The percentage of Americans who pay no
federal income tax is falling, thanks to an improving economy and the
expiration of temporary Great Recession-era tax cuts. In 2009, the Tax
Policy Center estimated that 47 percent of households paid no federal
income tax. This year, just 43 percent will avoid the tax.
The Tax Policy Center is a joint project of the Urban Institute and the Brookings Institution.
TPC’s 2009 estimate
went viral during the following tax season and then played a supporting
role in last year’s presidential election. Many commentators
misinterpreted the estimate as saying that nearly half of all households
paid no tax at all when, in fact, nearly everyone pays something. Even
if they don’t pay federal income tax, Americans almost all pay Social
Security and Medicare payroll taxes, state and local sales taxes, excise
taxes, or some other levy.
The new TPC estimates project
that the fraction of households with no federal income tax liability
will continue to fall over the next decade. By 2024, only one-third will
pay no income tax.
Of the 43 percent of households that
will owe no federal income tax this year, nearly half will be off the
rolls because their incomes are too low. The rest won’t pay because
preferences wipe out the taxes they would otherwise owe. Many of those
preferences, such as the Earned Income Tax Credit and the Child Tax Credit,
are social policy run through the tax code. If those provisions were
considered spending rather than tax cuts, many more people would be
counted among income tax payers. (Indeed, for budgetary purposes, much
of the value of those tax credits is considered an outlay.)
Fully two-thirds of households that
pay no federal income tax have workers that pay payroll taxes. Most
American workers pay more in Social Security and Medicare payroll taxes
than income taxes. Just 14 percent of households pay neither income nor
payroll tax and two-thirds of them are elderly.
Most of the rest are younger households
with no workers and income under $20,000. They pay no income taxes
because they have little or no income. The remaining 1 percent mostly
benefit from the tax code’s many exclusions, deductions, exemptions, and
credits that wipe out the income tax they would otherwise owe.
Even the 14 percent of households that
pay neither income nor payroll tax do pay other taxes. Most of us bear
some of the burden of the corporate income tax through reduced earnings
in our retirement and investment accounts or somewhat lower wages.
Anyone who buys gas, tobacco products, alcoholic beverages, or airplane
tickets pays federal excise taxes. And it’s nearly impossible to avoid
all state and local taxes—the income, sales, and property taxes that
support state and local governments.
Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we
inform you that, to the extent any advice relating to a Federal tax issue is
contained in this communication, including in any attachments, it was not
written or intended to be used, and cannot be used, for the purpose of (a)
avoiding any tax related penalties that may be imposed on you or any other
person under the Internal Revenue Code, or (b) promoting, marketing or
recommending to another person any transaction or matter addressed in this
communication
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