Why So Few People Pay Income Tax

By :: February 25th, 2010

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.

33Comments

  1. Anonymous  ::  1:49 am on February 26th, 2010:

    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?

  2. Anonymous  ::  2:21 am on February 26th, 2010:

    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?

  3. Anonymous  ::  1:47 pm on February 26th, 2010:

    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.

  4. Anonymous  ::  2:41 pm on February 26th, 2010:

    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)

  5. Anonymous  ::  7:52 pm on February 26th, 2010:

    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.

  6. Anonymous  ::  11:48 am on March 31st, 2010:

    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.

  7. Anonymous  ::  7:02 pm on May 10th, 2010:

    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.

  8. Anonymous  ::  7:47 pm on May 28th, 2010:

    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
    Support for music programs is affordable.

  9. Anonymous  ::  11:10 pm on June 7th, 2010:

    Why should they? They get paid not to work harder. Why bite the hand that feeds you?

  10. Anonymous  ::  11:59 pm on June 29th, 2010:

    I also think a majority of people know how to reduce taxable income significantly.

  11. Anonymous  ::  3:42 am on July 27th, 2010:

    No one ever thinks it's fair to pay taxes, but that's what keeps the country running!
    Clickbank Make Money

  12. Anonymous  ::  2:40 pm on August 4th, 2010:

    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”

  13. Anonymous  ::  12:18 pm on October 5th, 2010:

    Don't people actually get encouraged to pay taxes when they see and feel the good it's doing in the society?
    The Clickbank Toolbox -

  14. Anonymous  ::  7:33 am on November 15th, 2010:

    Suitable content of its own type…providing efficient and effective knowledge that will surely erase all problems of its own area.
    New cars

  15. Anonymous  ::  2:46 pm on November 19th, 2010:

    Very few pay tax because they have no say on how it will be used, period

  16. Judy  ::  12:13 am on January 10th, 2011:

    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.

  17. Hydroizolacje  ::  9:06 am on August 23rd, 2011:

    Hey, I’m truly glad I’ve found this information and facts. Currently blog writers publish just about gossips plus world-wide-web this also is actually irritating. A fantastic weblog with fascinating articles, that is what I want. Appreciate it for trying to keep this internet site, I’ll be visiting it. Do you do newsletters? Can’t find it.

  18. Judy  ::  5:48 pm on January 4th, 2012:

    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!

  19. paket wisata jogja  ::  3:02 am on January 23rd, 2012:

    godd post man..

  20. Jonathan Reilly-Hunt  ::  11:08 am on September 18th, 2012:

    Would you like to know how much I pay in tax influences my small business, a pretty successful one with a steady annual revenue of $4.5 million. Zero. I suspect most small business people would say exactly the same thing. Now credit, and the credit crunch, that has almost killed my business. In fact, the only business segment I have seen flourish in the last four years are venture capitalists, private equity folks. Those guys have made a killing and destroyed businesses and jobs at an alarming rate. Now you know why I will never vote for Mitt Romney. There are different type of business experiences to bring to the table. He has exactly the wrong set of tools to fix what ails us. I can’t think of a worse choice.

  21. Cara St.  ::  12:12 pm on September 21st, 2012:

    Exactly!

  22. Sonny  ::  6:26 pm on October 8th, 2012:

    voting for mitt is just wrong
    look I’m a disabled vet have been for a long time
    the red tape involved is horrible just getting medicine
    is a nightmare
    I only make $6000.00 a year for a federal pension
    I am not required to pay federal income taxes
    he wants to make me pay more taxes than i already
    pay. i can’t work any longer and i have tried but
    when your curled up in pain from injuries that you received
    when deployed (in the line of duty) what can you do
    if he is elected i will be on the streets begging for your
    change i can barely afford this room that i rent

  23. Michael G.  ::  11:45 am on October 10th, 2012:

    It is not true that Governor Romney is proposing a tax RATE increase on any individual or corporation. This is a ‘talking point’ frequently used by the Obama campaign. Romney proposes to lower the individual and corporate rates while eliminating deductions and ‘loopholes’ such that the tax reform is revenue neutral. In other words, the tax burden on top earners and corporations will be more evenly distributed and Corporations like Obama’s friend Jeffrey Immelt of GE who pays zero tax will actually pay tax. We already have the highest corporate tax rate in the world. At a time when we desperately need to create jobs and keep jobs in America, this proposal makes much more sense than raising the rates and keeping loopholes. The top 10% of individual earners already pay 72% of all taxes. That won’t change under a Romney plan. The burden will just be more evenly shared by top earners and corporations.

  24. Michael G.  ::  11:55 am on October 10th, 2012:

    If you read or listen to the details of Governor Romey’s proposal on tax reform you would know that he proposes lower rates on top earners and corporations WHILE closing eliminating deductions, loopholes and subsidies such that it will be revenue neutral. In other words, the total revenue will be the same or higher with the total tax burden being more evenly distributed. Individual top earners and corporations that pay little or no tax (like Obama’s friend Jeefrey Immelt of GE) will then pay tax. We already have the highest corporate tax rate in the world and the top 10% currently pay 72% of all taxes paid. We need jobs. Raising taxes doesn’t create jobs.

  25. Anthony Q  ::  8:07 pm on October 12th, 2012:

    I’m not quite sure why you think voting for someone who has a strong fundamental understanding of the economy and business is wrong. First of all Mitt Romney doesn’t want to make YOU pay more in taxes! Don’t believe it for a minute! Think about the current state of the economy. Is that Romney’s vault? Absolutely not! The Obama administration still wants to blame the previous administration, but you have to stop and think for a moment. Who controlled the majority in both the Senate and the House when Obama took office? That’s right, the Democrats. In fact, they had control since 2007 (2 years before Obama was sworn-in as President). So when he became President why didn’t he fix everything, as he promised? Hmmmm… The reason is simple. He has not been able to get bipartisan support for most of his policies. Without the ability to influence both sides of the aisle your are NOT going to be an effective President. That’s the real reason we are where we are today. Anyway, I’m sorry for that rant, but I’m real tired of our society’s failure to see what’s right in front of their own eyes! Finally, Romney won’t be perfect, but at least he might do a better job of bringing politicians across the aisle. Then maybe he can get back to making things happen in this country.

  26. Don Richter  ::  3:52 pm on November 16th, 2012:

    Remember,deductions fall on individual taxpayers, corporations get tax credits,so individuals take the tax hit,not corporations.since the Supreme Court has ruled that corporations are individuals too, lets eliminate one or the other tax rules so we all play under same rules. This means that individuals living abroad pay no income taxes also or corporations also pay taxes on foreign income.

  27. Don Richter  ::  4:00 pm on November 16th, 2012:

    Wrong, while the top rate is 35% business pays much lower,like the 5.25% that drug corporations paid on 80 billion dollars of foreign earnings they brought back to the U.S.under Bush in return for about 1 million in campai gn contributions that Bush recived from them

  28. Cody Why  ::  10:33 am on November 21st, 2012:

    American Health Journal is looking for partner blogs in the medical genre. AmericanHealthJournal is a medical web site containing a significant library of high quality medicine videos. We are looking for partners who are interested in contributing guest blog articles to our web site. . Come contact us at our contact form on our site.

  29. stock market trading  ::  9:41 pm on July 25th, 2013:

    you are in reality a good webmaster. The site loading velocity is incredible.
    It kind of feels that you are doing any unique trick.
    In addition, The contents are masterwork. you’ve performed a excellent activity in this topic!

  30. official Nets jersey  ::  6:02 am on July 2nd, 2014:

    Where to buy wholesale Bengals jerseys usa online

  31. traveling  ::  10:18 pm on August 27th, 2014:

    My partner and I absolutely love your blog and find nearly all of your post’s to be just what I’m looking for.
    Would you offer guest writers to write content for you personally?
    I wouldn’t mind publishing a post or elaborating on some
    of the subjects you write in relation to here.

    Again, awesome web log!

  32. empire Hack download  ::  10:12 am on September 23rd, 2014:

    Cool blog! Is yor theme custom made or did you download iit from somewhere?
    A theme like yours with a few simple tweeks would realkly make my blog jump out.
    Please let me know where you got your theme. Thanks

    My homepage; empire Hack download

  33. Trent Kuhlman  ::  3:08 pm on October 31st, 2014:

    More Bonuses