Posted by: danielfee | October 15, 2012

47% Achieve Republican Utopia

After thirty years of Republican tax policies, forty-seven percent (47%) of all Americans have achieved the Republican utopia of paying zero dollars in Federal income tax. But in a stunning reversal of Republican tax policies which started under Ronald Reagan, Mitt Romney declared at a private fundraiser in Boca Raton, Florida that “There are 47 percent of the people who will vote for the President no matter what. All right, there are 47 percent who are with him, who are dependent upon government, who believe that they are victims, who believe the 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. That that’s an entitlement. And the government should give it to them. And they will vote for this President no matter what…These are people who pay no income tax.”

So according to Mitt Romney, the Republican Party policies of the past 30 years which have consisted of passing tax cut after tax cut and signing pledges to never raise taxes has led directly to these people becoming victims that are dependent upon government and will therefore vote to re-elect President Obama. If this sounds a little strange, that’s because it is. Mitt Romney has been spinning so hard that he has come full circle and is now blaming tax cuts promoted by his Republican Party, with the assistance of some Democrats, for creating the entitlement society all of whom will now vote to reelect a Democratic President. The 47% statement by Romney is so wrong on so many different levels it is difficult to untangle. But I will give it a try.

First a little background. It was in March 1976 that a conservative associate editor for the Wall Street Journal named Jude Wanniski penned a political theory that he called The Two-Santa Theory. Wanniski then became a senior economic advisor to Ronald Reagan when the Republicans began implementing this theory. According to Wanniski, “For the U.S. economy to be healthy and growing there must be a division of labor between Democrats and Republicans; each must be a different kind of Santa Claus.” He said the Democrats are best suited for the role of the “Spending Santa Claus” and the Republicans should be the “Santa Claus of Tax Reduction”. Wanniski blamed the nations economic misery of the early 1970’s on the failure of the GOP to fulfill their role as the tax-cutting Santa Claus. He attributed this to “something in the Republican chemistry that causes the GOP to become hypnotized by the prospect of an imbalanced budget.” So under Wanniski’s theory, the Democrats got to play Santa Claus by giving the American people widely supported programs like social security, unemployment compensation and other “big government” projects like roads, bridges, dams and other infrastructure projects that provided paychecks to construction workers under FDR’s New Deal. Additional programs such as Medicare and Medicaid were added later by other Democratic presidents and were also widely popular and remain so today. As he saw it, “the Republican’s continued to play Scrooge, carping against increased spending without ever offering the obvious alternative of tax reduction”. Ever since the Reagan presidency the Republicans have followed this theory with one exception; George H.W. Bush broke his promise of “read my lips, no new taxes” and was punished at the polls when he sought re-election in 1992. To make sure no other Republicans would stray from the “never raise taxes” reservation, Grover Norquest of the conservative tax activist group Americans for Tax Reform (ATR) created “the pledge” that all Republicans have signed to make sure that they never vote for a tax increase again.

A companion political strategy employed by conservatives in an effort to limit government spending is known as starving the beast.” In theory, by cutting taxes to deprive the government of revenue will force the federal government to reduce spending and deprive Democrats of fulfilling their role as the “Spending Santa Claus”. In this context the term “the beast” refers to the government and the programs it funds. But they are typically only referring to the social programs such as welfare, Social Security, Medicare and public schools. However, it does not usually refer to government spending on military, law enforcement, prisons or other favored conservative programs. The earliest use of the actual term “starving the beast” as a political-fiscal strategy was in a Wall Street Journal article in 1985 where the reporter quoted an unnamed Reagan staffer. Maybe it was Wanniski himself that coined the phrase, but regardless the Republican Party has successfully implemented these dual political strategies for the past thirty years.

With this background in mind, if you are a logical and rational person you would think that the Republicans would be celebrating their achievement of reaching 47% of Americans paying no federal income taxes. But Mitt Romney was caught on tape saying just the opposite. So that raises the questions, just who are these 47%, from where did Mitt Romney obtain this statistic, and why does he think that paying no federal income tax is an “entitlement”? The 47% figure (actually it was 46.4%) came from the non-partisan Tax Policy Center. By the way, this is the same Tax Policy Center who recently evaluated the Romney-Ryan budget proposal to cut taxes further by reducing tax rates across the board another 20%, while at the same time committing that it will not increase the budget deficit because they will close tax loopholes and eliminate deductions. However Mr. Romney recently criticized the Tax Policy Center as being a partisan organization because they concluded that in order to achieve his commitment that the additional tax cuts would be deficit neutral, the only way he could accomplish it would be by closing tax loopholes and expenditures that would result in the middle class seeing a $2000 increase in their taxes while the top earners would see their taxes reduced. Keep this in mind and I will return to this topic later. Now that we know where he obtained the 47% figure, let’s look at the analysis prepared by the Tax Policy Center and see why Romney’s statement was so wrong.

The first level on which Romney’s statement was wrong is that he conflated those that receive welfare, Social Security or Medicare with the 47% of non-tax payers. While there may be some overlap between these two groups, they are not the same. It is doubtful that Mitt actually read the Tax Policy Center’s report “Why Some Tax Units Pay No Income Tax” because if he had here is what he would have discovered. Of the 37,870,000 tax units (the term unit is used because it could refer someone filing as single or married couple filing jointly) without an income tax liability, 16,665,000 (or 44%) were elderly. For many of these elderly this is because of the extra standard deduction in the tax code for the elderly or they may also qualify for an additional tax credit if they are 65 or older and make less than $17,500 ($20,000 if married filing jointly). Also their Social Security benefits are not taxable unless their income exceeds certain thresholds. Fully 90% of the elderly who pay no income tax are making under $40,000 per year. Would you call your parents or grandparents victims who don’t take personal responsibility just because they are using the tax credits provided to them in the tax code? Are the elderly tax credit and standard deductions some of the “loopholes” that Romney wants to close? Or is Mitt Romney proposing to tax all Social Security income regardless of income level? Who knows? He won’t say.

The next biggest portion of those who owed no income tax are those who claim tax credits for children or are the working poor using the earned income tax credit. Approximately 93% of these 11,510,000 (or 30.4%) tax units made less than $50,000 per year. The original purpose behind the earned income tax credit and the child tax credits, that were supported by both Democrats and Republicans, were designed to move people off welfare by giving them tax credits for working and tax credits for child care so they can come out farther ahead by working. So how is it that these working parents and working poor are not taking personal responsibility in Mitt Romney’s world? Most of the remaining tax units who owed no federal income tax were divided between those who qualified for education credits, had itemized deductions, ATL deductions and tax exempt interest, or other cash transfers that are excluded from taxation. Each of these deductions created a group that ranged between 5 to 6% of the total non-payers which combined were 8,632,000 tax units. But interestingly there are 65,000 tax units that made more than $200,000 that owed no federal income taxes and 3,000 of those actually made over one million dollars. How are these non-payers “victims” in Mitt Romney’s world? Are the child tax credits, earned income tax credits, education credits or itemized deductions some of the “loopholes” Romney wants to close? Again, who knows? He won’t say.

The second level on which Romney’s statement was wrong is that he classifies anyone who receives a government benefit as a “victim” and as someone who doesn’t take “personal responsibility.” The 49% of the population that lives in a household where at least one member is receiving what Mitt Romney classifies as “entitlements” are made up largely of the elderly, children and the disabled. For example, the largest group receiving a benefit are retirees who receive Social Security and/or Medicare benefits. 31.6% of Mitt’s “victims” are receiving Social Security benefits and 29% are receiving Medicare benefits. There is a lot of overlap between these two groups since they are both programs intended primarily to keep the elderly out of poverty. But would you consider a person who worked their entire life and paid into Social Security and Medicare who is now receiving the benefits they paid for as a “victim”? Sorry mom and dad or grandma and grandpa; you just didn’t take enough “personal responsibility” in your life so haven’t earned your Social Security or Medicare benefits, according to Mitt Romney. Once you subtract away the elderly, the portion of the population receiving assistance is closer to 19% through programs like Medicaid, food stamps (SNAP), welfare (TANF), unemployment insurance and veterans compensation. But if you dig a little deeper into the data on these programs, what you find with respect to the SNAP program is the breakdown of participants by age: 46.6% are children (0-17), 9.7% are elderly (60+) and of the 45.6% of non-elderly adults (18-59), almost two-thirds of them are women who are mostly stay at home moms taking care of their pre-school and school-aged children. Or if you look into the details of the welfare program, which is named TANF (Temporary Assistance for Needy Families), it requires a recipient to be working within two years of receiving benefits and it has a five-year lifetime cap on assistance. The actual number of people who receive welfare through the TANF program is only 1.4% of the total U.S. population. The average total number of recipients for 2011 was 4,363,000 people, translating to 1,845,638 families. Converting that into tax units, it represents just 2.2% of the non-tax payers if we assume that all of these recipients fall within the 47% Mitt Romney called victims. Of the total number of TANF recipients in 2011, 3,280,037 were children. Of course we all know that these “victim” children who won’t take “personal responsibility” for themselves will not be voting for Obama, because they have not reached voting eligibility age. When you subtract away the elderly and children, less than half of the recipients of some form of government assistance fall within the age group of 18-64 for working adults who might be eligible to vote. When all of this is taken into consideration, the so-called 47% drops to between 8 to 9% that are working age adults who might be able to vote for Obama, assuming that they had not lost their voting rights because of some past felony conviction. With voting participation rates in presidential elections ranging between 50 to 56%, it would seem that Mitt Romney has severely overestimated the number of people who he says are dependent on government and “will vote for this President no matter what.”

The third level on which Romney’s statement was wrong is his assumption that the 47% will be voting for Obama. The false assumption is that by receiving a tax deduction or credit which results in no income tax being owed, this somehow equates to a handout, or as Mitt phrased it, an “entitlement.” And that because they have received an entitlement, that implicitly means they will vote for Obama. But if you look closely at which states have the highest percentage on non-payers, the top ten in order are: Mississippi, Georgia, Arkansas, New Mexico, Alabama, Texas, Louisiana, Florida and Idaho. Eight of the top ten are “red states” that will no doubt vote for Mitt Romney. Of the top-ten, Obama will likely win New Mexico. Florida is considered a toss-up but appears to be leaning towards Obama. The other eight are strong Republican states and will vote for Romney. On the other hand the bottom ten, those with fewest non-payers, in order from the bottom up are: Alaska, Massachusetts, Connecticut, New Hampshire, Wyoming, North Dakota, Maryland, Washington, Minnesota, and Virginia. Only three of these states (AK, WY, ND) are certain to vote Romney. The remaining seven are likely to vote for Obama, with Virginia and New Hampshire still being classified as toss-ups but in which Obama has been leading in recent polls. So Mitt’s assumption that these non-payers would vote for Obama is not supported by the evidence of voting patterns or the recent polling data. Also, if you look at the age breakdown of the 47% non-payers, the largest percentage (44%) of them are elderly. Ironically, the only demographic group that Mitt Romney leads in the polls with is those over 65 years of age. However prior to making his 47% comment, Mitt Romney had a 20%+/- lead with the 65 and older voters. After his statement it has dropped to just 4%. I guess people who worked hard and paid into the Social Security and Medicare systems don’t like being told they are “victims” and don’t take “personal responsibility.”

The fourth level on which Romney’s statement was wrong is his assumption that the 47% are paying no taxes because they don’t work and “believe the 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.” When in fact the overwhelming majority of the 47%, except for those who have retired, are working. Conservatives like to say that the unemployed should take a job flipping burgers if they can’t find a job in their chosen career. But a job that pays $10 per hour, which is well above minimum wage, will generate a gross income of $20,800 per year. When you apply the standard tax deduction or any other of the other tax credits like the earned income tax credit or the child tax credits, these people will most likely be part of the 47%. This points to a much bigger problem that has been created by the trickle-down economic model. Over the past thirty plus years, as the productivity rate of the American worker continued to increase, the wage rate did not keep pace. From World War II until the early 1980’s, the chart of productivity gains and wage gains matched each other and rose together. Then they began to diverge with productivity continuing to rise and wages remaining flat. In other words, the trickle-down is not trickling down. The 47% of non-payers are working; they are just not being paid enough in order to owe taxes after tax credits and deductions are applied. What this also highlights is that the changes in tax and welfare policies which began under Ronald Reagan in 1986 has shifted the assistance to the working poor and even some in the middle class by utilizing the IRS taxing rules so that they would have less tax liability and therefore more money in their pocket to spend as opposed to a system where they are taxed. Then those tax dollars are recycled through a “transfer” system administered through some other government agency. In concept this is a sound policy, but in order for it to continue to work as originally intended, wages have to continue to grow along with productivity so that it doesn’t become a system where the tax credits alone are not enough to support a family; which means that additional “transfers” become necessary to make ends meet for some Americans. When wages don’t grow with productivity, this results in a government that receives less in tax revenues because there are now more non-payers and pays out more in expenditures. When economic conditions are good, people don’t tend to notice the size of the growing deficit and national debt resulting from the lower revenues and higher expenditures. But when the economy takes a severe downturn like it did in 2008-09, federal revenues drop even more and expenditures increase, then people start to take notice. But the typical knee-jerk reaction is to blame whomever is in charge at that moment instead of looking at history to find the root cause of the problem. There maybe some cases where the economic policy of the current President is responsible for a specific condition. But to create a situation where 47% of tax units owe no federal taxes is a multi-decade undertaking.

Maybe the statement Romney made at that $50,000-per-person private fundraiser in Boca Raton, Florida was not wrong from his perspective. Maybe it was a signal to his wealthy donors of how he intended to pay for the additional 20% cut in their tax rates that he was promising them. Remember that both the Romney 59-point plan and the Ryan budgets proposed to make the Bush tax cuts permanent. Then they also proposed to implement even more tax cuts which would cost approximately $4.8 trillion dollars over the next ten years. They pledged to lower the corporate tax rate from 35% to 25% and lower the marginal tax rates by 20% for everyone while broadening the tax base. But Romney and Ryan have also said that these additional tax cuts will be deficit neutral and that would be accomplished by closing tax loopholes and limiting deductions.

This brings us back to the topic I bought up earlier with respect to the analysis of the Romney-Ryan proposal by the non-partisan Tax Policy Center (T.P.C.). The study was prepared to determine the distributional effects of broadening the tax base if Mitt Romney were to keep his pledge of both cutting tax rates across the board and closing loopholes or limiting deductions to make it revenue neutral. They first determined how big of a hole would be created by the lowering of the tax rates, using today’s rates as the baseline. The first conclusion they reached was that everyone making more than $30,000 would see a tax cut, assuming no other tax policy changes were made (meaning no loopholes closed). Of course the amount of the tax cut would depend on the level of income, with those making between $30-50k seeing a 0.8% cut and those making over $1 million seeing a 8.3% tax cut. Those making under $30,000 would actually see a small tax increase due to the expiring tax provisions in the Obama stimulus bill even before the Romney broadening of the tax base is applied. Once the T.P.C. established how much lost revenue would need to be offset, they began to close loopholes and eliminate tax credits starting at the top income earning levels. Once they exhausted all of the loopholes for the top they worked their way down to lower-income earners. They assumed that there would not be any tax increases on savings or investments or changes to the capital gains rate since Romney has also stated they would be retained as they currently exist. After applying the closure of loopholes and elimination of tax credits, the net result is that those making under $200,000 would see a tax increase of 1.2%. Those making between $200,000-500,000 would see a tax cut of 0.8%. Those making between $500,000-1,000,000 would see a tax cut of 3.2%. And those making over a million per year would see a tax cut of 4.1%. It is a safe bet that those who forked out $50,000 for dinner that night in Boca Raton were in the last two groups.

Under repeated questioning, Mitt Romney has refused to provide any specifics when it comes to which loopholes he would close and deductions eliminated. But it is obvious that broadening the base cannot be accomplished by eliminating just the loopholes and deductions for the top tax brackets. Their tax cut may decrease from 8.3% to 4.1% as a result of losing deductions, but hey, it is still a tax cut. But if you are part of the under $200,000 per year group, look out! Your taxes are going up under Romney’s tax proposal.

Will the elderly lose their extra standard deduction, their tax credit and will all of their Social Security income now become taxable? Who knows? Mitt won’t say. Will the working poor lose their child tax credit, their child and dependent care tax credit, their earned income or make work pay tax credits? Who knows? Mitt won’t say. Will the middle class lose their itemized deductions for home mortgage interest, tax exempt interest or education tax credits? Who knows? Mitt won’t say. But all or some combination of these tax credits and exemptions for those making under $200,000 will have to go away. Unless, of course, Mitt Romney is lying and he plans to add the cost of his tax cuts onto the national debt just like his Republican predecessors George W. Bush and Ronald Reagan did.

Do I believe that Mitt Romney is actually proposing to reverse thirty years of Republican tax policies? No; I believe that Mitt is in favor of tax cuts. It is just that he only supports them for those in the top tax brackets. What he is proposing is just a repeat of the standard bait-and-switch tax strategy that the Republicans use during elections – promise an across the board tax cut which looks good on the surface. But as the saying goes, the devil is always in the detail. For those who are not making over $500,000 per year, when you hear Mitt Romney talking about broadening the base, closing loopholes and limiting deductions, just look in the mirror if you want to know who he is targeting with his tax proposals. You should keep this in mind when you vote in November.



  1. Excellent explanation and analysis. Thank you!

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