U.S. Tax Structure - Is It Designed to Help The Poor? Tyler Andre National University ECON204 Prof. Karen Joiner July 29, 2023 U.S. Tax Structure - Is It Designed to Help The Poor? 1 I. Introduction and Objective The United States tax system, a vast and intricate network of policies, laws, and regulations, plays a pivotal role in the nation's economic structure. It is instrumental in generating revenue for public services, influencing economic behavior, and redistributing wealth. However, the current U.S. tax structure has been criticized, among which is the claim that it does not effectively support those at the lower end of the income spectrum, specifically the poor. Despite incorporating specific provisions specifically aimed at assisting low-income individuals, the tax system often appears to favor the wealthy and corporations. This paper argues that the U.S. tax structure, in its current form, is not optimally designed to alleviate the financial burdens of the poor. The complexities inherent in the tax code, the multitude of regressive tax policies, and the significant influence wielded by corporate interests and the wealthy have undermined the ability of the tax system to support those most in need. The subsequent sections will explore these issues in detail, comprehensively examining how and why the U.S. tax structure often falls short as a tool for reducing economic inequality and poverty. II. Review of Literature “The Poverty Tax and America's Low-Income Households” by Karger and “The Tax War” on Poverty by Tahk both examine the challenges faced by low-income families in the United States and propose potential solutions. Karger focuses on the "poverty tax," arguing that the poor pay more for essential goods and services due to lack of transportation, poor credit, and reliance on high-cost fringe financial services (Karger, 2007). The poor face tough financial decisions and predatory businesses that trap them in debt. Tahk analyzes the growing number of tax provisions aimed at alleviating poverty, constituting a "tax war on poverty" (Tahk, 2014). U.S. Tax Structure - Is It Designed to Help The Poor? 2 These tax-based programs provide income support, work incentives, childcare, housing, jobs, education, healthcare, and charitable giving. Both authors contend that current approaches are insufficient. Karger advocates for heavier taxes on exploitative businesses, stronger regulation, financial literacy programs, pressuring banks to serve people experiencing poverty, and addressing root economic problems like stagnant wages. Tahk notes the tax war's shortcomings, like neglecting the extremely poor but proposes surmounting negatives and improving effectiveness by properly evaluating tax programs' impact. She argues that if tax lawyers embrace fighting poverty through tax policy, the tax war could become more successful than traditional welfare. David Kamin concludes that for tax debates, we should be motivated primarily by poverty alleviation, not reducing overall inequality, given limited policy resources (Kamin, 2013). In his paper “Reducing Poverty, Not Inequality: What Changes in the Tax System Can Achieve”, Kamin details how tax policy clearly has an effect on combating poverty and through what policies/programs. Together, these papers examine the mechanisms producing and perpetuating poverty in America, including predatory businesses, economic conditions, and limitations of existing tax and non-tax anti-poverty programs. They point to the need for multi-pronged strategies. III. Analysis A. Complexity of the Tax System: Firstly, the cost associated with tax preparation is a significant burden for low-income individuals and families. While those with higher incomes can comfortably afford professional tax preparation services or sophisticated tax software, these tools are often out of reach for those U.S. Tax Structure - Is It Designed to Help The Poor? 3 with limited financial resources. Free tax preparation services do exist but are often underresourced and can't meet the demand, especially during tax season. “Low-income taxpayers may have trouble with complex forms, and, while the IRS is investing in Volunteer Income Tax Assistance (“VITA”) sites across the country, those sites currently only serve a fraction of the need that exists in helping low-income taxpayers navigate complicated tax provisions” (Tahk, 2014). As such, many low-income individuals end up either spending money they can barely afford on professional services or risk making errors if they attempt to navigate the system themselves. Secondly, understanding the tax code is crucial for taking advantage of various deductions, credits, and benefits designed to alleviate poverty. Still, this understanding is often lacking among low-income individuals. The tax code is filled with legalese and complex terminology, making it inaccessible for those without specialized knowledge. This complexity can lead to missed opportunities for tax savings. For instance, the Earned Income Tax Credit (EITC), a refundable tax credit for low- to moderate-income working individuals and couples, particularly those with children, is often underclaimed. According to the Internal Revenue Service, “about 20% of EITC eligible taxpayers do not claim it” (IRS, 2023b), mainly due to a lack of awareness or understanding of how to claim it. Lastly, access to sound financial advice is another area where low-income individuals are at a disadvantage. Wealthier individuals often have access to financial advisors who can provide strategic guidance on how to reduce tax liabilities through legal means, such as itemized deductions, tax credits, and tax-advantaged investments. In contrast, low-income individuals, who could greatly benefit from such advice, often do not have the same access or resources to hire these professionals. U.S. Tax Structure - Is It Designed to Help The Poor? 4 B. Regressive Tax Policies A regressive tax is a type of tax that takes a larger percentage of income from low-income earners than from high-income earners. It is the opposite of a progressive tax, which takes a larger share from high-income earners. In a regressive tax system, the tax rate decreases as the taxable base amount increases. Therefore, those with less income pay a higher percentage of it in taxes, exacerbating existing income inequalities. The primary reason that a tax can be regressive is that it is applied uniformly to all situations, regardless of the payer. While it might seem fair at first glance to levy the same tax rate on everyone, this uniformity can lead to situations where the tax constitutes a far larger burden relative to income and ability to pay for lower-income individuals than for those with higher incomes. For example, consider a hypothetical sales tax of 10%. If a person earning $30,000 per year and a person earning $1,000,000 per year both purchase an item priced at $100, they will both pay $10 in tax. While the amount of tax paid is the same, the $10 constitutes a much larger percentage of the lower earner's income (0.033%) than of the higher earner's income (0.001%). Therefore, the burden of the tax is more significant for the lower earner. In the U.S., some typically regressive taxes include sales taxes, excise taxes (taxes on specific goods like gasoline and alcohol), and property taxes. While the intent behind these taxes is not necessarily to burden the poor more than the wealthy, the practical effect often does so. CBPP argues that even a progressive tax, like income tax, is too detrimental to the poor and should be eliminated for them (OLIFF et al., 2012). C. The Ineffectiveness of Tax Provisions for the Poor U.S. Tax Structure - Is It Designed to Help The Poor? 5 While the tax code does contain some provisions aimed at alleviating the tax burden on low-income individuals, such as the Earned Income Tax Credit (EITC) and the Child Tax Credit, these measures fall short of adequately supporting the poor. The EITC, for instance, has restrictive eligibility requirements and only provides a few hundred to a couple thousand dollars in credits per year (IRS, 2023a). This insignificant sum is insufficient to lift households out of poverty or provide meaningful financial stability. Meanwhile, many poor families are unable to claim the full Child Tax Credit because it is only partially refundable (IRS, 2023c). Overall, the tax breaks targeted at lower-income filers are limited in scale and scope, while the wealthy can use abuse the system. “According to a 2021 White House study, the wealthiest 400 billionaire families in the US paid an average federal individual tax rate of just 8.2 percent. For comparison, the average American taxpayer in the same year paid 13 percent” (Oxfam, 2022). These provisions for the poor fail to address broader regressive elements of the tax code that disproportionately impact the poor, such as payroll taxes and sales taxes. More transformational policy changes are needed to build a truly equitable tax system that aids the poor. IV. Summary and Conclusion In summary, the current U.S. tax system favors the wealthy and places a disproportionate burden on the poor. As stated in the thesis, the tax code is structured to benefit corporations and high-income individuals through various deductions, loopholes, and preferential rates on capital gains and dividends. Meanwhile, low-income families pay a higher effective tax rate once payroll taxes and state/local taxes are factored in. The analysis showed how tax cuts and credits like the EITC provide some relief to the poor, but do not offset the overall regressive nature of the tax system. The wealthy can utilize more tax loopholes and evasion strategies due to complexities in the code and access to U.S. Tax Structure - Is It Designed to Help The Poor? 6 accountants. Tax avoidance through offshore accounts and inversions further reduces revenues from corporations and high-net-worth households. Potential reforms could help create a more progressive tax system supportive of lowerincome families. Raising the capital gains and dividends rate could make it comparable to earned income. Phasing out more deductions and limiting credits only for the poor could simplify the code and raise revenues. Enhanced IRS enforcement and closing international loopholes could also help. But comprehensive reforms may be politically challenging due to lobbying and resistance. In conclusion, the current regressive U.S. tax system exacerbates income inequality and poverty. While incremental changes provide some help, more substantial reforms are likely needed to create a truly equitable system that eases the tax burden on poor families and generates sufficient revenues to fund anti-poverty programs. Taxes play a major role in the distribution of income, so restructuring the system could significantly impact economic outcomes for lowincome Americans. U.S. Tax Structure - Is It Designed to Help The Poor? 7 References: IRS. (2023a, January 25). Earned Income Tax Credit (EITC) | Internal Revenue Service. Www.irs.gov. https://www.irs.gov/credits-deductions/individuals/earned-income-taxcredit-eitc IRS. (2023b, January 27). On EITC Awareness Day, IRS and partners promote major tax benefit to millions of low- and moderate-income workers | Internal Revenue Service. Www.irs.gov. https://www.irs.gov/newsroom/on-eitc-awareness-day-irs-and-partnerspromote-major-tax-benefit-to-millions-of-low-and-moderate-incomeworkers#:~:text=Even%20though%20millions%20of%20people Kamin, D. (2013, March 1). Reducing Poverty, Not Inequality: What Changes in the Tax System Can Achieve. Papers.ssrn.com. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2234519 Karger, H. J. (2007). The “Poverty Tax” and America’s Low-Income Households. Families in Society, 88(3), 413–417. https://doi.org/10.1606/1044-3894.3650 OLIFF, P., Mai, C., & Johnson, N. (2012, April 17). The Impact of State Income Taxes on LowIncome Families in 2011. Center on Budget and Policy Priorities. https://www.cbpp.org/research/the-impact-of-state-income-taxes-on-low-incomefamilies-in2011#:~:text=Taxing%20poor%20families%20makes%20it%20harder%20for%20them %20to%20work Oxfam. (2022, November 15). Do the rich pay their fair share? Www.oxfamamerica.org. https://www.oxfamamerica.org/explore/stories/do-the-rich-pay-their-fair-share/ U.S. Tax Structure - Is It Designed to Help The Poor? Tahk, S. C. (2014). The Tax War on Poverty. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2413233 8
