Why do so many Americans pay no income taxes?
15 April
Today many are discussing how many Americans do not owe income taxes. The traditional debate splits along partisan lines. Many Republicans and conservatives argue it is both unfair and politically dangerous to have (almost half / more than one-third, depending on who’s measuring) of Americans not owing any income taxes. Many Democrats argue the rich should pay more, and that it’s good that low and even moderate-income people owe no income taxes.
I wonder how many Republican Members of Congress remember that they are, in large part, responsible for this outcome?
First, here’s a quick refresher on the difference between a tax deduction and a tax credit:
- Suppose you make $60,000 per year. If you donate $5,000 to charity, you get a $5,000 deduction. You pay income taxes on only $55,000.
- Suppose a married couple finds they owe $12,000 in income taxes before accounting for the child credit. If they have three kids, they get a $1,000 tax credit for each child, for a total of $3,000 in tax credits. They subtract this $3,000 from their $12,000 of income taxes owed, leaving them owing $9,000 after accounting for the child tax credit.
- Suppose this same family owed only $2,500 in income taxes before accounting for their three children and the child tax credit. Since the child tax credit is refundable, the $3,000 credit wipes out all of their $2,500 of income tax liability and they get $500 from Uncle Sam.
The reason so many Americans don’t owe income taxes is because we have two big tax credits in the code: the Earned Income Tax Credit (EITC) and the child tax credit. I hope the above explanation shows the power of a tax credit: one dollar of tax credit wipes out one dollar of tax liability. So if you provide a big tax credit to someone who owes only a small amount of income taxes, you’re probably going to move them into the non-payer category.
The EITC benefits low-wage earners. Legislative support often splits roughly along party lines, with most Democrats wanting a bigger EITC, and many Republicans wanting a smaller (or, at least, no bigger) EITC. Republicans like to complain about the EITC on a day like today.
But most of the increase since the mid-1990s in the number of people who owe no income taxes is the result of the child tax credit. This policy was created by Congressional Republicans and expanded with Republicans in the lead.
The nonpartisan Tax Foundation has measured the top nonpayer threshold. This is the highest income taxpayer that owes no income taxes, setting aside unusual tax situations. They looked at how the top nonpayer threshold changed from 1993 to today for a married couple with two kids. All figures are in 2010 dollars for comparison:
- In 1997 every “normal” married couple with two children that earned $24,000 or more (in today’s dollars) had to pay at least some income taxes. The top nonpayer threshold for a family of this size was just under $24,000. This means there were some four-person families with income just below $24,000 that owed no income taxes.
- In 1997 a Republican majority Congress and President Clinton enacted the Balanced Budget Act. At the insistence of Congressional Republicans, this law created a $400-per-child tax credit which began in 1998. This caused the top nonpayer threshold to jump more than $7,000, to about $31,300. Millions of families with kids with incomes between $24,000 and $31,300 were “taken off the rolls” because the child tax credit wiped out the small income tax liability they owed.
- As a result of the 1997 law, in 1999 the child tax credit automatically increased to $500 per child, and the threshold for a married family with two kids grew to $32,800 in today’s dollars.
- In 2001 President Bush and the Republican Congress enacted a major tax law that increased the child tax credit to $600. This law also introduced the 10% income tax bracket, which lowered by 5 percentage points the lowest income tax rate. The combination of these two tax changes raised the top nonpayer threshold to $38,700. That law further phased in over time increases in the child credit to $1,000 per child.
- The 2003 tax law enacted by President Bush and the Republican Congress accelerated the $1,000 per child amount to be effective immediately. This increased the threshold to $47,400 in 2003. That’s a huge jump. It was incredibly popular, and it helped create political impetus for the 2003 law which also accelerated rate reductions and cut capital gains and dividend rates.
- The 2008 stimulus (President Bush + Democratic majority Congress) included stimulus checks of $1,200 per married couple, plus another $300 per child. This increased the threshold to $56,700. This was a one-time increase, however, and the non-stimulus threshold for 2008 was about $44,500.
- In 2009 President Obama and a Democratic majority Congress increased this threshold to $51,400 with the new “making-work-pay” tax credit. This was enacted on near party-line votes. That threshold drops slightly to about $50,300 this year.
What can we conclude from this?
- The huge number of Americans who owe no income taxes is the result of the interaction of three tax policies:
- a progressive rate structure and a standard deduction;
- the Earned Income Tax Credit, which significantly reduces tax liability for the lowest earners;
- the per-child tax credit, which significantly reduces tax liability for low- and moderate-income families with kids.
- Different political coalitions support these three policies:
- There is broad-based political support spanning both parties for a progressive rate structure. Republicans split on this point, with some conservatives favoring a flat tax. Even many flat tax supporters support some progressivity with a large(r) standard deduction.
- Support for expanding/keeping EITC tends to be center-left. Many on the right oppose it at its current size.
- Support for the per-child tax credit is nearly universal, but it started on the right.
- The large number of people who owed no income taxes until the mid-90s was driven largely by the first two factors and especially by the Earned Income Tax Credit, a policy driven by the Left.
- The dramatic increase in the number of people who owed no income taxes since the mid-90s was driven almost entirely by the creation and expansion of the per-child tax credit, a policy driven by the Right.
- This was a “pro-family” tax credit created in the 1994 Contract with America, pushed to a veto by Congressional Republicans in 1995, negotiated with President Clinton in 1997, and expanded by President Bush and Republicans.
Behind closed doors Republicans split on the per-child tax credit. Economic types oppose it or hold their noses. Social/family conservatives vigorously support it, as does almost anyone running for office.
It’s easy for Republicans to complain today about the end result. They (we) have an out in that they can point to the EITC as one of the causes. But much of this outcome is driven by tax policy changes initiated and expanded by Republicans.
If you wanted to work within the current income tax system and reverse some of this trend, broadening the income-taxpaying base, you’d be hard pressed to get a big effect just by raising the bottom rates. To affect millions of people you’d need to either scale back EITC or the per-child tax credit. I think both are highly unlikely.
(photo credit: IRS)
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It drives me crazy that people only think of "income tax" when they use the shorthand phrase "taxes." Everybody pays taxes — sales taxes, property taxes, FICA, etc. — and most of those taxes are regressive. The income tax is perhaps the most progressive tax paid by lots of people, and it helps balance the others — sometimes inadequately, since some analyses show poorer classes paying as much or more of their income in taxes than higher income groups.
When we don't look at the total tax burden, we get all kinds of angry, cynical, or just incomplete responses.
While it is nice for boomers (like me) to think of all those delightful kids growing up to support us in our old age, there are only so many humans Mother Earth can handle without taking matters into her own hands, like earthquakes, hurricanes, fires, volcanic erruptions, you get my point. Although I have a modest income of just less than $30k, I never had kids and prefer to remain unmarried (or divorced, technically). Somehow I managed to pay taxes of $1,720 this year. $2,500 in federal income taxes were withdrawn from my salary last year and I'm getting a $780 refund. Seems fair to me, considering how much I get for that $1700.
But it does bug me that people are so generously rewarded for bringing more and more children into a world with fewer and fewer resources.
I have made between 40K-50K for the last ten years (as a teacher). I am single, without child, and have chosen not to buy a home (beyond my means) in order to pay off my student loans first. I have paid around 4k – 5k in taxes each year, frequently writing an addition $100 – $200 check to the IRS at filing time. I never understood how so many of my peers were getting large returns back. One year I forced myself to save every "business related expense" I could think of and the difference it made was negligible. I feel good about most of my life choices, yet at tax time it is hard for me to feel that my country values them. The message with these numbers is buy property, get married, have kids. In the 21st century, are those choices that much more central to building a good society than being educated, healthy, and civic minded? I would never lobby for greater deductions for myself… how others can in good conscience is troubling.
Everyone who has income tax withheld pays taxes 364 days of the year. If they get a refund back when they file, it doesn't mean they weren't paying withholding taxes the rest of the year. I hate this canard. Withholding means people pay taxes throughout the year even if they get it all back at the end of the year.
You can bet that more than 90% of tax payers have income tax withheld. I guarantee EVERY SINGLE ONE of these individuals who have income tax withheld do not believe themselves to be part of the 47% who pay no taxes. To a person, every single person who has tax withheld from their paycheck believes they are part of the 53% that pays income tax.
Even if they get 100% of their withholding they believe themselves to be part of the 53% that pays income tax.
Even if they get back MORE than 100% of their withholding they believe themselves to be part o the 53% that pays income tax.
Withholding makes people believe they pay income tax even if they get a refund and qualify as NOT PAYING INCOME TAX!!!!!
That's why this is such a stupid metric.
According to the New York Times, the number of tax payers who have nothing to the federal government in income tax is 10%. The vast majority of these people still pay state taxes, social security tax, medicare and medicaid tax and various local taxes like the CA disability tax. The number of people who have no tax burden whatsoever is closer to 2%.
10% is a lot different than 47%
2% is even more different.
but when people hear 47% they do not think, 'no income taxes' They think "gets to keep 100% of paycheck as takehome pay."
In other words what people DEFINE as "no income taxes" is actually only two percent of the population. But they are told it is 47%. Hence some of the class warfare.
Some obvious fixes to the tax code should be, no refund greater than the amount put in. If you've got three kids and your total tax burden for the year was 2800, you don't get 3000 back because of the Kid credit. That's just common sense.
I don't really have an issue with people getting a 100% refund. It's claiming that those who get 100% refund pay no income tax (they paid income tax 364 out of 365 days, so I think that means they paid) and people getting back MORE than a 100% refund of taxes withheld.
I am not a mortgage holder, but I am penalized with a higher tax burden in order to subsidize the mortgage interest tax deduction enjoyed by most of my countrymen–in other words I'm taxed higher unless I engage in a private contract for a mortgage, in which case my income tax burden goes down. I don't like being mandated to have a mortgage to get the mortgage interest tax deduction.
The above paragraph was tongue in cheek and meant to point out that the future health insurance tax deduction (those who have health insurance are deducted the amount of the "penalty" from their tax burden) is constitutional because the mortgage interest tax deduction is the same thing.
As an employee I paid $14000 income tax on an income of $84,000 using standard deductions(not able
to itemize.) Now that I'm retired I live on $26,000 and pay $2300 in income tax. My $400/month pension and a portion of my social security is taxable. I am able to use only the standard deductions. Where am I
going wrong??? According to the statistics, I shouldn't be paying income tax(although I don't mind doing it at this level.) I can't be alone so there are a lot of relatively low income people paying taxes, particularly
single, retired workers like me. I live on $23,700 minus insurances (home, car, hurricane, Medicare
Parts B and D premiums and Medigap premiums–altogether $5,000) I am debt-free so that is a big plus.
What are the "Economic types" arguments against the Child tax credit?
Is "non-tax payer" status qualified by whether I owe money after my tax return is complete? In other words, if throughout the hypothetical tax year, the amount of tax withheld equals $5,000 and when my return is completed, it says that I get no refund but don't owe anymore either, aren't I still a $5,000 contributor?