Our Tax System Should Be a Tool to Fight PovertyBut Instead It۪s Pushing People into It
There is a lot of rhetoric these days about fighting poverty from political leaders across the ideological spectrum. Unfortunately, while policymakers pay lip service to these ideals, many continue to push policies that undermine one of our most valuable tools in this fightthe tax system.
Efforts to use our tax system to address poverty are being threatened on two fronts. First at the federal level, there has been an escalation of misleading rhetoric designed to delegitimize the Earned Income tax Credit (EITC) and the progressive income tax more generally. Then at the state level, regressive tax systems are actually pushing low-income families into poverty. Astonishingly, policymakers in some states seem intent on exacerbating the problem.
The federal EITC has historically enjoyed broad bipartisan support. It works by providing up to 45 cents in tax credits for each dollar earned by families living near the poverty lineencouraging employment and moving low-paid workers closer to a living wage. For example, the EITC lifted 3.1 million children in working families out of poverty in 2011. But a stealth campaign against the EITC and similar low-income tax credits threatens to subvert this crucial anti-poverty strategy.
At the federal level, this campaign is embodied in one number: 47 percent. Some policymakers have argued that because nearly half of Americans pay no federal income taxes, these low-income Americans have no “skin in the game.” This argument has been used to justify tax cuts that disproportionately help the best-off Americans: since the poor aren۪t paying anything now, why should we give them tax cuts? But the logical extension of this argument is to eliminate the low-income tax credits that help make that 47 percent statistic possible. If the goal is to give everyone skin in the game, there۪s no more straightforward way then eliminating the EITC.
But the skin in the game argument is flat wrong. In fact, everyone pays taxes. The oft-cited 47 percent statistic refers only to the federal income tax, which represents roughly half of all federal revenues. The other half includes the payroll tax and excise taxes, which actually fall most heavily on the poorest Americans. An analysis by my organization, the Institute on Taxation and Economic Policy (ITEP), shows that when these other taxes are accounted for, every income group ends up paying a substantial share of their income in federal taxes.
The same ITEP analysis also shows that when applied to state and local taxes, the skin in the game argument is merely a cruel joke. In almost every state, the state tax system imposes the highest effective tax rates on low-income families. This is because states rely heavily on highly regressive sales and property taxes. States usually incorporate a third revenue source, the income tax, which can be easily structured to raise substantial revenue without imposing costs on low-income families. In reality though, most state income taxes fail to live up to that promise. As the chart below indicates, rather than getting a free ride, many lower-income Americans are facing substantial burdens once state and local taxes are accounted for.
This disturbing tendency of state tax systems to make the poor poorer has a straightforward remedy: enhancing progressive state income taxes, while providing meaningful low-income tax credits and resisting the urge to further increase sales taxes. Sadly, lawmakers in some states have proposed the opposite approach: paring back or repealing the state income tax while simultaneously increasing their sales tax. These moves would invariably make already-unfair tax systems even worse. An ITEP analysis of Louisiana Governor Bobby Jindal۪s 2013 proposal to gradually replace the state۪s income tax with a higher sales tax showed that it would sharply increase taxes for families living below the poverty line, while providing huge tax cuts for the best-off Louisianans. During state legislative battles this year, our work documented a similar potential impact under proposed tax shifts in Nebraska, North Carolina, Ohio, and a number of other states.
The good news is that to date, our collective commitment to achieving anti-poverty objectives through the tax code has not yet been undermined. There has been no serious legislative effort to repeal the EITC at the federal level, and recent efforts to enact regressive “tax shifts” at the state level have generally fallen flat. There is a straightforward explanation for these recent failures: the American public understands and supports the goal of ending poverty, and recognizes that these misguided proposals would push more families below the poverty line. As policymakers in Washington and the states embark on efforts to reform tax systems, it۪s essential to communicate to lawmakers what the public already knows: our tax system plays a vital role in mitigating poverty, and that role should be expandednot reduced.
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Matt Gardner is the executive director of the Institute on Taxation and Economic Policy.
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