47% Pay Zero Federal Income Taxes

The combination of a down economy and various stimulus givebacks means that nearly half of Americans paid no federal income tax in 2009.

Tax Day is a dreaded deadline for millions of Americans, but for nearly half of U.S. households, it’s simply somebody else’s problem.

About 47% will pay no federal income taxes for 2009. Either their incomes were too low, or they qualified for enough credits, deductions and exemptions to eliminate their liability. That’s according to projections by the Tax Policy Center, a Washington research organization.

The vast majority of people who escape federal income taxes do pay other taxes, including federal payroll taxes for Social Security and Medicare, and excise taxes on gasoline, aviation, alcohol and cigarettes. Many also pay state or local sales, income and property taxes.

So, to be clear:  Most everyone pays federal taxes and even more pay some kind of taxes, somewhere.

Still, the system has gotten out of whack.

In recent years, credits for low- and middle-income families have grown so much that a family of four making as much as $50,000 will owe no federal income tax for 2009, as long as there are two children younger than 17, according to a separate analysis by the consulting firm Deloitte Tax.

That’s beyond progressive.  It makes both practical and moral sense to limit taxation on the poorest of the poor and practicality demands that those at the upper range of the income distribution pay more than our fair share.  But, surely, people well into the middle class shouldn’t be exempted altogether from contributing to the general fund?  Shouldn’t we set a floor of, say, 1% that everybody owes the treasury as a cost of citizenship?

Otherwise, we remove a stake in society from far too many people.  Why should they care how much the federal government spends — or, indeed, how much it taxes — if they don’t pay their share?

FILED UNDER: Economics and Business, Politics 101, , , , , , , , , , ,
James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Alex Knapp says:

    Shouldn’t we set a floor of, say, 1% that everybody owes the treasury as a cost of citizenship?

    How about 7.65%? Oh wait, we already do that, because FICA taxes roll into the general revenue fund despite the claim that they’re “only for Social Security and Medicare.”

    At no point in history has the income tax ever covered all Americans? Why should it? When it was introduced, it was applied to the wealthiest only, then spread out to encompass more people. I don’t see why paring back the number of people who pay it is a bad thing.

  2. alkali says:

    But, surely, people well into the middle class shouldn’t be exempted altogether from contributing to the general fund?

    They aren’t exempted. We essentially have two federal income tax systems: (i) one for Social Security and Medicare, which IIRC is close to half the budget, and (ii) one for everything else in the budget. Everyone who works a day pays into the first system.

  3. Mithras says:

    Shouldn’t we set a floor of, say, 1% that everybody owes the treasury as a cost of citizenship?

    I understand the gist of your argument, but mandating a “floor” tax rate runs into a raft of practical problems:

    1. It creates a huge administrative cost to collect and account for a much smaller amount of revenue. If everyone pays 1%, no matter how little income they have, then we’ll be collecting nickels from millions of poor people and spending dollars to process their returns.

    2. If you say that your deductions, no matter how large, can’t shelter your income, then you have to define what “taxable income” is some other way. Will it be gross income? Gross income less some package of “real” deductions, not the fake ones like additional exemptions for dependent children? Once you head down that path, you’re right back where you started.

    3. Sometimes any amount of tax seems unjust. I have a client with $5,000 in income for 2009 and $17,000 in medical expenses. What amount of income tax should he pay?

  4. PD Shaw says:

    Shouldn’t the title be 47% pay zero taxes?

  5. James Joyner says:

    Taxing the rich was and always has been a camel’s nose under the tent. See the “Cadillac Tax” in the recent healthcare bill, for example.

    The fact of the matter is that the income tax is how we pay for the federal government. I can accept arguments for why the successful have to shoulder a greater share of the burden but not why most should shoulder none at all.

  6. Rick DeMent says:

    And what about the taxes bakes into every good and service one buys? Not just State and local sales tax but the tax a corporation pays tot he feds is baked into the price of their goods and services, and also lets not forget excise taxes. By focusing only on income tax you miss a huge part of the picture.

  7. Hoodlumman says:

    1. It creates a huge administrative cost to collect and account for a much smaller amount of revenue. If everyone pays 1%, no matter how little income they have, then we’ll be collecting nickels from millions of poor people and spending dollars to process their returns.

    a)This administrative bureaucracy is already in place. b) Everyone has to file their taxes anyway regardless of if they owe nothing, something or are getting a return.

  8. Steve Plunk says:

    Don’t forget most Americans pay fuel and sales tax. Others pay property tax, state tax, and even some local taxes.

    For most of us out here taxes are taxes no matter where they go. Income tax is just another in the long list.

  9. James Joyner says:

    If you say that your deductions, no matter how large, can’t shelter your income, then you have to define what “taxable income” is some other way. Will it be gross income? Gross income less some package of “real” deductions, not the fake ones like additional exemptions for dependent children? Once you head down that path, you’re right back where you started.

    But we have an Alternative Minimum Tax now that seeks to get around this issue. I know all too well, since it takes away most of my deductions. Currently, it kicks in at a higher level. I’m just saying that there should be a base level that people pay.

    Shouldn’t the title be 47% pay zero taxes?

    No. They pay taxes, just not federal income taxes. It’s just that those are highly symbolic.

  10. Rick DeMent says:

    The fact of the matter is that the income tax is how we pay for the federal government.

    Well 45% of it anyway so you’re almost half right.

  11. PD Shaw says:

    James, I meant that the story uses the 47% figure and the title of your post uses 43%.

    If it’s a typo, I’d hate to see you tarred as a weak-tea RINO whose not serious about taxes.

    Ah. I saw the 47%, subtracted it from 100 . . . – jhj

  12. sam says:

    What Alex said.

  13. Michael Reynolds says:

    The working class pay a much higher percentage of their total income in payroll taxes than do people with higher income. So I think there’s a certain rough justice in letting them off the hook for income taxes.

    An alternative might be making both payroll and income taxes inclusive of all income, and progressive.

    Any volunteers for that among wealthier readers? Hello?

  14. Herb says:

    This is something me and my Mom bring up to my conservative brother and uncle when they complain about paying too much in taxes. “Don’t you, um, get child tax credits?”

    Surprise, surprise, the conservatives in the family don’t like the taxes they don’t have to pay and the liberals don’t mind paying the taxes they do. Thank God for unmarried liberals without kids and their lesbian can’t-file-jointly mothers!

  15. pete says:

    How about The Fair Tax? It’s basically what is now being floated as the VAT. Except the Fair Tax gets rid of all Federal Income taxes while providing the same level of funding and then expanding the tax base.

  16. Alex, et al, your telling half truths at best. Federal incomes taxes make up the lion’s share of federal taxes most people pay. Don’t throw state, property, and local taxes into the mix, since the people of, say, the state of New York can’t force me to pay any of those taxes in their state. Nice to note that Alex acknowledges the outright lie that is Social Security since that money has been going into the general fund for a long time. In fact, that’s how Clinton was able to claim he balanced the budget.

    Just wait until the number rises to 50% + 1. That’s when the real fun starts.

  17. Zelsdorf Ragshaft III says:

    How do you protect the rights of the minority against the will of the majority? If I get to vote for you paying my way, that has my vote. Government that can give you everything can take everything away.

  18. Also, many retired people who do not work for a wage have income but pay no Social Security taxes, so that canard is, again, only partially true at best.

  19. A Modest Proposal: in the elections for a particular jurisdiction, you receive an additional vote for each $100 dollars you pay in taxes in that jurisdiction. e.g. if you paid $12,000 in federal taxes, you’d get to cast 121 votes for president.

  20. Alex Knapp says:

    Alex, et al, your telling half truths at best. Federal incomes taxes make up the lion’s share of federal taxes most people pay.

    Do they? Can you provide support for the idea that most people who pay federal income taxes do so at an effective rate greater than 7.65%?

    Don’t throw state, property, and local taxes into the mix, since the people of, say, the state of New York can’t force me to pay any of those taxes in their state.

    Why not? Is it because the poor pay a higher percentage of their income in these taxes than do the wealthy, thereby undercutting your “50+1” thesis?

  21. sam says:

    Stop it, Alex. You might force Charles to change his mind. God only knows what the galactic effects of that might be.

  22. I don’t have ready access to that data Alex, but I believe it to be a red herring. I am also not inclined to go looking for it since it wouldn’t affect my point, or yours for that matter.

    Do you have evidence that most of those who still pay federal income taxes do not pay at an effctive rate greater than 7.65%?

    Do you have evidence that those who still pay federal income tax are not paying much more federal income tax than all other federal taxes combined.

    As to local and state taxes, I have much more of an idea what they are going for and it isn’t generally wealth redistribution.

    What, no snappy retort about the retired, or others with no wages but plenty of income who pay no Social Security taxes?

    Last time I checked, Nancy Pelosi and Harry Reid and Barack Obama cannot raise my property taxes or my state taxes or my state and local sales taxes (yes, yes, I know that one’s coming).

    I’ll be honest, my concern isn’t with the richest 3% or the poorest 3%. But I can’t get over the fact that you think it doesn’t matter that most people won’t pay federal income taxes as though it can’t have real deleterious affects on the body politic.

    So much emphasis in society and business has been put the last few years in the concept of stakeholders. But if you have no skin in the game, what exactly is your stake?

    sam, stay classy.

  23. Brett says:

    Otherwise, we remove a stake in society from far too many people. Why should they care how much the federal government spends — or, indeed, how much it taxes — if they don’t pay their share?

    The reason this is, James, is because policymakers (including many, if not most from your party) decided years ago that tax credits were a better way to do welfare policy than either federal programs, federally subsidized state-run programs, or federally subsidized private efforts. The side-effect, of course, is that a large fraction doesn’t pay net income tax.

    If you don’t like that, we can always go back to subsidies and programs for helping the poor.

  24. Alex Knapp says:

    Charles,

    I don’t have ready access to that data Alex, but I believe it to be a red herring. I am also not inclined to go looking for it since it wouldn’t affect my point, or yours for that matter.

    Do you have evidence that most of those who still pay federal income taxes do not pay at an effctive rate greater than 7.65%?

    You made the affirmative statement: “Federal incomes taxes make up the lion’s share of federal taxes most people pay.”

    In order for that to be true, most people who pay income taxes need to be paying at an effective rate higher than 7.65%. I was wondering if you had data to back that up. I don’t know if your statement is true or not.

    As to local and state taxes, I have much more of an idea what they are going for and it isn’t generally wealth redistribution.

    I was under the impression that your definition of “wealth redistribution” included social welfare programs above and beyond law enforcement, courts, and the military? So Medicare, unemployment, schools, universities, etc. don’t count anymore?

    What, no snappy retort about the retired, or others with no wages but plenty of income who pay no Social Security taxes?

    I don’t have enough data to make a judgement–I don’t know what the tax situations are completely for people in those categories. I was under the impression that retirees do pay FICA on non-SS income, but I don’t know that 100%.

    But I can’t get over the fact that you think it doesn’t matter that most people won’t pay federal income taxes as though it can’t have real deleterious affects on the body politic.

    My point is, um, they’ll still pay 7.65% of their income, even if they pay no income tax.

  25. steve says:

    Do you have evidence that most of those who still pay federal income taxes do not pay at an effctive rate greater than 7.65%?

    As can be seen here, the bottom 50% have paid income tax at an average rate of about 3% to 5% since 1987.

    http://www.taxfoundation.org/news/show/250.html

    Steve

  26. anjin-san says:

    I don’t have ready access to that data Alex

    There’s a shocker.

  27. john personna says:

    Part of it is just names. It matters most how many don’t pay tax. After that, who doesn’t pay Federal tax, and on to greater specifics.

    We could concentrate on “no income tax” and talk about why it’s bad. It would be unfair to the rest of us if many were dodging. But the shoe would be on the other foot if those people didn’t have [enough] income.

    “enough” might be the rub. What do you all think, where is the real poverty level? Where would you start charging more than a token amount?

  28. john personna says:
  29. Rick DeMent says:

    You know this argument is stupid, it says almost nothing about who pays taxes.

    The one thing is does prove is how many crappy, low paying jobs are out there compared to a very few people making unimaginable amounts of money.

    In order for people to make those huge other worldly sums of cash it requires a an unholy amount of people to sucking wind on cooley wages. The solution is to create more good paying jobs and the tax situation will flatten out .. then everyone will be happy.

  30. john personna says:

    As an aside, it is kind of a demonstration of how hard it is for facts to penetrate a contrary mind, that I can post things like that quintile/tax-burden thing so often, and have them so resolutely ignored by so many.

    Facts? Facts won’t help our indignation 😉

  31. Franklin says:

    A Modest Proposal: in the elections for a particular jurisdiction, you receive an additional vote for each $100 dollars you pay in taxes in that jurisdiction. e.g. if you paid $12,000 in federal taxes, you’d get to cast 121 votes for president.

    We already live in an oligarchy due to something called lobbying. Your proposal would make it approximately 10 times worse, but I suppose it would cut out the middle man.

  32. Michael Reynolds says:

    John P:

    Facts? We don’t need no stinkin’ facts!

  33. ATM says:

    People who pay primarily only Social Security and Medicare taxes usually get far more out of the system once they reach the eligibility age. The payout system for Social Security pays more out per dollar paid into the system for people who had low earnings. That’s a good reason why the cap should on SS taxes should never be eliminated, and why investment income shouldn’t be have SS taxes.

  34. sam says:

    sam, stay classy.

    stay paranoid, bro.

  35. Dantheman says:

    Michael,

    While not needing any facts, regardless of how odoriferous they are seems par for the course around here, this post at Nate Silver’s place provides some interesting ones. Basically, the US is around the middle of the pack in income distribution before taxes, but the most unequal after taxes.

  36. James Joyner says:

    Nate Silver’s place provides some interesting ones. Basically, the US is around the middle of the pack in income distribution before taxes, but the most unequal after taxes.

    I read that yesterday. But that’s an argument about income redistribution rather than about having people pay taxes. Other countries take more from the successful and give more to the unsuccessful.

  37. john personna says:

    Nake Silver takes the hard line that a wide distribution is a “maldistribution.” I wouldn’t go that far. If I coast through my retirement, as I plan, I’ll make a lot less that Donald Trump does in the same years. That’s not Donald’s fault, nor should a tax system try to “correct” it.

  38. Fog says:

    “A Modest Proposal: in the elections for a particular jurisdiction, you receive an additional vote for each $100 dollars you pay in taxes in that jurisdiction. e.g. if you paid $12,000 in federal taxes, you’d get to cast 121 votes for president.”

    I like it ! But let’s go all the way and reinstate the draft by the same principles. If you paid $12,000 in federal taxes, your birthday gets 120 extra ping pong balls in the hopper. I mean, it’s all about skin in the game, right?

  39. Dantheman says:

    James,

    “I read that yesterday. But that’s an argument about income redistribution rather than about having people pay taxes. Other countries take more from the successful and give more to the unsuccessful.”

    I don’t see a lot of difference between the two. Are you saying there would be any reason to prefer a system where, for example, a poor person pays $5,000 in taxes, and gets $10,000 in transfer payments over a system where that same person would pay $0 in taxes and get $5,000 in transfer payments?

  40. john personna says:

    Dantheman, the income distribution graphs are interesting for discussion, but I don’t see any useful policy ever coming out of them. How “wide” might just be a measure of “how many rich people you got?”

    A better questions is what we, and other countries in comparison, do for people who make $0K per year, or $15K, or $30K, …

    I think the proper questions are about survival cost, minimum acceptable lifestyle costs, and so on. And those are hard questions, because we don’t really what to think/talk about what it takes to support a nice, poor, life.

    We don’t want European style apartment blocks, with public transport, because (while that allows one to live a poor but civilized life) it isn’t the American dream.

    I’d say our poor are caught on that contradiction. Buy a house, or go to the homeless shelter. We don’t plan for in-between.

  41. Dantheman says:

    john p,

    I am going to disagree with you — this data is very useful to show that our tax and transfer policies are far less than other developed nations, and that therefore we should not be adjusting them to create greater burdens on the poor, as so many at this site advocate.

    “A better questions is what we, and other countries in comparison, do for people who make $0K per year, or $15K, or $30K, …”

    Not if the average income is so much higher here. The answer to your question would differ significantly in a country where the average person makes $15K per year and one where the average person makes $50K per year.

  42. john personna says:

    The answer to your question would differ significantly in a country where the average person makes $15K per year and one where the average person makes $50K per year.

    Are you saying that in an abstract “fairness” sense, Dan?

    I’m concerned whether $15K person has a roof, a bed, 3 squares a day, and access to a public library. That is not dependent on what the average person makes.

  43. Dantheman says:

    john p,

    “Are you saying that in an abstract “fairness” sense, Dan?

    I’m concerned whether $15K person has a roof, a bed, 3 squares a day, and access to a public library. That is not dependent on what the average person makes.”

    I’m saying that a country where a person with income equal to the national average doesn’t have those things is a country probably doesn’t exist. A country where a person whose income is 30% of the national average probably needs help getting those things. That’s why income distribution is important.

  44. john personna says:

    Well, it’s one thing if we agree that we want to achieve those basic amenities, another to say that there is only one path to get there.

    I’m a little worried that folk who want to get there by income redistribution are more concerned with their favorite method than the goal.

    Another way to do it would be to ensure that the basic amenities are available at low cost, even if that took subsidy to the supplier, rather than the user.

  45. john personna says:

    BTW, I think that if we did eliminate all subsidies for home ownership, one natural market response would be more, better, cheaper, rentals.

    Possibly we’d need to clobber any zoning restrictions on minimum size (apartment, home, lot).

  46. rjs says:

    with only 59% of the civilian workforce employed, and 20% of those underemployed, that’s a surprise?

  47. spencer says:

    How does the point that Exxon paid no federal taxes last year even though they were profitable?

    Do you think they, like individuals, should pay something just so they have some skin in the game?

    Remember, the Supreme court just ruled that corporations were individuals.

  48. Dantheman says:

    john p,

    “Well, it’s one thing if we agree that we want to achieve those basic amenities, another to say that there is only one path to get there.

    I’m a little worried that folk who want to get there by income redistribution are more concerned with their favorite method than the goal.”

    I think you are misreading me, but to make it plainer, my 9:43 AM comment was meant to be rhetorical, as I see no difference between a system where a poor person pays $5,000 in taxes, and gets $10,000 in transfer payments and a system where that same person would pay $0 in taxes and get $5,000 in transfer payments, except the latter is likely more efficient.

    “Another way to do it would be to ensure that the basic amenities are available at low cost, even if that took subsidy to the supplier, rather than the user.”

    Maybe, although I’d be leery of the unexpected incentives that creates, such as the subsidies to reduce food costs creating the high fructose corn syrup issues we have.

    “BTW, I think that if we did eliminate all subsidies for home ownership, one natural market response would be more, better, cheaper, rentals.”

    More, probably. Better and cheaper, likely not.

    “Possibly we’d need to clobber any zoning restrictions on minimum size (apartment, home, lot).”

    I don’t see that happening. Local politicians who proposed that would get voted out extremely quickly. Minimum size restrictions are incredibly popular, as they keep the value of the homes of the people who can actually vote for them higher to the detriment of people who cannot vote for them.

  49. I don’t have ready access to that data Alex

    There’s a shocker.

    anjin-san, Alex proposes a new question and surprisingly, to you at least, I didn’t have it memorized and at that moment didn’t have time to look for it. Maybe you should try to be less of an ass.

  50. john personna, I apologize in advance but I don’t have time to dig into all the 2004 Tax Foundation numbers. Some of them seem to be a little bizaare though. The lowest quintile pays 21% of its income in payroll taxes? Really? Perhaps “Cash Money Income” is a different metric than what we are talking about here.

  51. From the Heritage Foundation for 2009:

    Personal income taxes made up 43.5% of federal revenue.

    Social insurance taxes made up 42.3% of federal revenue.

    Corporate income taxes made up 6.6% of federal revenue.

    Customs duties, misc made up 3.5% of federal revenue.

    Excise taxes made up 3.0% of federal revenue.

    Estate and gift taxes made up 1.1% of federal revenue.

  52. john personna says:

    A lot of people cite the “percentage of federal revenue” numbers, but they aren’t really reversible to tax burden.

  53. James Joyner says:

    Do you think they, like individuals, should pay something just so they have some skin in the game?

    I don’t have any idea why Exxon wouldn’t have paid taxes last year but, yeah, to the extent that corporations are going to be taxed, large ones that make huge profits should pay.

    (Although, again, a consumption-based tax would solve this sort of anomaly: Exxon would pay every time they bought anything, just like anyone else.)

  54. anjin-san says:

    I don’t have any idea why Exxon wouldn’t have paid taxes last year but

    Really. No idea at all? 🙂