Per the Tax Foundation, the chart below shows that since 1980, the share, each year, of tax filers who owe no income tax.
This chart of nonpayers who file taxes appears in an excellent article by Garrett Watson. But the author also highlights the data from the Tax Policy Center based on tax units, which is interesting too. Watson writes that:
That means that, in 2020, all of the income tax revenue was collected from only 40 percent of U.S. households. This is by design, and it is done by excluding households through a combination of personal exemptions, the standard deduction, zero bracket amounts, and tax credits. Since roughly 50 percent of federal revenue comes from individual income taxes, it means that a few households pay a big share of all federal taxes.
The TPC estimates that the share of households paying no income tax will drop starting next year. However, these projections will not hold if President Biden extends or makes permanent many of the tax credits he plans.
To that effect, the piece has a good discussion about the impact on the share of households, by income group, not paying taxes of making permanent or extending tax credits such as the expanded Child Tax Credit (CTC), Earned Income Tax Credit (EITC), Child and Dependent Care Tax Credit (CDCTC), the Premium Tax Credit provided originally through the Affordable Care Act (ACA), and others. It includes this:
In other words, the share of households with zero income tax would continue to expand way beyond lower income households.
Looking at the underlying TPC data, I notice another interesting thing. Also growing is the share of households that pay neither the income tax nor the payroll tax. For the record, for most people, the payroll tax is the biggest federal levy they face (not surprising considering how many are exempted from paying the income tax), so this trend is interesting. The share of households that don’t pay the income tax and that don’t pay the payroll tax grew from 14.8 percent in 2011 to 20.5 percent in 2020. The share stood at 16.8 percent in 2019, so there too pandemic-related factors are at play.
Still, these trends should worry us all. But for those of us who would like to see the government significantly shrink, it should freak us out. It is easy to want more spending and larger government when you don’t have to pay for it. That’s one of the many things I find so problematic with government spending that’s paid for with Uncle Sam’s credit card. It shifts the cost of today’s programs onto future generations. Adding insult to injury, because the spending multiplier is less than 1 in most cases, all that spending is also reducing private economic activity.
Some of these tax credits create serious disincentive to work, marry, or stay married, bad news all around, though not a new phenomenon. In addition, these tax credits make the tax code very complicated. Last year, I wrote a piece in the New York Times looking at this issue through after the “scandal” about President Donald Trump. Part of the carveouts people took issues with were corporate ones, but there is plenty on the individual side too.
Veronique de Rugy is a Senior research fellow at the Mercatus Center and syndicated columnist at Creators.
READER COMMENTS
Alan Goldhammer
Sep 8 2021 at 2:52pm
Even we life long liberals find the current tax system, replete with privileges for those who don’t need them, abhorrent. The corporate income tax has long been a diminishing contributor of funds relative to other income sources for the government and ought to be either abolished or dropped down to a very low rate. Instead, put in place a VAT which is easy to administer as a substitute. Euro countries figured this one out a long time ago. If we end all of our foolish military adventures, lots of money gets saved. Let’s be more like Switzerland in that regard.
I’m looking forward to the day (maybe only in my dreams) when I just have to check the numbers that the government already has for my various income streams and if they are in accord, my tax filing should take no more than 10 minutes versus the couple of hours I spend with Turbo Tax right now.
robc
Sep 8 2021 at 3:09pm
I asked on previous thread, but why a VAT over a national sales tax? VAT has much complexity compared to a sales tax and is hidden.
Also, while I would not oppose a consumption tax instead of an income tax, but don’t see the need for both.
Also, also, I would prefer a Single Land Tax to both.
Student of Liberty
Sep 9 2021 at 2:32am
What do you call a sales tax and how is it different from VAT? Would this means that if I sell directly to the consumer the tomatoes I produce, the tax is paid once but if there is an intermediary and a retailer, it is paid thrice?
VAT (or GST in some countries) is the way of having a sales tax paid once, by the last consumer only.
robc
Sep 9 2021 at 11:35am
You have that backwards. VAT is paid thrice, each time value is added. Hence the name. Sales tax is only paid on the final retail sale and generally not embedded into the price. Which confuses Europeans who come to America as the price they pay is not the price listed.
Student of Liberty
Sep 10 2021 at 6:18am
VAT is paid on each transaction indeed but all professional intermediaries get back the VAT they paid so, ultimately, it is a sales tax on the total value of the retail sale (the retail consumer being the only one who does not deduct any tax from bis costs)
I am not sure how it works in the US so that the sales tax is only charged on the consumer. How does anyone know that a professional seller needs to apply the tax or not? How the said professional seller knows that he is selling to somebody who should be subjected to the tax or not?
robc
Sep 10 2021 at 9:32am
It is rarely an issue, and in those cases where it is, either the buyer had a certificate showing they were buying for a tax-free org, or in the case of a business, they could get a credit for sales tax paid on their sales tax form.
So, basically, the same as for a VAT, only it only came up in rare cases instead of on every purchase.
Thomas Lee Hutcheson
Sep 9 2021 at 10:52am
I’d use a VAT to replace the wage tax assigned to SS and Medicare funding. But a progressive income or consumption tax would be needed for redistribution.
Vivian Darkbloom
Sep 9 2021 at 2:44am
“Instead, put in place a VAT which is easy to administer as a substitute. Euro countries figured this one out a long time ago.”
*Instead*? Not that I’m against a VAT, but Euro countries figured out that they could tax the poor by instituting a VAT making it difficult for them to notice it *and* impose income taxes at rates in most cases higher than the US. I fail to see how operating both in tandem is “simpler”.
@robc : The VAT mechanism is easier to enforce than a sales tax in that it is tracked through each phase of production to sale, as well as importation. Also, the VAT isn’t really any more “hidden” than a sales tax. Consumers normally don’t examine their sales receipts carefully and eventually just assume the VAT/sales tax is a part of the purchase cost. On the other hand, there is something psychologically more compelling about filing an income tax return and realizing how much you’ve paid over the course of a year, particularly if you have to write a check to the IRS.
robc
Sep 9 2021 at 11:33am
The VAT is harder to enforce for the reason you state, as it is applied at each level, instead of just at the final consumer level.
More paperwork for more companies. Most retailers already handle sales tax, so adding on a national sales tax would be another tax. Still annoying, but not a massive change from current system.
And sales tax is noticeable. The first time I ate out at a restaurant when I moved to Mt Pleasant SC, I had a sticker shock, as the sales tax was 11%. If it had been built into the price, I would have just seen higher prices on the menu and not thought anything of it.
Vivian Darkbloom
Sep 9 2021 at 1:39pm
I don’t know what your experience is with VAT administration, but I’ve had more than 30 years actual experience in Europe. You don’t need to take my word for it: The Tax Policy Center has a brief explanation as to why VAT enforcement is easier than a simple sales tax:
https://www.taxpolicycenter.org/briefing-book/why-vat-administratively-superior-retail-sales-tax
As far as people not paying much attention, the average person just gets used to it as if it’s part of the price of a good charged by the vendor. That’s my experience and I think the politics supports this notion. How do you think European countries get away with charging 20 plus percent on almost all consumer items regardless of income? Why are there not riots and demonstrations? Where is Thomas Piketty when he’s needed? Ditto for the US. All the political attention is focused on income taxes and “inequality” allegedly caused by them. Why is every income tax proposal accompanied by detailed distribution analyses and the inevitable political consequences if the bottom half is expected to pay one penny more? Perhaps I’m out of touch, but I don’t get the impression sales taxes draw nearly as much attention. It might not be rational, but it certainly seems to be the case.
robc
Sep 9 2021 at 2:53pm
I see the problem, you are talking about “easy to administer” from the revenue collectors and I am talking about “easy to administer” from the business side. I don’t care much about the IRS side. What I want is low overhead on the business side. And for non-retailers, sales tax is much easier than VAT, as it is non-existent. 0% is super easy.
In the two businesses I have owned, one was primarily retail and one was rarely retail. Sales tax was easy. The hardest part on the latter business was filling out and sending in the $0 form on a regular basis. When there was actually sales tax to submit it was easy.
robc
Sep 9 2021 at 2:58pm
And I did use the word enforce when I meant administer, up above. My bad for causing the confusion.
But, to repeat, I am more concerned with amount of paperwork in the private sector. I don’t care how hard the IRS has to work.
But even on that, go back up to my first comment, the SLT is much easier to enforce than a VAT.
robc
Sep 9 2021 at 3:02pm
See the article you posted, it mentions that no state has a sales tax rate over 10% (which isn’t entirely true — while the state rate was lower than 10%, the total rate was 11% due to city/county/state/special sales tax when I was in Mt Pleasant SC). The reason is that people pay attention much more than they do to a VAT, which is why VAT rate can be 20% or more in Europe.
The reason it doesnt get much attention is it is low. Make the income tax brackets 5% and 10% and there won’t be much fuss over it either.
robc
Sep 9 2021 at 11:40am
I would agree with this if withholding didn’t exist. Instead you get the “I didnt pay tax, I got a rebate” idiots*.
*In some cases, they are accurate, if their EITC or other rebate exceeds the amount withheld, but those arent the ones I am referring to.
Thomas Lee Hutcheson
Sep 9 2021 at 10:03pm
Sending a check to th IRS gives you more a feeling of solidarity with ones fellow citizens, knowing it is a fairer (if still not fair enough) tax.
Thomas Lee Hutcheson
Sep 8 2021 at 6:27pm
I really do not see much significance in what percent of people or households pay what percent of tax, much less what percentage of one specific tax. I judge progressivity by what percentage of income a person earning X pays. I think it is a shame, for example, that any percent of people pay any percent of capped payroll tax at all as a VAT would be less distortive of the paid work/non-paid work and non-work choice and probably be more progressive, too.
Mark Barbieri
Sep 8 2021 at 6:28pm
Not all zero tax people are poor. We’re retired and pre-RMD. We’re living off of savings, so our tax rate is either low or 0%, depending on factors like how much we realize in capital gains and whether/how much we do IRA to Roth conversions. I don’t know whether people in similar circumstances make up a noticeable portion of that non-taxed percentage.
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