Why 40% Pay No Fed Income Tax

RUSH: We’ll start in North Canton, Ohio. Mark, I’m glad you called. Great to have you here.

CALLER: Thanks, Rush. My question is: How did 40% of — approximately 40% of — the population end up not paying any federal income tax, and what would need to be done for that to be reversed?

RUSH: Well, the original intention of this, to go back to where this all started, first, the 38% or 40% figure is pretty accurate, but it includes the people who are in the poverty quintile.

CALLER: Okay.

RUSH: So, that bunch never pays income tax, as well they shouldn’t.

CALLER: Right.

RUSH: They’re the working poor. The working poor. Now, what happened is this. When Ronald Reagan took office, you know what the top marginal tax rate was in the 1981? It was seventy percent. The top marginal tax rate was 70%. Now, very few people paid it. The top marginal rate is the rate you pay on the last dollars you earn, but back then there were so many deductions and so many so-called tax shelters that very few (only stupid idiots) ever reached the 70% figure. But the idea was, ‘Look, we need to simplify this,’ and so the first round of Reagan tax cuts took the 70% to 50, and by the time they got to 1988 the rates were 15 and 28%. There was a bubble for some people that made ’em pay 31. In exchange for that all those shelters were taken away, and all the tax shelters and the various deductions, most of them were swept away. Simplification. By the way, this led to a doubling of revenue in the Treasury throughout the eighties from $500 billion in 1981 or close to $500 billion. Whatever it was, it doubled it to almost a trillion, $900-and-some-odd billion dollars, with cutting the rate from 70 to 28%. Now, in the process of this, that 15% rate was designed to be as fair as possible. A flat tax of 15% would be a great rate for everybody. What happened along the way is Reagan left office, and George Bush broke his promise on no new taxes, and we ended up with something called the Earned Income Tax Credit.

CALLER: Yes, I’m familiar with that.

RUSH: And the Earned Income Tax Credit combined with the, AMT, the Alternative Minimum Tax… The Alternative Minimum Tax started out as a way to make sure that people who earned lots of money but paid no taxes, paid some. That now affects a whole bunch of people. It’s unintended consequences. The Alternative Minimum Tax has basically resulted in welfare payments to the people above the poverty line up to the percentage 38 to 40% who are no longer paying taxes. The personal exemption was raised. The reason for this — this happened during the nineties primarily with Clinton tax policy. The reason for this was exactly what’s happened now, to get as many people — ’cause there are far more people who earn $50,000 or less than there are people who earn $250,000 or more. Let’s even say 75 grand. You get all those people at 75 grand or 50 grand and under on your side. You outnumber the people that make over 250.

CALLER: Sure.

RUSH: And that’s what the objective was, was to get as few of those people paying any income tax, while at the same time blaming the plus-250 crowd for not paying enough, when their burden increased. So it was a political ploy to get as many people to oppose legislation that would ever cut taxes.

CALLER: Do you think it could ever be reversed?

RUSH: By a one-term president, yes, if he had a Congress that was of his party.