As the President prepares to sign the 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. reconciliation bill recently passed by Congress, much media attention has focused on the often-cited figures that the average American earning over $1 million will save around $43,000 from the tax bill, while those earning between $10,000 and $20,000 will save just $3.
These figures were prepared by the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute and a well-known source for static distributional estimates of the effects of tax bills. By relying only on these absolute dollar figures, many media commentators in recent days have denounced the bill as regressive and distributionally unfair.
Of course these figures seem unfair, until you understand that the Tax Policy Center is comparing the tax relief going to people who pay income taxes with millions of people who either do not file a tax return or do not owe income taxes if they do file a tax return. Simply put, you can not give income tax relief to people who pay no income taxes, and the number of Americans outside of the tax code has exploded in recent years.
According to the Tax Policy Center’s own web site, the database by which they produce these estimates includes 20 million Americans at the bottom of the income scale who do not even file a tax return. As it is, the “taxpayers” in the lowest income group (or quintile) show a net gain at tax time – or as revenue estimators would say, they have a negative 1.4 percent tax burden. In other words, they not only get back every dollar that was withheld from their paychecks during the year, but they get checks back from the IRS through programs such as 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. (EITC).
The “taxpayers” in the second quintile also have a negative tax liability to the tune of 1.9 percent. According to Tax Policy Center data there are 58 million “tax units” in these two quintiles who look to the IRS as a dispenser of cash benefits, not a place to send their tax payments. Considering these statistics, it is actually remarkable that the Tax Policy Center determined that these people would get $3 worth of benefits from the tax bill.
Tax Foundation economists estimate that 43 million Americans filed a tax return last year and owed zero income taxes after they took advantage of the credits and deductions available to them. These figures don’t include the non-filers and still mean that the number of “non-payers” has grown by nearly 50 percent since 2000 when 29 million tax filers owed no taxes.
The growing number of Americans outside of the income tax code is increasingly making these sorts of distributional analysis misleading at worst and meaningless at best. According to the Tax Policy center, Americans in the top quintile (those making over roughly $82,000) pay nearly 87 percent of the income tax burden. This means that the bottom 80 percent of taxpayers are now only paying less than $0.14 cents out of every dollar of income taxes collected overall.
Recent income tax policy has created two Americas – payers and non-payers. If distributional analysis is to have any meaning in future tax debates, it should be conducted only of the shrinking group of Americans who pay income taxes and exclude the growing population of people who have been dropped from the tax rolls. Only then will the public get a true sense of how real “taxpayers” will benefit from the changes in tax laws.
Scott A. Hodge is President of the Tax Foundation in Washington, D.C.
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