What Romney Should Have Said

Getting more of the 47% to where they can pay taxes

Mitt Romney’s inartful comments, delivered at a private Florida fundraiser in May, obscure the real story about the positive effects of economic growth on lower-income Americans.

Romney said that 47% of Americans — because they don’t pay income taxes and depend on government entitlements — will vote for President Obama no matter what. What he didn’t say, was that his policies might turn some of them into taxpayers.

America’s federal individual income tax system no longer raises revenues from most Americans. But Americans move around income groups — some pay taxes one year, some pay taxes another year. Some of the 47% who didn’t pay taxes this year, perhaps due to unemployment, might have paid last year when they were employed. And some, such as students, will pay next year if they graduate and find jobs.

The question is how to get more growth of real income for all Americans, wherever they stand, especially if they are in the bottom half of the income distribution. Romney’s policies would raise economic growth — although the candidate did not make the best arguments in his remarks to Florida supporters.

Over the past few decades the individual income tax system has undergone dramatic change.

In 1979 only the lowest fifth of households paid no federal individual income tax, according to data published in July by the nonpartisan Congressional Budget Office. By 2009, the lowest 40% not only made no contribution to income tax revenues, they actually received individual income tax transfers. They were net recipients of federal payments because of programs such as the earned income tax credit, the child tax credit, and Making Work Pay credit.

In 1979, the middle fifth contributed 11% of individual income tax revenues. By 2009, this share at declined to 3%. The middle three quintiles contributed 35% in 1979. In 2009 the middle three quintiles contributed 13%.

Equally surprising is the change in the share of taxes paid by the top fifth, which rose from 65% in 1979 to 94% in 2009. It’s disingenuous to speak of changes in income taxes on the middle class when much of the middle class no longer pays much into the income tax system.

The shift in income tax payments from 80% of American households in 1979 to essentially just 20% today would be even more troubling if Americans stayed permanently in one income class. Fortunately, American households have dramatic shifts in income over time.

A 2009 study by economists Gerald Auten and Geoffrey Gee of the U.S. Treasury Department’s Office of Tax Analysis found that there was considerable mobility between income groups between 1987 and 2005.

Using a sample of individuals aged between 25 and 64, the Treasury study found that 56% of those in the lowest income quintile at the beginning of the period had moved to a higher quintile 10 years later. Almost 30% went to the second quintile, and 27% moved up two or more quintiles. At the end of the 10 year period, 4.5% had moved to the top quintile. Read the study.

Other sources of Treasury Department data show that the same people are not necessarily in the top 1%, or top 10%, over time. The Department regularly publishes data on the turnover among the top 400 richest individuals, and how many times each individual has appeared on the list. Contrary to popular perception, the list shows substantial turnover.

The latest study, released last month, contains information from 1992 to 2009. The data show that 3,869 taxpayers were in the list of the top 400 returns between 1992 and 2009. About 27% of taxpayers are represented more than once on the list, and 15% more than two times. On average, each year 39% of those in the top 400 were not on the list in any other year. Read the data about the tax returns of the 400 richest people.

The question is how to raise real incomes for most Americans. Here, Romney can help, if elected, by making America’s tax system more competitive and efficient, encouraging domestic energy production, reforming regulations, and encouraging school choice.

America now has the highest corporate tax rates in the world, at 35%. If Romney were to succeed in lowering the U.S. corporate tax rate to 25%, as he has proposed, more corporations now overseas would locate in America.

Romney’s support for domestic energy production — more drilling for domestic oil and natural gas, using new hydrofracturing techniques — will also create jobs. North Dakota, a hydrofracturing hub, had 3% unemployment in July, the lowest in the nation.

Vast shale reserves exist in Texas, Louisiana, Arkansas, New York, Michigan, West Virginia and Ohio, with the potential to lower unemployment rates in these states also.

In addition, Romney has come out strongly in favor of allowing parents to choose schools for their children. With an average American high school graduation rate of 75% — 50% in some urban school districts — many children would benefit from the ability to attend private schools, or, as in some cities, publicly funded charter schools.

It’s not difficult to envision an educational system where dollars follow the child. They exist now for some students in Indiana, Louisiana, and Florida, and could be extended to all students.

Data clearly show the success of private schools. In 2011, private schools had a 98% graduation rate, according to Education Department data. In contrast, the 2011 graduation rate for public school children who started high school in 2007 was 75%.

Nationally, 40% of public school students went on to college, compared to 57% of students who attended private schools. Such academic success means faster upward mobility, because fewer people are stuck at the bottom of the career ladder.

The challenge for America lies in getting the 47% who don’t pay income taxes into a position where they can. Now, all Romney has to do is say how.

This piece originally appeared in WSJ's Marketwatch

This piece originally appeared in WSJ's MarketWatch