Would Obama’s Robin Hood Tax Plan Redistribute Wealth?

The National Taxpayers Union and the National Taxpayers Union Foundation prepared some easy-to-read tables entitled “Who Pays Income Taxes?” for tax years 1999-2006 using Internal Revenue Service data. According to them, the top 1% of income earners in 2006 paid 39.89% of all personal income taxes while the bottom 50% of income earners paid just 2.99% of all personal income taxes. Let me restate the obvious for 2006: 1% of Americans paid 40% of all personal income taxes while the bottom half of income earners paid just 3% of all personal income taxes. Put another way, the top half of all income earners paid 97% of all personal income taxes in 2006.

This same group analyzed “Who Doesn’t Pay Taxes” and reported the numbers for tax years 2003-2005 using Internal Revenue Service data. In 2005, there were 134.4 million tax returns filed. Of them, 90.6 million were “paying returns” and 43.8 million “non-paying returns.” The percentage of tax returns where no taxes were paid was 32.6% of all returns. That means nearly 1/3 of all Americans didn’t pay any personal federal income taxes in 2005. That figure doesn’t mean they didn’t owe additional taxes, it means they didn’t owe ANY personal income taxes at all that year.  Their federal income tax liability was zero. If they had taxes withheld, they were due a refund.

The Tax Foundation’s Fiscal Fact No. 27 reports a similar finding on the number of Americans who are “outside the income tax system” and have “zero tax liability.” In other words, they pay no personal income taxes.  The latest figures on this report show that the number of people paying no personal income taxes grew under the Bush Presidency — 31.8% of Americans paid no personal income taxes in 2003 (which was up from 25.2% in 2000 under the Clinton tax increase code). In 2003, that was equal to more than 41 million tax returns with no tax liability whatsoever.

[Note that during the Clinton years about 1/4 of all Americans paid no income taxes. Contrast that with the Bush years when even more paid no taxes — about 1/3 of all Americans paid no income taxes. The Bush tax cuts actually increased the number of Americans who paid no personal federal income taxes and shifted a greater portion of the overall tax burden on higher income earners.]

My question is this: If almost 1/3 of Americans don’t pay personal income taxes to the federal government, then how is Barack Obama going to give 95% of Americans a tax cut as he promised?  How do you reduce nothing?  Can you tax somebody less next year if they are paying no taxes now?  How can 95% of Americans get a tax cut when only about 65% pay taxes?

It simply doesn’t make sense and that concerns me because it suggests something very damaging to our economy and personal freedoms could occur in the name of a “tax cut.” We’ve already seen small “refund” payments made to zero liability tax return filers in the name of tax cuts or rebates. Could Obama be planning to expand on this redistribution scheme in the name of “tax cuts”?

Let’s go over this again: zero minus something equals a negative number. The only way to deal with a negative number and balance the tax books is for the government to pay those whose tax rates are negative with money taken from those whose tax rates are positive.  Does that mean that Obama is going to take money from the “rich” and give it to the “poor” so they can get their promised “tax cut”? If that’s the case then Obama’s “Robin Hood” tax plan would result in a massive and damaging redistribution of wealth.

I say Robin Hood because as the medieval Robin Hood story suggests, Robin Hood took from the rich to give to the poor who were being oppressed (overtaxed) by a corrupt and rich king. If I am right about Obama’s plan, it would actually turn the Robin Hood story on its head with the rich being overtaxed by a corrupt government to pay the poor. Correct me if I’m wrong but wouldn’t such an economic redistribution scheme amount to pure communism?

Note: For an interesting case against the Obama tax plan from a small business perspective see “An Argument Against Obama’s Tax Plan” by Grover G. Norquist (7/11/08, Politico.com).