Last fall, we began to hear the drum­beat of “half of all Amer­i­cans pay no taxes”. Specif­i­cally, it was that they pay no fed­eral income taxes, though that detail was often lost in the rhetoric. The topic became a hot one among the Repub­li­can Pres­i­den­tial can­di­dates start­ing in mid-​​August, 2011.

With Tax Day nearly upon us, it seems worth­while to inves­ti­gate this topic in more depth.

Since this is a meme watch arti­cle, let’s start by look­ing at what was going on at that time that would trig­ger the meme’s for­ma­tion. The hot topic in early August was the bat­tle over the debt ceil­ing. As part of that bat­tle, Pres­i­dent Obama pushed for the expi­ra­tion of the Bush tax cuts.

 

Given that Obama’s fall­back posi­tion was to main­tain the tax cuts for all but the most wealthy Amer­i­cans, it’s unsur­pris­ing that the Repub­li­can retort was to focus instead on the ones who weren’t pay­ing income tax at all. Hence, the meme.

The Her­itage Foun­da­tion even went so far as to pro­duce a pretty graph show­ing how the per­cent­age of Amer­i­cans not pay­ing fed­eral income taxes has been on the rise since the last years of the Rea­gan Pres­i­dency. There are numer­ous rea­sons for this, which we can exam­ine in turn.

The Earned Income Tax Credit (EITC) is one. It was cre­ated in 1975, and then expanded in 1986, 1990, 1993, 2001, and 2009. Note how the num­ber of peo­ple not pay­ing income taxes spiked in 1975, 1986, 1990, 2001, and 2009. That’s five out of the six EITC expansions.

One can cer­tainly argue against the EITC, but it requires one to have earned income in order to claim it. This has, in fact, been an argu­ment made by Repub­li­cans in the past in favor of the EITC. And it’s a good one, in that we want to encour­age peo­ple to be employed where pos­si­ble. Of course, if we have high unem­ploy­ment caused by a larger sup­ply of work­ers than demand for them, encour­ag­ing peo­ple to look for employ­ment isn’t espe­cially meaningful.

But this EITC group makes up only 7.5 per­cent of Amer­i­cans, or 15 per­cent of those who aren’t pay­ing fed­eral income taxes. Clearly, the EITC can’t account for the growth in the non­pay­ing group.

Another rea­son for the increased num­ber of non­pay­ers is age. The per­cent­age of peo­ple 25 to 60 years old who pay fed­eral income tax is a lit­tle over 70 per­cent. As they approach 65, the per­cent­age of fed­eral income tax­pay­ers drops off sharply, dip­ping below 30 per­cent as they get into their 70s.

Why is this? It’s a com­bi­na­tion of fac­tors. One is that the num­ber and size of income tax deduc­tions increases for senior cit­i­zens. Social Secu­rity income is tax-​​exempt for most seniors. In addi­tion, the shift in retire­ment income from pen­sions to tax-​​sheltered invest­ment vehi­cles led to an increase in the amount of money put into tax-​​free invest­ments such as munic­i­pal bonds. Put all of those together, and it’s not sur­pris­ing to find that fewer than half of America’s seniors pay fed­eral income tax.

And now that the baby boomers have begun to get beyond age 60, we should expect a steady rise in the num­ber of Amer­i­cans who aren’t pay­ing fed­eral income taxes. From 2000 to 2010, we had a 21 per­cent rise in the num­ber of Amer­i­cans over age 62, accord­ing to the Cen­sus Bureau. That’s more than dou­ble the over­all pop­u­la­tion growth rate. The senior pop­u­la­tion should level off in a decade or so, and then begin to fall.

But even here we’re talk­ing about only 11 per­cent of Amer­i­cans. Cou­pled with the EITC group, it’s 18.5 per­cent, or a lit­tle over a third of those who aren’t pay­ing fed­eral income tax.

Of course, if you look at the graph above, you can clearly see that rel­a­tively few 20-​​year-​​olds are pay­ing fed­eral income taxes, too. This is hardly a sur­prise, since that group is dis­pro­por­tion­ately made up of peo­ple in col­lege. And, among those not in col­lege, few are able to earn enough to exceed the stan­dard deduc­tion and per­sonal exemp­tion. This is why 80 per­cent pay fed­eral pay­roll taxes, even though only 30 per­cent pay fed­eral income taxes.

Just as we had a rise in the per­cent­age of the pop­u­la­tion made up of seniors, so too did we have a rise in the per­cent­age of the pop­u­la­tion made up of 18–24 year olds. So the rise in the over­all per­cent­age of peo­ple not pay­ing fed­eral income taxes makes sense here, too.

From that same graph above, you can see that the group who is most likely to be pay­ing fed­eral income taxes is in the 25 to 55 age range. The only age group that the Cen­sus Bureau saw shrink from 2000 to 2010 is the 25–44 group. Clearly, if the over­all pop­u­la­tion grew by 9.7 per­cent, and that sub­group shrank by 3.4 per­cent, you’d expect there to be an impact on the over­all per­cent­age of Amer­i­cans who are pay­ing fed­eral income taxes.

In other words, a sig­nif­i­cant amount of the growth in non­pay­ers over the past decade comes from pre­dictable demo­graphic shifts.

There’s one other group, mak­ing up 6.5 per­cent of the pop­u­la­tion, or 13 per­cent of those not pay­ing fed­eral income taxes. These peo­ple made enough money to stay well above the poverty line, but had enough deduc­tions to reduce their tax bur­dens to zero.

For each of these groups, what is to be gained by rais­ing fed­eral income taxes on them? Is it a token ges­ture? If so, then it’s a dis­cus­sion entirely sep­a­rate from that of address­ing the fed­eral deficit. If, on the other hand, it’s intended to close our deficit, then it’s point­less to go after this group, since it would have a mighty small impact. The total income for this group is about a tril­lion dol­lars per year. What sort of fed­eral income tax rate would one pro­pose for this?

Con­sider for a moment the impact of a one point increase in the effec­tive fed­eral income tax for the bot­tom 50 per­cent of all earn­ers. To gen­er­ate the same amount of addi­tional fed­eral income taxes from the top two per­cent (those earn­ing at least $250,000 per year), we’d need to increase the effec­tive fed­eral income tax rate by a mere 0.125 points. Or, to turn it around, a one-​​point increase on the top two per­cent of earn­ers would gen­er­ate as much addi­tional fed­eral income tax rev­enues as an eight–point increase on the bot­tom 50 percent.

The bot­tom line here is sim­ple. The only fea­si­ble rea­son for increas­ing the fed­eral income tax on those who aren’t cur­rently pay­ing is as a token ges­ture. And that is a com­pletely dif­fer­ent dis­cus­sion from the one that started this meme in the first place. Remem­ber that? It was the debt ceil­ing, and Obama’s pro­posal to allow the Bush tax cuts to expire for those mak­ing over $200,000 per year. That makes the “half don’t pay taxes” meme a change of sub­ject, not a coun­ter­ar­gu­ment, against allow­ing the Bush cuts to expire.

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