Fiscal Fact No. 7
As we scramble to pay 2003’s taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es, let’s look ahead for a moment at the taxes we will pay for 2004. By midnight on April 15 a year from now, Americans will have filed roughly 132 million tax returns with the IRS. While most of the tax day stories will focus on how much less typical families are paying because of the 2001 and 2003 tax cuts, little attention will be given to the millions of Americans who will have no income tax liability at all.
Tax Foundation economists estimate that for tax year 2004, a record 44 million tax returns will be correctly demanding the return of every dollar (or more) that is being withheld from their paychecks during the year. In other words, after taking all the available credits and deductions, they will owe no income taxes and Uncle Sam may well owe them. Of course, this is quite different from the situation of people who have paid a great deal in income taxes throughout the year but are getting a small refund because the government withheld even more than the amount due.
The group of zero-tax filers is growing rapidly because of the Bush tax cuts. It was 29 million in 2000, and it will be 44 million in 2004, a 50 percent increase. (See Table 1.)
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Table 1: Growing Share of Zero-Tax Filers |
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|
Number of Zero-tax Filers |
Zero-tax Filers as a Percentage of All Filers |
|
|
1980 |
18.6 |
19.8% |
|
1985 |
16.7 |
16.5% |
|
1990 |
21.5 |
19.0% |
|
1995 |
26.7 |
22.6% |
|
2000 |
29.9 |
23.1% |
|
2004 est. |
44.0 |
33.0% |
|
Source: IRS Statistics of Income and Tax Foundation estimate. |
In addition to these zero-tax filers, roughly 14 million individuals and families will earn some income but not enough to be required to file a tax return. When these non-filers are added to the zero-tax filers, they add up to 58 million income-earning households who will be paying no income taxes.
Even 58 million is not the actual number of people because one tax return often represents several people. When all of the dependents of these income-producing households are counted, roughly 122 million Americans – 44 percent of the U.S. population – are outside of the federal income tax system.
Considering how fast this population of zero-tax filers is rising, it is important for lawmakers to have a better understanding of who they are. To gain a better insight into the economic and demographic profiles of these Americans, Tax Foundation economists employ a sophisticated database that combines IRS tax return data with Census household data.
A Portrait of Zero-Tax Filers
Individuals and families who will earn enough to file a tax return can eliminate their tax liability by taking advantage of credits and deductions in the tax code. Many of these are familiar to all tax filers: the personal exemption is worth $3,050 in 2003, and the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes.
is worth $4,750 for singles and $9,500 for married couples. Taxpayers with children can subtract $1,000 from what they owe for every child under 17, and if they’ve paid for child care, they can take the child care credit. For tax filers who have itemized deductionItemized deductions allow individuals to subtract designated expenses from their taxable income and can be claimed in lieu of the standard deduction. Itemized deductions include those for state and local taxes, charitable contributions, and mortgage interest. An estimated 13.7 percent of filers itemized in 2019, most being high-income taxpayers.
s that exceed the standard deduction, there are the amounts paid for mortgage interest or given to charity as well as various education-related deductions. Business owners can take advantage of an even wider array of credits and deductions to reduce their tax liability.
Less familiar, and much more difficult to understand, is the Earned Income Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. . Uncle Sam sends out about $40 billion in checks to the families and single individuals who qualify for this tax credit.
Broadly speaking, the 44 million zero-tax filers are: low-income, young, female-headed households, part-time workers, and beneficiaries of the $1,000 per-child tax credit. (See Table 2.)
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Table 2: Demographic Profile of Zero-Tax Filers and Non-filers |
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Distribution of 44 Million Zero-tax Filers |
Distribution of 14 Million Non-Filers |
Distribution of Combined Non-Paying Population |
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Income |
|||
|
$1–$19,999 |
75.3% |
97.1% |
90.4% |
|
$20,001–$39,999 |
18.5% |
2.4% |
4.7% |
|
$40,000–$74,999 |
5.7% |
0.5% |
4.5% |
|
$75,000+ |
0.5% |
0.0% |
0.4% |
|
Age |
|||
|
<18–24 |
35.9% |
9.9% |
29.8% |
|
25–34 |
20.0% |
7.7% |
17.2% |
|
35–44 |
22.4% |
9.7% |
19.4% |
|
45–54 |
11.1% |
10.0% |
30.3% |
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55+ |
10.6% |
62.8% |
22.7% |
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Race or Ethnicity |
|||
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White |
78.7% |
75.2% |
77.9% |
|
African American |
16.7% |
20.1% |
17.5% |
|
American Indian |
1.2% |
1.3% |
1.2% |
|
Asian America |
3.4% |
3.4% |
3.4% |
|
[Hispanic American] |
[15%] |
[12%] |
[14%] |
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Gender of Major Earner |
|||
|
Male |
46.4% |
37.4% |
44.3% |
|
Female |
53.6% |
62.6% |
55.7% |
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Filing Status* |
|||
|
Single |
43.5% |
39.8% |
NA |
|
Married Filing Jointly |
27.7% |
20.7% |
NA |
|
Married Filing Separately |
1.2% |
7.1% |
NA |
|
Head of Household |
27.6% |
NA |
NA |
|
Widow(er) |
0.1% |
32.3% |
NA |
|
Working Status |
|||
|
Full-Time 50-52 Weeks |
37.9% |
1.5% |
29.4% |
|
Full-Time Less than 50 Weeks |
20.4% |
1.7% |
16.0% |
|
Part-Time More than 13 Weeks |
31.6% |
3.6% |
20.9% |
|
Part-Time Less than 13 Weeks |
10.1% |
93.3% |
33.7% |
|
* Filing status of non-filers assigned using Census definitions, not strictly comparable to IRS definitions used for all filers. |
Income
The 44 million zero-tax filers will be largely low-income. Indeed, 75 percent of will earn less than $20,000 per year and 97 percent will earn less than $40,000. Fewer than 1 percent will earn more than $75,000 per year – a group comprised largely of business owners whose tax liabilities will be erased due to business losses, carry-overs from prior year AMT payments, or foreign tax credits.
Age
Zero-tax filers in 2004 will be overwhelmingly young. Looking at the age of the primary breadwinner on these tax returns, only 22 percent are 45 years old or older. More than one-third (36 percent) are younger than age 25, and 56 percent are younger than age 35. Interestingly, there is a large cluster of households (22.4 percent) where the principal wage earner is between the ages of 35 and 44. Most likely, these are modest-income families who are benefitting most from the increased value of the child credit to $1,000.
Race or Ethnicity
The racial or ethnic composition of the 44 million zero-tax filers will roughly mirror the demographics of American tax filers as a whole. For example, white Americans are 83 percent of total taxpayers, and the percentage of zero-tax filers who are white is 79 percent. African Americans are roughly 13 percent of total taxpayers and 17 percent of zero-tax filers. Asian Americans comprise 3.6 percent of total taxpayers and 3.4 percent of zero-tax filers.
That said, the percentage of zero-tax filers within each ethnic or racial group does vary: 34 percent of Asian Americans tax filers will get back every dollar withheld, 35 percent of white American tax filers will owe nothing, and 48 percent of African Americans will file a tax return with no liability.
Absent from these categories are Hispanic Americans. Within Census data, race and ethnic Hispanic origin are not comparable concepts because a Hispanic individual can be of any race. As a result, Hispanics Americans must be considered separately from racial characteristics. Hispanics make up 15 percent of the 44 million taxable households that will pay no income taxes in 2004. In contrast, they will make up 10 percent of all 132 million taxable American households.
Gender
Some 54 percent of 2004’s zero-tax filers will be single women or families with children where the principal wage earner is a woman. That will leave 46 percent of zero-tax filers in 2004 who will be men or families in which a man is the major breadwinner.
Marital Status
The overwhelming majority of tax returns that will pay no income taxes will be filed by single individuals or heads of household (an unmarried individual with children). Due in large part to their young age, 43.5 percent of these filers are single, while 27.6 percent are single parents. By contrast, heads of household comprise just 14 percent of all tax returns. Married couples comprise just 27.7 percent of tax returns with no income tax liability.
Work Status
Zero-tax tax filers tend to be low-income, working part-time or full-time for only part of the work year. Indeed, 42 percent will be working part-time or hardly at all, while another 20 percent will be working full time but less than 50 weeks out of the year. Just 38 percent of zero-tax filers will be working full-time for all of 2004.
Occupation
The occupations of zero-tax tax filers are difficult to generalize because of the large number of categories government statistics tend to group them in. However, due again to their young age, 20.2 percent of these filers are classified as “children” or “students” rather than their occupations. The other leading categories of occupations are “other services” (17.2 percent), “administrative support” (11.8 percent), “sales” (11.4 percent), and “precision production” (7.6 percent). None of the other professions or trades will have a significant number of zero-tax tax filers.
Beneficiaries of Tax Credits
In 1997, Congress enacted a new $500 per-child tax credit and expanded the Earned Income Tax Credit (EITC) for low-income workers. The 2003 tax cuts increased the value of the child credit to $1,000. These two tax credits – especially the child credit – have had a powerful effect on reducing, and many cases eliminating, the income tax liability for millions of Americans. Of the 44 million tax returns that pay no income taxes, 34 percent claim the EITC and 50 percent claim the child credit. Tax Foundation economists estimate that the expanded child credit alone knocked 5.8 million families with children off the tax rolls.
Business Income
Surprisingly, one of every five tax returns (20.9 percent) that paid no income taxes claimed some form of business income. Some 15 percent of all zero-tax tax returns claimed Schedule C (sole proprietorship) or farm income. Another 5.6 percent claimed Schedule E income, which includes S-Corporations (limited shareholder companies), real estate, or partnerships.
Who Doesn’t Have to File?
Americans are required to file a tax return if their income is over a certain amount. For single individuals under 65, that amount is $7,800. For those 65 or older, the amount is $8,950 (Social Security benefits are not included). Married couples must file if their gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.”
is at least $15,600. Heads of households (single parents) must file if they earn at least $10,050.
Broadly, people who won’t be filing a tax return for 2004 are college students, retirees, and single parents. They have part-time jobs but earn less than the mimumum amounts that are required to file a tax return.
Income
Of the 14 million income-earning households that do not file a tax return, more than 97 percent earn less than $20,000 and 99.4 percent earn less than $30,000.
Age
While the zero-tax tax filers tend to be young, two-thirds (or 8.8 million) of the non-filers are older than age 55. By contrast, only 10.7 percent of the larger population of zero-tax filers are older than age 55. As Table 2 shows, when zero-tax filers and non-filers are combined, more than half of all households that will pay no income taxes are either younger than age 25 or older than age 55.
Race and Ethnicity
Among the 14 million in the non-filing population, the ethnic differences are slightly more pronounced than the population as a whole. For example, 75 percent of the non-filing households are White Americans while 20 percent are African Americans and 3 percent are Asian Americans.
Overall, out of the 58 million taxable households that pay no income taxes some 56 percent of African American households pay no income taxes, while 40 percent of Asian American households and White American households do not. Of the 14 million non-filers, Hispanics make up 12 percent of the total. Overall, Hispanics make up 14 percent of the 58 million taxable households that pay no income taxes.
Gender
Among the population of non-filers, female-headed households are even more dominant. Roughly two-thirds of these households are headed by women, whereas 37 percent are headed by men.
Work Status
Not surprisingly, 93 percent of non-filing households are considered non-workers – meaning they worked less than 13 weeks out of the year. Only 1.46 percent of non-filers will have worked full-time during 2004.
Conclusion
This year, a record 44 million tax returns – one-third of all returns filed – will have no income tax liability because of the available credits and deductions in the tax code. This is a 50 percent increase in the number of zero-tax filers in just four years. In addition to these zero-tax filers is 14 million individuals or households who do not earn enough to file a tax return. Overall, some 58 million taxable households are outside of the income tax system.
These findings raise some serious questions about the future of the U.S. income tax system. Are any future tax cuts, or even tax reforms, possible when the lion’s share of the tax burden is increasingly borne by a shrinking pool of taxpayers who – at least on paper – appear to be “upper-income”? And will the expanding pool of non-payers demand even higher income taxes? These are questions lawmakers must begin to debate.
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