Why Do People Pay No Federal Income Tax?

The percentage of Americans who don’t pay income tax is making headlines again. However, the story hasn’t changed since I blogged about it last year and my TPC colleagues and I analyzed why in a longer paper. In 2011, 46 percent of tax units paid no federal income tax. Half of them had no taxable income—the standard deduction and personal exemptions exceed their income.  The other half get enough tax breaks to wipe out their basic tax liability.

It’s worth noting that the percentage has changed over time, rising and falling as the economy fluctuates and Congress enacts short-term stimulus tax cuts. Looking forward, we project that the percentage will fall below 40 percent by the end of the decade, even if Congress makes the Bush-era tax cuts permanent.