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Why more Americans pay no income tax

By Scott A. Hodge, Special to CNN
  • Scott Hodge says 52 million Americans who file returns won't have to pay income tax
  • He says politicians have created too many credits and loopholes
  • Hodge says it's dangerous to have so many people who don't contribute to tax rolls
  • Hodge: The credits make for a more progressive tax system, but that can harm the economy

Editor's note: Scott A. Hodge is president of the Tax Foundation, a nonpartisan tax research group in Washington which favors tax simplification and broader based taxes with low rates.

Washington (CNN) -- If "taxes are the price we pay for civilized society," to quote Justice Oliver Wendell Holmes Jr., then April 15 is the day that bill comes due for every working American.

But that is no longer the case for a growing class of Americans for whom the price of civilized society has been reduced to zero because the tax code's generous credits and deductions completely erase their income tax liability.

And for many of these nonpayers, civilized society actually pays them a hefty refund, which is not much different from a welfare check except that it's run through the tax code instead of through the Department of Health and Human Services.

If tax year 2009, for which we are paying today, is anything like tax year 2008, then a record number of the nearly 142 million Americans who will file a tax return will get back every dollar that was withheld from their paychecks during the year. During 2008, more than a third of all tax returns resulted in complete nonpayment. Many got quite a bit more, turning Tax Day into a payday.

Over the past 15 years, politicians have been working overtime to create a blizzard of tax credits targeted to "help" the so-called "middle class."

They've created the child credit, which is different from the child care tax credit, unless you have a grown child and then you can use the education credit. And if you don't have a child, then you can get one using the adoption credit. If you don't care for a child, there's the credit for caring for granny instead.

But if you'd rather care for air than people, there's a credit for buying a hybrid vehicle, unless you'd rather put a solar panel on your roof, or simply replace all the windows in your house. Oh, don't have a house? Then there is the first-time homebuyer's credit.

The consequence of turning the tax code into a tool for social policy is that we now have a record 52 million filers off the income tax rolls. This means 36 percent of all so-called taxpayers actually pay zero in income taxes after taking their credits and deductions. But these figures don't include some 15 million people who work but don't earn enough to file a tax return. When these people are added to the non-payers, estimates the Tax Policy Center, the percentage of households who don't pay income taxes rises to 47 percent.

Nonpaying status used to be a sure sign of poverty or near-poverty, but Congress and the president have changed the tax laws to pull much of the middle class into the growing pool of nonpayers. The income level at which a typical family of four will owe no income taxes has risen rapidly, now topping $51,000.

Two arguments are often heard in support of growing the nonpaying population.

First, nonpayers are still liable for other federal taxes such as payroll taxes and therefore help with the cost of government. Secondly, all redistribution from higher-income to lower-income people is good by definition. Not so fast.

Many nonpayers receive generous cash payments through "refundable" tax programs such as EITC or the child tax credit so that all the other taxes they pay are offset as well. In fact, the IRS paid out more than $72 billion in these refundable tax credits in 2008, a higher amount than the employee share of payroll tax obligations of everyone who earns under $30,000.

As for all redistribution being good, the U.S. already has the most progressive individual income tax in the developed world, according to the OECD. Progressive tax policies take a large toll in added complexity and economic inefficiency, so at some point, we have to decide that enough is enough.

Tax years 2009 and 2010 are likely to produce a higher number of nonpayers than in 2008 because of Obama's new tax credits targeted at lower- and middle-income taxpayers.

As the number of refundable tax credits continues to grow, more and more tax filers are seeing the IRS as a source of income, not as a feared tax collector. That may be OK for the public relations department at the IRS, which now pays for ads nationwide touting its giveaways, but the nation needs the IRS to be a tax collector, not a welfare dispenser.

The real issue is that millions of Americans no longer have any skin in the game and are becoming inoculated from the basic cost of government. To them, government seems free and politicians can easily convince them to support more and more spending because someone else is going to pay the tab. This trend deserves a broader national discussion than either party in Washington seems willing to engage in.

The opinions expressed in this commentary are solely those of Scott A. Hodge.