U.S. Markets open in 7 hrs 34 mins

Romney Is Half Right About People Who Don't Pay Taxes

Rick Newman

In one of his biggest gaffes of the campaign, GOP presidential candidate Mitt Romney has characterized nearly half of all voters as overdependent slackers "who believe the government has a responsibility to care for them." While his words may seem callous, Romney has fingered a problem that many tax experts agree is legitimate.

[Photos: The 2012 Presidential Campaign Trail]

Romney's remarks--made privately to a group of donors in May and captured on a video that has recently been published--drew on the popular conservative theme of personal responsibility. Romney groused about the 47 percent of adult Americans who pay no federal income tax, whom he described as people "who believe that they are victims." Since they pay no tax, Romney said, they're not receptive to Republican efforts to lower taxes, which means they'll vote for President Obama "no matter what."

Republicans have long decried the nation's substantial welfare state, but the huge portion of workers who pay no federal income taxes reflects a broken tax code that is probably crimping the nation's economic competitiveness and slowing economic growth. Romney's facts in this case are mostly correct. The nonpartisan Tax Policy Center has, in fact, found that 47 percent of Americans pay no federal income tax. It's worth keeping in mind, however, that they do pay other types of taxes, such as the payroll tax deducted for Medicare and Social Security, state and local income taxes, sales tax, and property tax.

Still, the huge portion of people with no federal income tax liability is a big and problematic hole in the tax code. The bipartisan Bowles-Simpson commission, appointed by President Obama to devise a plan for paying down the national debt, acknowledged this problem in its 2010 report, which could end up being a blueprint for tax reform if Congress ever takes that up.

[See who's worse off under President Obama.]

Among other things, the commission called for reforms that would "broaden the base" of taxpayers, which means cutting deductions and exemptions so that more people pay taxes. This is widely viewed as necessary so that the maximum portion of working Americans have some stake in the system, even if their tax burden remains small. And broadening the base is probably necessary--along with closing many other loopholes--if overall income-tax rates are to come down, which is another thing many tax experts advocate.

Under the Bowles-Simpson plan, tax rates would come down but nearly everybody's taxes would go up, mostly because of broadening the base and closing loopholes. The average federal tax paid by the bottom fifth of earners would rise by $24; it would rise by $464 for the second fifth of earners, and by $8,686 for the top fifth. Of course, neither Romney nor Obama is being honest with voters about the eventual need for across-the-board tax hikes such as these, since that's a poor way to win an election.

Now for what Romney got wrong: His implication that the 47 percent of untaxed workers are lazy tax evaders is bogus. Those workers are generally playing by the rules and claiming tax breaks that Congress has been layering onto the tax code for years--mostly back when the government had much healthier finances and could afford to be so generous. Nor are most of those people employing high-priced tax strategists (ahem) to skirt their responsibilities. The Tax Policy Center found that most of those 47 percent are senior citizens living on fixed incomes or low-income families with kids. A combination of low incomes and various tax credits simply cuts their taxable income to a threshold at which they don't have to pay.

[See why Mitt Romney is one person who's better off under President Obama.]

Romney also can't know if those 47 percent will vote for Obama. Since the voter turnout rate is only about 64 percent for presidential elections, some of them won't vote at all. And some lower-income voters do favor conservative candidates who want to keep taxes low.

There's some final irony to Romney's remarks as well. First of all, Romney himself has benefited from the same layer cake of tax breaks that has been constructed since the last round of tax reform, in 1986. In particular, Romney gained millions when President George W. Bush lowered the capital-gains tax rate. That's why Romney, a multimillionaire, pays an effective income-tax rate of just 14 percent or so, which is lower than what many middle-income people pay.

Finally, Romney is relying on figures supplied by the same independent research group that has cast huge doubts upon his own tax plan. The Tax Policy Center found that Romney's plan to cut all tax rates by 20 percent would leave a huge hole in the federal budget, with no way to fill it except to raise other taxes on the middle class.

If there's a common thread in all of this, it's that just about every taxpayer is getting off easy these days compared with what Washington spends. It's not just one group that will have to pay more in the future; it's every group. But that's a dirty little secret that neither candidate will mention, not even in private.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

More From US News & World Report