-wage work pay more than welfare. Not because welfare was so generous, but because many low wage jobs pay so little, but require a family to take on more expenses such as transportation, slightly better clothing, child care, etc. The Earned Income Tax Credit maxes out about $5700, but that is only for families with under $50,000 income.
Skin in the Game
The outcry arises because these worker don't have "skin in the game" because they don't pay income tax. The argument is that they don't care about income tax rates because they don't pay. There is some logic in this argument, but it isn't strong. Anyone can be accused of caring only about their own tax rate, and not about any other tax rates. Many times this is true. Lots of people want their own rates low, and everyone else's higher. This isn't a vice you can pin only on low-wage workers, because it applies equally to middle class, upper middle class, well-to-do, and the rich.
I suspect that this is a dog-whistle that goes along with the conservative talking point that the Democrats are trying to increase the number of people dependent on the government. However, low-wage workers aren't getting a free ride. They work AND they pay payroll taxes, which are a huge contributor to the federal budget (40% in 2010).
Make Them Pay
If you want to make life harder for the working poor, by all means, protest the EITC. But maybe it should be the last program you try to eliminate since it gives recipients the most control over how they allocate the money. If you want to reduce government spending, you may want to target direct welfare, medical payments, food stamps, rental subsidies, public schooling, social programs, training, and higher education first.
If you're angry that some people pay less tax than you do, get over it. EITC recipients will never contribute as much to federal revenue as middle-class workers who pay both payroll and income taxes. They just don't earn nearly as much, so they don't have the money to contribute. But what should they do, just disappear? Work 80 hours a week just so that they can pay more? I think only a selfish lout would demand that.
[Original post accidentally deleted, then reconstituted from salvaged bits. What a pain. An instance where one wrong move creates a ton of new work.]
Update 10/11/11. Read my thoughts on a fairer tax code.