Middle-Income Now Get $2.14 in Transfer Income for Every $1 They Pay in Federal Taxes

October 9, 2012

Last week, we reported on a recent CBO study indicating that 60 percent of American households now get more in federal transfer income than they pay in all federal taxes. While it is not surprising that low income households receive more in transfer income than they pay in all federal taxes, it was surprising to learn that households in the middle quintile are now over that threshold. Indeed, in 2009, they got $2.14 in transfer income for every dollar they paid in federal taxes.

Interestingly, as the chart below indicates, the year in which middle-income households began getting more back in transfer income than they paid in federal taxes was 2001 – the first year of the Bush tax cuts which, among other things, increased the value of the child credit from $500 to $600 and introduced the 10 percent tax bracket.

These measures greatly reduced the income tax liability for families in the middle quintile and began the recent acceleration in the number of nonpayers. Since the child credit was also made partially refundable, it and the expanded Earned Income Tax Credit began to offset the other federal taxes that eligible families pay. Thus, their total federal tax burden shrank relative to the other federal spending benefits they received.

In 2000, some 32.5 million tax filers (or 25.2 percent of all filers) paid no income taxes after taking their credits and deductions. In 2001, the number of nonpayers jumped to 35.5 million, or 27.2 percent of filers. By 2003, when all of the Bush tax cuts were fully phased in – and the value of the child credit was increased to $1,000 – the number of nonpayers topped 41.5 million, and the percentage of nonpaying filers neared 32 percent. (For a full accounting of the history of nonpayers see our recent study here).

Today, the number of nonpayers has reached 58 million, or roughly 42 percent of all filers, and many of these families are eligible for the more than $100 billion in refundable tax credits that the IRS now doles out.

When you combine these expanded tax programs with the expansion of recession-induced “safety net” programs, it is not surprising that the majority of American households are now net beneficiaries of government spending.

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