Fiscal Fact No. 27
One of the biggest obstacles facing President Bush’s Advisory Panel on Federal 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. Reform is the fact that America has become divided between a growing class of people who pay no income taxes and a shrinking class of people who are bearing the lion’s share of the burden.
Despite the charges of critics that the tax cuts enacted in 2001, 2003 and 2004 favored the “rich,” these cuts actually reduced the tax burden of low- and middle-income taxpayers and shifted the tax burden onto wealthier taxpayers. Tax Foundation economists estimate that for tax year 2004, a record 42.5 million Americans who filed a tax return (one-third of the 131 million returns filed last year) had no tax liability after they took advantage of their credits and deductions. Millions more paid next to nothing.
As Figure 1 and Table 1 show, the number of Americans who paid no income taxes because of the preferences in the tax code has varied greatly since 1950. While the number of these “non-payers” has averaged about 22 percent of all filers over the past five decades, it has spiked to record levels in recent years and the trend line does not appear to be slowing.
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Table 1. Number of Tax Filers with Zero Tax Liability, 1950-2004 |
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|
Year |
Total Tax Returns Filed |
Tax Returns with Zero Tax Liability |
Percentage of Tax Returns with Zero Tax Liability |
|
1950 |
53,060,098 |
14,873,416 |
28.0% |
|
1951 |
55,447,009 |
12,798,399 |
23.1% |
|
1952 |
56,528,817 |
12,652,544 |
22.4% |
|
1953 |
57,838,184 |
12,615,033 |
21.8% |
|
1954 |
56,747,008 |
14,113,948 |
24.9% |
|
1955 |
58,250,188 |
13,561,123 |
23.3% |
|
1956 |
59,197,004 |
12,938,358 |
21.9% |
|
1957 |
59,825,121 |
12,959,806 |
21.7% |
|
1958 |
59,085,182 |
13,433,048 |
22.7% |
|
1959 |
60,271,297 |
12,774,384 |
21.2% |
|
1960 |
61,027,931 |
12,966,946 |
21.2% |
|
1961 |
61,499,420 |
12,916,655 |
21.0% |
|
1962 |
62,712,386 |
12,620,023 |
20.1% |
|
1963 |
63,943,236 |
12,620,015 |
19.7% |
|
1964 |
65,375,601 |
14,069,263 |
21.5% |
|
1965 |
67,596,300 |
13,895,506 |
20.6% |
|
1966 |
70,160,425 |
13,451,349 |
19.2% |
|
1967 |
71,651,909 |
12,978,971 |
18.1% |
|
1968 |
73,728,708 |
12,440,000 |
16.9% |
|
1969 |
75,834,388 |
12,112,994 |
16.0% |
|
1970 |
74,279,831 |
14,962,460 |
20.1% |
|
1971 |
74,576,407 |
14,660,035 |
19.7% |
|
1972 |
77,572,720 |
16,703,713 |
21.5% |
|
1973 |
80,692,587 |
16,425,425 |
20.4% |
|
1974 |
83,340,190 |
16,005,423 |
19.2% |
|
1975 |
82,229,332 |
20,738,595 |
25.2% |
|
1976 |
84,670,389 |
20,249,022 |
23.9% |
|
1977 |
86,634,640 |
22,253,502 |
25.7% |
|
1978 |
89,771,551 |
21,083,246 |
23.5% |
|
1979 |
92,964,302 |
20,999,319 |
22.6% |
|
1980 |
93,902,469 |
19,996,225 |
21.3% |
|
1981 |
95,396,123 |
18,671,399 |
19.6% |
|
1982 |
95,337,432 |
18,302,132 |
19.2% |
|
1983 |
96,321,310 |
18,304,987 |
19.0% |
|
1984 |
99,438,708 |
17,799,199 |
17.9% |
|
1985 |
101,660,287 |
18,813,867 |
18.5% |
|
1986 |
103,045,170 |
19,077,757 |
18.5% |
|
1987 |
106,996,270 |
20,272,474 |
18.9% |
|
1988 |
109,708,280 |
22,572,948 |
20.6% |
|
1989 |
112,135,673 |
22,957,318 |
20.5% |
|
1990 |
113,717,138 |
23,854,704 |
21.0% |
|
1991 |
114,730,123 |
25,996,536 |
22.7% |
|
1992 |
113,604,503 |
26,872,557 |
23.7% |
|
1993 |
114,601,819 |
28,166,452 |
24.6% |
|
1994 |
115,943,131 |
28,323,685 |
24.4% |
|
1995 |
118,218,327 |
28,965,338 |
24.5% |
|
1996 |
120,351,208 |
29,421,858 |
24.4% |
|
1997 |
122,421,991 |
28,950,791 |
23.6% |
|
1998 |
124,770,662 |
31,722,764 |
25.4% |
|
1999 |
127,075,145 |
32,529,065 |
25.6% |
|
2000 |
129,373,500 |
32,555,897 |
25.2% |
|
2001 |
130,255,237 |
35,491,707 |
27.2% |
|
2002 |
130,076,443 |
39,112,547 |
30.1% |
|
2003 |
130,571,319 |
41,467,439 |
31.8% |
|
2004* |
131,113,969 |
42,545,501 |
32.4% |
|
* Estimated. |
In addition to these non-payers, roughly 15 million individuals and families earned some income last year but not enough to be required to file a tax return. When these non-filers are added to the non-payers, they add up to 57.5 million income-earning people who will be paying no income taxes.
Even 57.5 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 people are counted, roughly 120 million Americans – 40 percent of the U.S. population – are outside of the federal income tax system.
Considering how fast this population of Americans outside of the income tax system 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 profile of these Americans, Tax Foundation economists employ a sophisticated database that combines IRS tax return data with Census household data.
A Portrait of Non-Payers
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 $3,100 in 2004, 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 $4,850 for singles and $9,700 for married couples. 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.
In 1997, Congress enacted a new $500 per-child 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. 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.
These two credits are unique in that a taxpayer can receive the full value of the credit even if they have no tax liability. To see how this works, consider, for example, a family that has three children (and thus should receive $3,000 in tax credits), but only has a tax liability of $1,505. Under the rules of most tax credits, this family would only be allowed $1,505 in tax relief – an amount equal to their tax liability. But a “refundable” tax credit gives this family the full amount they are eligible for — $1,505 toward their tax liability, and the remaining $1,495 in the form of a refund check. (See Table 2.)
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Table 2. How “Refundable” Tax Credits Work |
|
|
Tax Liability Under 2004 Tax Law |
|
|
Adjusted Gross Income in 2004 |
$40,000 |
|
Minus Standard Deduction |
-$9,700 |
|
Minus Personal Exemption |
-$15,500 |
|
Taxable Income |
$14,800 |
|
Gross Taxes Owed |
$1,505 |
|
Minus 3 Child Credits |
-$3,000 |
|
Taxes Owed |
$0 |
|
“Refundable” Credit Received |
$1,495 |
Of the 42.5 million tax returns that pay no income taxes, 52.9 percent received some form of a refundable credit – either the EITC or the child tax credit. In 2004, Uncle Sam paid out about $33 billion in “refundable” checks to the families and single individuals who qualified for the Earned Income Credit and another $9 billion to families who were eligible for the child credit.
Broadly speaking, the 42.5 million zero-tax filers are: low-income, young, female-headed households, part-time workers, and beneficiaries of the $1,000 per-child tax credit or the Earned Income Credit. (See Table 3.)
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Table 3: Demographic Profile of Zero-Tax Filers and Non-Filers |
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|
Distribution of 42.5 Million Non-Paying Filers |
Distribution of 15 Million Non-Filers |
Distribution of Combined 57.5 Million Zero-Tax Population |
|
|
Income |
|||
|
$1–$19,999 |
90.8% |
98.9% |
92.9% |
|
$20,001–$39,999 |
5.2% |
0.6% |
4.0% |
|
$40,000–$74,999 |
3.7% |
0.5% |
2.9% |
|
$75,000+ |
0.24% |
0.02% |
0.2% |
|
Age |
|||
|
<18–24 |
34.9% |
9.9% |
28.4% |
|
25–34 |
18.6% |
7.7% |
15.8% |
|
35–44 |
20.7% |
9.7% |
17.8% |
|
45–54 |
10.8% |
10.0% |
10.6% |
|
55+ |
15.0% |
62.8% |
27.5% |
|
Race or Ethnicity |
|||
|
White |
79.4% |
75.2% |
78.3% |
|
African American |
16.3% |
20.1% |
17.3% |
|
American Indian |
1.2% |
1.3% |
1.2% |
|
Asian America |
3.2% |
3.4% |
3.2% |
|
[Hispanic American] |
[14.0%] |
[11.5%] |
[13.5%] |
|
Gender of Major Earner |
|||
|
Male |
46.0% |
37.4% |
43.8% |
|
Female |
54.0% |
62.6% |
56.2% |
|
Filing Status* |
|||
|
Single |
44.4% |
32.1% |
41.2% |
|
Married Filing Jointly |
27.7% |
55.5% |
34.9% |
|
Married Filing Separately |
1.3% |
4.7% |
2.2% |
|
Head of Household |
26.5% |
7.8% |
21.6% |
|
Widow(er) |
0.1% |
0.0% |
0.1% |
|
Working Status |
|||
|
Full-Time 50-52 Weeks |
34.6% |
1.5% |
25.9% |
|
Full-Time Less than 50 Weeks |
19.9% |
1.7% |
16.0% |
|
Part-Time More than 13 Weeks |
26.6% |
3.6% |
20.9% |
|
Part-Time Less than 13 Weeks |
18.9% |
95.3% |
38.8% |
|
* Filing status of non-filers assigned using Census definitions, not strictly comparable to IRS definitions used for all filers. |
Income
The 42.5 million non-payers are largely low-income. Indeed, 91 percent of them earned less than $30,000 per year and 96 percent earned 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
Non-payers in 2004 were overwhelmingly young. Looking at the age of the primary breadwinner on these tax returns, only 26 percent are 45 years old or older. More than one-third (35 percent) are younger than age 25, and 54 percent are younger than age 35. Interestingly, there is a significant cluster of households (20.7 percent) where the principal wage earner is between the ages of 35 and 44. Most likely, these are modest-income families who benefited most from the doubling of the value of the child credit to $1,000 and were, thus, pushed into the non-payer status.
Race or Ethnicity
The racial or ethnic composition of the 42.5 million non-payers roughly mirrors 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 16 percent of zero-tax filers. Asian Americans comprise 3.6 percent of total taxpayers and 3.2 percent of zero-tax filers.
That said, the percentage of non-payers within each ethnic or racial group does vary: 28.6 percent of Asian Americans tax filers get back every dollar withheld, 31.1 percent of white American tax filers will owe nothing, and 41.7 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 42.5 million individuals or households that paid no income taxes in 2004. In contrast, they made up roughly 10 percent of all 131 million taxable American households.
Gender
Some 54 percent of non-payers are single women or families with children where the principal wage earner is a woman. That leaves 46 percent of non-payers in 2004 who are either men or families in which a man is the major breadwinner.
Filing Status
The overwhelming majority of tax returns that owe no income taxes are filed by single individuals or heads of household (an unmarried individual with children). Due in large part to their young age, 44.4 percent of these filers are single persons without children, while 26.5 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
Non-payers tend to be low-income, working part-time or full-time for only part of the work year. Indeed, 45.5 percent will be working part-time or hardly at all, while another 20 percent are working full time but less than 50 weeks out of the year. Indeed, 7.5 million of these individuals who file a tax return earn less than the threshold amount for filing a tax return, but do so just to recover the amount of taxes that were withheld during the course of their part-time employment. Just 34.6 percent of zero-tax filers worked full-time for all of 2004.
Occupation
The occupations of non-paying 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, 24 percent of these filers are classified as “children” or “students” rather than their occupations. The other leading occupational categories are “other services” (16.6 percent), “administrative support” (11.2 percent), “sales” (11.0 percent), and “precision production” (7 percent).
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 was $7,950 in 2004. For those 65 or older, the amount was $9,150 (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 $15,900 ($17,800 for couples over age 65). Heads of households (single parents) must file if they earn at least $10,250.
Broadly, people who did not earn enough to file a tax return for 2004 (“non-filers”) are college students, retirees, and single parents. They have part-time jobs but earn less than the minimum amounts that are required to file a tax return.
Income
Of the 15 million income-earning households that do not file a tax return, some 98.9 percent earn less than $30,000, while roughly 99.5 percent earn less than $40,000.
Age
While non-paying Americans tend to be young, two-thirds (or 9.4 million) of the non-filers are older than age 55. By contrast, only 15 percent of the larger population of non-payers are older than age 55. As Table 3 shows, when non-payers and non-filers are combined, more than half of all households that pay no income taxes are either younger than age 25 or older than age 55.
Race and Ethnicity
Among the 15 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.
When we combine the populations of non-payers and non-filers and look to see what overall percentage of each group is not paying taxes, we find that: 50.7 percent of African American households pay no income taxes, 35.5 percent of Asian American households do not, 37.6 percent of White American households do not, and roughly 52 percent of Hispanics 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
In 2004, a record 42.5 million tax returns – one-third of all returns filed – had no income tax liability because of the available credits and deductions in the tax code. This is a 42 percent increase in the number of zero-tax filers in just four years. In addition to these zero-tax filers are the 15 million individuals or households who do not earn enough to file a tax return. Overall, nearly 58 million taxable households are outside of the income tax system.
These findings raise 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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