An annual report recently released by the IRS (found here) documenting the number of taxpayers earning over $200,000 who paid no federal income 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. 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 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. , 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.
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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.
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Table 1: Nonpayers by Income |
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|
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.
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Table 2: Nonpayers and Marital Status |
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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.
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Table 3: Nonpayers by Age |
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|
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 |