Why So Few People Pay Income Tax
Last week Fox Business News asked me whether it was a problem that nearly half of all Americans paid no federal income tax last year. I’ve gotten that question repeatedly since I reported the Tax Policy Center estimate that 47 percent of all taxpayers and 55 percent of the elderly and families with children paid no federal individual income tax in 2009. (Remember, however, that most people who pay no federal income tax do pay Social Security, Medicare and other federal taxes as well as state taxes.) Still, reporters and others want to know if it is fair that so many people pay “no” tax?
The explanation is simple: the income tax serves two masters. On one hand, it raises nearly half of all federal revenues. On the other, it delivers a broad array of social benefits in the form of exemptions, deductions, and credits that reward people for government-favored behavior. If we look only at raising revenue, about three-fourths of people pay taxes. It’s that social welfare function that knocks so many people off the tax rolls.
Over the past two decades, Congress has repeatedly used the income tax to encourage or subsidize specific activities. We subsidize kids with the child credit, college attendance with multiple higher education credits, retirement with all sorts of tax-favored savings plans, work with the earned income credit, and child care with, you guessed it, the childcare credit. And we’ve retained most itemized deductions that subsidize homeownership, state and local governments, and charitable giving.
Colleagues Eric Toder, Len Burman, and Chris Geissler cataloged at least $950 billion of such tax expenditures in 2007. That amount was more than 80 percent of the income tax revenues collected that year. The government could deliver virtually every one of those benefits through spending programs. And if it did, a lot more people would pay income tax.
Who would pay federal income tax if we zeroed out all those credits, itemized deductions, and dependent deductions and added in the major income exclusions—Social Security, pension income, and tax-exempt interest? TPC’s tax model found that 80 percent of individuals and families would owe income tax this year—far more than the half who pay once those tax benefits are figured in. And 90 percent of those who would pay no tax have income under $20,000. By contrast, nearly everyone–98 percent—of those with income over $20,000 would pay some income tax if we got rid of the major tax subsidies. Include payroll taxes and the percentages of non-payers get even smaller.
The high percentage of people paying no federal income tax is not the result of the levy’s tax function. It is caused almost entirely by Congress’s insistence on using the tax system to deliver social benefits.
godd post man..
I am tired of corporate welfare benefits delivered to corporations via our tax system. You know what I am talking about – corn subsidies, a tax deferral on income earned overseas, oil and gas subsidies, Big Agri subsidies – and an abundance of other goodies designed to benefit corporate taxpayers. I am tired of a successful big business buying a less succesful business so the big business can offset their income using the net operating loss carryovers from the less successful.
Shame on this author for singling out poor people and the elderly without telling the whole story – both sides of the double-edged sword. But then he does speak for Fox News which explains why Faux News spouts such nonsense!
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Very few pay tax because they have no say on how it will be used, period
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Don't people actually get encouraged to pay taxes when they see and feel the good it's doing in the society?
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I am a little confused on reading that article. Are you advocating the present system or are u saying that it is totally unnecessary? It has been such a make you own opinion kind of blog that I feel utterly inadequate and some what stupid. So to be exempted from the tax the lower income groups jump on to these scheme which then provide for them. So basically government takes from the people for the people!!! Florida Title
yeah as you have rightly said “No one ever thinks it's fair to pay taxes”
No one ever thinks it's fair to pay taxes, but that's what keeps the country running!
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I also think a majority of people know how to reduce taxable income significantly.
Why should they? They get paid not to work harder. Why bite the hand that feeds you?
Who would pay federal income tax if we zeroed out all those credits, itemized deductions, and dependent deductions and added in the major income exclusions—Social Security, pension income, and tax-exempt interest? TPC’s tax model found that 80 percent of individuals and families would owe income tax this year—far more than the half who pay once those tax benefits are figured in. And 90 percent of those who would pay no tax have income under $20,000. By contrast, nearly everyone–98 percent—of those with income over $20,000 would pay some income tax if we got rid of the major tax subsidies. Include payroll taxes and the percentages of non-payers get even smaller. Rondo Music
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I don't think it's fair to charge people with a low income with income tax (IVAs). These people barely manage to live from a day to the other and pay a lot of other taxes I think that is enough.
I advise you to read about how the taxes, or pay someone to do it. I am sure that is always a good idea to capture the higher wages, because you are not the highest figure recorded for all of your salary.
This is still too many tax filers. Indeed, having to file paperwork of any kind is what sticks in people's craws. A Value Added Tax could be levied so that everyone paid some tax, while a Subtraction VAT could be used to distribute tax credits (either a housing credit and a child credit or a larger child credit) and fund (and in some cases replace) entitlement programs. Only those who have a substantial tax bite – likely those with significant non-wage income at a level that justifies a higher tax rate – should have to file income taxes – and this is primarily so that they can have such income without sharing this information with employers.
We definitely do include non-filers in our count of tax units. In 2010, about 19 million of our 153 million non-dependent tax units don't have to file returns, primarily because their income is too low and they don't qualify for refundable tax credits.
If we excluded non-filers, the percentage of tax units not paying income tax would be much smaller–just under 33 percent in 2010, compared to the 45 percent value we estimate. (See http://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=2677)
I don't think the Fox interviewers were thinking about federal spending, either indirect through the tax system or direct through government programs. That does not mean, however, that we should not be concerned about both forms of spending.
As a nation, we have decided to have a progressive income tax, even if you ignore all the deductions, credits, and exclusions. That implies some degree of redistribution. We also have decided to provide a broad array of social benefits, some of which further redistribute goods and services. And it is possible that a majority could impose its will on a minority to claim an even larger share of the pie. That comes with having a representative democracy.
Do tax units only count those that file, or the entire population? A non-trivial portion of tax filers don't have a requirement to file a return. Do you know that portion?
I think the substance of the Fox Business News question is whether it is a problem that so many taxpayers are net recipients of direct government payments. For purposes of this question your distinction between social welfare function and the tax raising function isn't meaningful (in fact for this purpose you would also want to include direct spending on social welfare and any payroll taxes). Once all of this is taken into effect, I don't know how close we would be to having a majority of US citizens being net recipients, but if the majority of American's are net recipients of direct government payments, what stops them from deciding they want to vote themselves more benefits at the expense of net tax payers. This is basically how Democrats are trying to sell health care reform. Offering 30 million people health car to be paid for in large part by tax increases on the top 1% of taxpayers. Do you think that this is an issue?
Ultimately, all social benefits are paid by taxes. Instead of opening a whole bunch of agencies and hiring thousands of caseworkers (which would cost the government a lot of money) to deliver these social benefits, the IRS delivers them automatically. So by using the tax system to deliver these benefits, the IRS is saving taxpayer dollars.