Meme Watch: The Half Who Don’t Pay Taxes
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.
- Who really pays the most Federal income tax? Part 2 (thedauntlessconservative.wordpress.com)
- The tax code’s EITC contribution to the safety net for the poor (dontmesswithtaxes.typepad.com)
- Hamilton Project: The Truth about Taxes — Just About Everyone Pays Them (taxprof.typepad.com)
- The Flawed Earned Income Credit (yeagercpa.wordpress.com)
- The Cost of Opposing Reform
- The Deal with the Deal
- Do Any Studies Show that Tax Cuts Pay For Themselves?
- Does Buffett Pay a Lower Tax Rate than his Secretary?
- Republican Debate December 3
- Republican Debate November 22
- No True SCOTUS
- <span class="dquo">“</span>A Colossal Failure”?
- The Ryan Game
- <span class="dquo">“</span>Fair” Unbalanced?