Millions Pay No Income or Payroll Taxes Thanks to Refundable Credits

June 16, 2010

In 2008, the IRS paid out over $70 billion in refundable credits to people who had no income tax liability. Congress's Joint Committee on Taxation recently produced some estimates on the number of tax filers who receive refundable credits larger than what they pay in payroll taxes. This is an important contribution to the debate over the use of credits because in any discussion about the record number of non-payers, we frequently hear the refrain that "well, they do at least pay FICA taxes."

In a May 28, 2010 letter to Representative Dave Camp and Senator Kent Conrad, JCT reports that between 2000 and 2006 the number of returns with refundable credits in excess of the employee's share of payroll taxes increased from 11.8 million to 16.1 million. In 2009 and 2010, those figures jumped to 23 million because of such things as the making work pay credit and the lowering of the income threshold for determining the refundable portion of the child credit to $3,000.

JCT projects that the number of returns with refundable credits exceeding the employee's share of payroll taxes will hover between 14 million and 15 million for the next ten years.

Of course, employers pay the other half of an employee's payroll taxes so JCT estimated how many returns receive refundable credits in excess of both portions of the payroll tax. In 2000, 8.7 million returns got more in refundable credits than they paid in total payroll taxes. The number jumped to nearly 12 million in 2006 and then up to 15.5 million in 2009 and 2010. It will hover between 10.6 million and 11.3 million for the next decade.

There are two elements to this story. The obvious first one is the increased role of the IRS in delivering what are essentially welfare benefits to people who don't pay income taxes. Whatever we think of the IRS, this is generally not a function it should play. As I've said repeatedly, too many people see April 15th as payday, not Tax Day.

Lastly, not only are these people not paying any income taxes to fund the general cost of government from which they benefit, but they are effectively not paying into the Social Security or Medicare systems for which they will benefit in retirement. That's a free ride in any book.


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