Record 58 Million Off the Tax Rolls, Yet Outrage Over 1 in 189 Wealthy Nonpayers?

June 01, 2012

An annual report recently released by the IRS (found here) documenting the number of taxpayers earning over $200,000 who paid no federal income tax has generated a considerable amount of attention. As Bloomberg first reported, in 2009, some 20,000 high-earners had no federal income tax liability after taking their credits and deductions. The biggest contributing factors erasing their tax bills were the taxes paid deduction (such as state and local taxes), the foreign tax credit, the interest paid deduction, the charitable deduction, and the deduction for business losses.

Despite the fact that the number of non-paying high-earners amounted to just 1 in 189, or 0.53 percent, of the 3.9 million taxpayers over $200,000 in 2009, there has been a general lack of perspective in the reporting and commentary on this issue (see here for an example).

The fact is, as the chart below shows, 2009 had the largest percentage of Americans paying no income taxes since 1940 – 42 percent of all filers, or 58.6 million. In other words, 1 in 2.4 taxpayers in the general public paid no U.S. income tax in 2009 because of the generosity of the credits and deductions in the tax code.

While the percentage of Americans outside the income tax has fluctuated since WWII, the biggest growth in nonpayers has occurred since the 2001 and 2003 tax cuts. When President Bill Clinton left office in 2000, by contrast, “just” 25 percent of filers had no income tax liability. 

The tables below give us better demographic profile of the non-paying population. As Table1 shows, the vast majority of nonpayers earn less than $75,000 and a large percentage of those earning under $40,000 pay no income taxes. After $100,000 in income, the percentage of nonpayers drops off to a tiny fraction.

Table 1: Nonpayers by Income

 

All Returns

Taxable Returns

Nonpayers

Percent of Nonpayers Within Income Group

Share of All Nonpayers

Total

140,494,127

81,890,189

58,603,938

42%

100%

$0 to $20,000

49,024,635

9,961,694

39,062,941

80%

67%

$20,000 to $40,000

33,067,926

18,832,693

14,235,233

43%

24%

$40,000 to $75,000

29,491,305

24,830,410

4,660,895

16%

8%

$75,000 under $100,000

11,463,725

10,987,101

476,624

4.2%

1%

$100,000 under $200,000

13,522,048

13,374,553

147,495

1.1%

0.3%

$200,000 under $500,000

3,195,039

3,178,420

16,619

0.52%

0.03%

$500,000 under $1,000,000

492,567

489,904

2,663

0.54%

0.005%

$1,000,000 or more

236,883

235,413

1,470

0.62%

0.003%

Source: http://www.irs.gov/pub/irs-soi/09in14ar.xls

 

 

Table 2 reveals that single taxpayers represent the largest group of nonpayers at 43 percent. Married couples comprise about 30 percent, while heads of household comprise 27 percent. However, looking within each filing status, we can see that 73 percent of heads of household are nonpayers while 40 percent of singles are nonpayers. Married couples have the smallest percentage of nonpayers at 32 percent.

Table 2: Nonpayers and Marital Status

 
 

Total Returns

Nonpayers

Percentage of Nonpayers within Filing Status

Share of All Nonpayers

Married Filing Jointly

53,570,158

17,241,772

32%

29%

Married Filing Separately

2,539,588

724,084

29%

1%

Head of Household

21,496,275

15,669,606

73%

27%

Singles

62,819,226

24,928,833

40%

43%

Source: http://www.irs.gov/pub/irs-soi/09in12ms.xls

   

 Table 3 indicates that nonpayers tend to be young. Indeed, 44 percent of all nonpayers are under age 35. The smallest share of nonpayers is found among taxpayers over age 45. Looking within each age group we can see that the younger cohorts have the highest incidence of nonpayers. Not surprisingly, these are the age groups most likely to take advantage of tax credits such as the EITC, child credit, and first time homebuyers credit.

Table 3: Nonpayers by Age

 

All Returns

 Returns with Income Tax Liability

Returns with No Income Tax Liability

Percentage of Nonpayers within Age Group

Share of Total Nonpayers

All returns

140,494,127

81,890,189

58,603,938

42%

100%

Under 18

1,793,202

492,689

1,300,513

73%

2%

18 under 26

21,700,462

8,690,395

13,010,067

60%

22%

26 under 35

24,392,888

12,448,516

11,944,372

49%

20%

35 under 45

25,596,464

14,566,606

11,029,858

43%

19%

45 under 55

26,297,862

17,648,297

8,649,565

33%

15%

55 under 65

20,399,964

15,284,452

5,115,512

25%

9%

65 and over

20,313,285

12,759,233

7,554,052

37%

13%

Source: http://www.irs.gov/pub/irs-soi/09in37ag.xls

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