About Those 47 Percent Who Pay “No Taxes.”

By :: April 15th, 2010

Last June, my colleague Bob Williams posted a TaxVox article that reported 47 percent of American households paid no federal income tax in 2009. Bob was exactly right, but rarely has a bit of data been so misunderstood, or so misused.

Let me explain—repeat actually—what this means: About half of taxpayers paid no federal income tax last year. It does not mean they paid no tax at all. Many shelled out  Social Security and Medicare payroll taxes. In fact, only 14 percent of Americans didn’t pay either income or payroll taxes. Some paid property taxes and, it is fair to say, just about all of them paid sales taxes of one kind or another. So to say they pay no taxes is flat wrong.

However, this class warfare-like rhetoric plays to a perception that the income tax is a chump tax: Only hard-working folks like us pay it. The welfare queens don’t. The super-rich don’t. It is a powerful emotional argument. It is also flat wrong.

So who are these folks who pay no federal income taxes? Mostly, they are people who don’t make very much money. Many are elderly: Think a widow living only on Social Security benefits. Others are parents earning less than $20,000. Only about 5 percent are non-elderly households making more than $20,000. 

It is no accident, btw, that the number of people not paying income tax was so high in 2009. You may have noticed that we’ve had a recession lately. And here is a powerful insight: When people’s incomes decline so too does their income tax (at least most of the time).  At the same time, many working families have benefited from temporary tax cuts aimed at boosting the economy, and as a result some did not pay income taxes last year. As the economy improves and those tax cuts expire, it should also be no surprise that the share of people who don't pay income taxes will likely shrink from half last year to less than 40 percent by 2012.

There is, however, another reason why some people don’t pay. For decades, both Democratic and Republican governments have made conscious policy decisions to remove low-income working families from the income tax rolls. And, guess what, sometimes government policy works exactly as intended. That’s what happened this time.

Let’s take one of the biggest drivers: the Earned Income Tax Credit. Based on an idea (the negative income tax) originated by conservative icon Milton Friedman, the EITC is refundable, so that people who work for low wages can not only wipe out their income tax liability, they can even get a cash payment from the government. The EITC was enacted in 1975 under President Ford, greatly expanded in 1986 under President Reagan, and expanded again under presidents Clinton and Bush (both of them). It's been the very model of bipartisan tax policy (which, I suppose, is why some dislike it so).  

Both the EITC and the child care credit are explicitly designed to encourage people to work—a goal most of us (including Friedman and Ronald Reagan) thought was a very good thing.

While we are talking history, as my colleagues Gene Steuerle and Eric Toder remind me, big changes in the percentage of Americans who pay tax are nothing new. As Gene notes, prior to World War II, almost no Americans paid the income tax, and through the 1950s we paid only a small 3 percent Social Security tax. There was no Medicare tax since there was no Medicare. Today, the combined 15.3 percent payroll tax is pretty stiff, and just about every worker pays it, whether they owe income taxes or not. In fact, three-quarters of us pay more in payroll taxes than in income taxes. 

Let me close with two questions: Do those who reflexively oppose all tax hikes now favor raising taxes on elderly widows and low-income working families? And what would these critics of small government suggest we do with the revenue windfall this tax hike on the poor would generate? Help finance a cut in the estate tax, perhaps?  

So, as you file your last-minute returns on Tax Day, keep in mind what really is going on with the now-famous 47 percent. It may not be quite what you think.   

30Comments

  1. Anonymous  ::  9:14 pm on April 15th, 2010:

    There are some of us, like myself, Len Burman and Michael Graetz who would decrease the number of people filing even more, with the payment on their wage taxes going on other places. Burman would make filing unnecessary but not invisible by turning low rate income taxes into something more akin to a payroll tax (but with tax benefits paid by the employer). Graetz would eliminate the personal tax for most earners altogether, but would retain payroll taxes, which could be a vehicle for VAT offsets. I would simply shift the burden of both payroll taxes and low rate income taxes to employers (and VAT payers), who would distribute credits and lose their deduction for wage and salary income – leaving only the wealthiest to pay taxes but removing their most favored mortgage interest and property tax credits. Burman's higher 25%tax rate is only 10% over the general 15% rate (I don't recall what he does with the mortgage deduction). Graetz's surtax is higher at 20% to 25%, retains the home mortgage and charitable deductions and reaches lower to the $50K/$100K range. My proposal is for a broader base (only ESOP and charitable deductions – although I could be talked into a state income tax deduction) – including inherited income when cashed out, more progressive rates (from 3% to 20%) and a higher exemption $75K/$150K).
    I would love to see you guys do a side by side of Graetz, Burman, Ryan and Bindner as to the distributional and revenue effects. May the best proposal win!

  2. Anonymous  ::  12:04 am on April 16th, 2010:

    The issue of everyone paying taxes is key to those who support a Flat Tax, who desire totally proportional taxation with everyone paying the same rate. The Fair Tax is a varient of this, even with VAT offsets, since the rate charged prior to offsets is equal to everyone. This view is important to people who believe in equality in process rather than equality of result. Indeed, they believe equality of result rewards sloth and breaks down a sense of community sacrifice. Dick Armey is an extreme believer in this view – and not just because his funders also hold it.
    This desire is not uncommon in society. It's existence is why I propose a VAT along with a shift of wage taxes from individuals to an expanded business income tax. Making such taxes visible promotes at least some shared sense of sacrfice.
    This desire for shared sacrifice also leads to the use of per capita debt statistics – even though such statistics are entirely inappropriate given our tax system. The real liability for the national debt is exactly the same as the liability for the payment of tax. They are one and the same, since the ability of a nation to borrow rests solely on its ability to tax. If anything, the national debt liability should reflect the distribution of wealth, which is much more skewed to the top than either the distribution of income or the distribution of taxation. Since wealth is harder to tax than income (even by an LVT – because of the liquidity problem), what each individual owes is a function of the amount on line 60 of their Form 1040, less the credits on lines 63, 64, 65, 66, 67, 69 and 70. This total, times 9 (which is roughly the ratio of federal income taxes to national debt) gives each individual what they really owe. We ended up owing roughly $5,500. Our share of the debt (aside from taxes owed) is roughly $50,000.
    The tax changes I propose would essentially further limit the liability for the debt to the wealthy who pay an income surtax – however I would limit the surtax to debt repayment, interest payments and the payment for overseas deployments. Once such deployments are ended and the debt repaid, the reason for the tax would cease – as would the tax itself.
    The other egalitarian feature I wish to emphasize is my proposed expanded child tax credit, which would be an offset to business income taxes and paid to workers as a component of wages. This would replace other family entitlements and is necessary on justice and efficiency grounds because small employers of low wage workers cannot afford to pay a living wage (which for me as a Catholic intellectual is non-negotiable doctrine) if mandated without some kind of tax support. Lacking tax support would either drive small firms into bankruptcy or result in business size exclusions that defeat the purpose of living wage mandates.

  3. Anonymous  ::  12:40 am on April 17th, 2010:

    Distributional effects are interesting, but they become largely irrelevant if the proposed tax system is not politically stable. What needs to be analyzed is the stable final state of the tax system after the ball stops rolling. Graetz's proposal, with only a small minority of voters paying income tax at relatively low rates, strikes me as very unstable politically. The rates would likely end up much higher within just a few years, perhaps even probing the actual region of decreasing revenues on the Laffer curve.

  4. Anonymous  ::  8:49 pm on April 19th, 2010:

    Prof. Graetz's rates are higher because he allows most deductions. Most money would come in from his fairly high VAT, although a 20% tax on income over $100 K, even with a mortgage deduction, is not income to sneeze at.
    The reason I like my approach a bit better is that I dedicate high income taxation to a few specific purposes, all of which could end and allow the tax to sunset.
    I think my scheme does the best job of answering VO Key's question on how to decide what to spend on – at least in a broad sense.

  5. Anonymous  ::  3:29 pm on April 20th, 2010:

    As a tax preparer, I think of everything in terms of the tax return. My personal opinion is that all of these non-refundable and refundable credits need to be abolished. If refunds, deductions and credits are such that “47 percent pay no federal income tax”, maybe that's part of the reason the government is complaining that it has no money. What is the purpose in telling the taxpayer that everyone has tax liability when there is frequently “0” on line 44 or line 44 is zeroed out for half the population! So they pay Social Security and Medicare taxes…so what?? We should ALL be paying ALL of these taxes. I sure as heck don't want to support half the population and I know half the population does NOT want to support ME! There are only three categories of people who should be allowed to “zero out” on federal taxes as far as I'm concerned: those below the poverty line, those receiving ONLY Social Security and/or Disability with nothing or very little else, and independent contractors/self-employed – as they are stuck with self-employment taxes no matter what and are not allowed to collect unemployment benefits no matter how bad it gets. Anybody outside of these categories should be paying something, even if it's .5 percent! It's about being a contributing member of society. And it doesn't matter WHAT the intent/requirements are for these credits. For many they have become a way of life. After working at H&R Block for 2 years, I became disgusted at the number of people who see the EIC as a lifeline…running in and out of the office driving us crazy with various scams, laughing up their sleeves over their big fat refund checks, and whining when they no longer qualified to receive it. It's tough times now, that means EVERYONE has to make sacrifices, from the TOP all the way down. 20% of the population is out of work. Congress fights over extending unemployment benefits…yet we've got money for EIC, tax rebates, Making Work Pay Credit, and reduction/elimination of tax for the employed. Meanwhile others are still sailing around in their yachts and banks “robo-call” customers who can't pay bills. The solutions seems rather simple to me.

  6. Anonymous  ::  6:23 pm on April 20th, 2010:

    That would be the beauty of a VAT and an employer based, rather than employee based – income tax. Of course, if we did that, Anonymous would be out of a job since no one would have to go to block. Business would use full-time accountants or IRS provided tax accounting packages. That is actually one of the main reasons tax reform is stalled – there is quite a constituency for the status quo. However, I have to admire the cajones of a tax preparer who speaks out against the system that keeps him employed.

  7. Anonymous  ::  5:42 am on April 21st, 2010:

    Help finance a cut in the estate tax? Are you kidding? What a ridiculous characterization of those who disagree with you.
    First of all nobody is proposing a tax hike on the poor. What they are saying is that the poor should stop suggesting tax hikes on the non-poor since the poor already don't pay income taxes.
    Secondly, how about using the “windfall” to actually pay for our federal budget rather than borrowing an unforgivable amount of money each year?
    Here's something interesting: everyone understands that a politician who accepts donations from a company is not completely impartial even if they think they are.
    But how about when one group of people actually have something to gain (government services) by raising taxes on another. Yet their opinion can be treated as impartial?
    Finally, how much did the 47% who did not pay federal income tax receive in federal services or just straight up checks? Many of those folks who paid nothing would end up netting a large negative number.

  8. Anonymous  ::  1:56 am on April 25th, 2010:

    Eugenics? If only……
    I don't care if they populate like rabbits. You're right….with shows like “Maury” it's clear no one can control their bedrooms…nor does anyone want to…least of all me….lice…disease…gross…..
    Likewise, I don't care to support them. If they can't/won't take responsibility for themselves, it's fine with me if they hone out some dirt out in the hinterlands to raise their broods. Not my business…not my problem… or anyone else's. Middle class families are generally educated and WILLING to be re-trained. Tax credits for McMansions are only there to subsidize the real estate industry and whoever they are in bed with. Anybody buying property in this economy is a FOOL even if they have a job!
    The “Catholic” argument doesn't wash. Having been raised with a family that ate, slept, and breathed Catholicism I can say that the average Catholic today would NOT support anybody living off of anybody else (unless of course it's a priest or nun who thinks everything should be a freebee). Republicans are only interested in “social justice” when it applies to their particular circle, regardless of religion. Democrats are only interested in “social justice” when they are trying to prove they care about everyone. The truth is money outweighs politics or religion, which is why the middle class is stuck holding the bag.
    THIS tax preparer left H&R Block because of jerks on mid- and upper income whose refunds were NEVER big enough and whiners who blamed other peoples' “color” for their bad/lazy lot in life.
    And no, contrary to anyone's perception, “the system” does NOT keep me employed. NONE of my clients benefit from ridiculous credits/handouts because most of them are either in life circumstances which does not make this legally allowable or they are beyond income phaseout limitations.

  9. Anonymous  ::  8:11 pm on May 28th, 2010:

    So who are these folks who pay no federal income taxes? Mostly, they are people who don’t make very much money. Many are elderly: Think a widow living only on Social Security benefits. Others are parents earning less than $20,000. Underground Guitarist
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  10. Anonymous  ::  5:27 am on June 27th, 2010:

    I thoroughly agree with the tax preparer! It is a simple solution that everyone contributes to our society including corporations whose percentage tax liability on the whole has declined over time and their loopholes have increased! Get rid of the loopholes for everyone as described and let's pay this debt off.

  11. It’s A Myth That 47% Of Americans Pay No Taxes, In Truth 86% Pay Taxes  ::  2:07 pm on July 18th, 2011:

    […] Policy Center has tried to correct Fox News and the right wing media’s misuse of their research. In April 2010, Howard Glickman of the TPC wrote, Let me explain—repeat actually—what this means: About half of taxpayers paid no federal income […]

  12. Occupy Wall Street, The fight against capitalism! – Page 16 – The Orange Room – forum.tayyar.org  ::  8:30 pm on October 21st, 2011:

    […] […]

  13. Amy  ::  8:29 am on October 27th, 2011:

    You are not very Catholic. Please stop making us look bad by saying that “most” of us wouldn’t support others.

  14. Maybe the Big O is not the wimp you think – Page 2 | Free For All Forum  ::  1:29 pm on January 29th, 2012:

    […] Center has tried to correct Fox News and the right wing media’s misuse of their research. In April 2010, Howard Glickman of the TPC wrote, Let me explain—repeat actually—what this means: About half of taxpayers paid no federal […]

  15. Utter Nonsense From The National Media. – Page 9  ::  11:13 pm on August 30th, 2012:

    […] […]

  16. Nirad  ::  6:53 pm on September 17th, 2012:

    here’s a map of where government benefits go: http://www.nytimes.com/interactive/2012/02/12/us/entitlement-map.html

  17. A President for Just the 53%: Romney Not Worried about more than Half of Country | SaltyPoliticalMusings  ::  11:14 pm on September 17th, 2012:

    […] that nearly half of all Americans don’t even pay any income tax.” As stimulus-minded Obama tax policies increased the number of Americans who paid no net income taxes, Republicans started characterizing […]

  18. We Are the 47%: The Lousy Math Behind Romney’s Gaffe  ::  2:10 am on September 18th, 2012:

    […] that nearly half of all Americans don’t even pay any income tax." As stimulus-minded Obama tax policies increased the number of Americans who paid no net income taxes, Republicans started characterizing […]

  19. Who are Romney’s 47% that don’t pay tax? – The Guardian | Dubai News|Dubai Hotels|Dubai Business  ::  9:23 am on September 18th, 2012:

    […] Howard Gleckman wrote for Tax Policy Centre about the situation in 2009: “You may have noticed that we’ve had a recession lately. And here is a powerful insight: When people’s incomes decline so too does their income tax (at least most of the time) … there is, however, another reason why some people don’t pay. For decades, both Democratic and Republican governments have made conscious policy decisions to remove low-income working families from the income tax rolls. And, guess what, sometimes government policy works exactly as intended. That’s what happened this time.” […]

  20. Who are Romney’s 47% that don’t pay tax? | Old News  ::  9:25 am on September 18th, 2012:

    […] Howard Gleckman wrote for Tax Policy Centre about the situation in 2009: “You may have noticed that we’ve had a recession lately. And here is a powerful insight: When people’s incomes decline so too does their income tax (at least most of the time) … there is, however, another reason why some people don’t pay. For decades, both Democratic and Republican governments have made conscious policy decisions to remove low-income working families from the income tax rolls. And, guess what, sometimes government policy works exactly as intended. That’s what happened this time.” […]

  21. Sunday Round Up + This Week In Crazy « What a Witch  ::  12:46 pm on November 25th, 2012:

    […] How about someone in your life directly or indirectly insisting that the problem with the nation is “takers” who are parasitically living on the labor of the “makers”? Have the mentioned the fictional 47%? Tell them to fuck right off. Everyone pays taxes. Period. […]

  22. Aaron Gascho  ::  1:27 pm on June 13th, 2013:

    Total BS that 47% of Americans dont pay taxes…where on earth was that figure pulled from? Either way a flat tax is the only way to go although that will never be instituted.

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