Who doesn’t pay taxes, in eight charts

September 18, 2012

A leaked fundraising video caused a stir Monday when it showed Mitt Romney taking a rather caustic view of Obama supporters.

In particular, Romney bemoaned the fact that nearly half the country doesn't pay federal income taxes: "These are people who pay no income tax. Forty-seven percent of Americans pay no income tax. So our message of low taxes doesn't connect. … [M]y job is not to worry about those people. I’ll never convince them that they should take personal responsibility and care for their lives."

So why don't many Americans pay income taxes? And what taxes do they pay? Let's try to do a comprehensive breakdown in — yes — charts:

1) About 46.4 percent of U.S. households didn't pay federal income taxes in 2011. Mitt Romney's right about that.

(Tax Policy Center)

2) That number is abnormally high right now in part due to the recession and slow recovery. When people lose their jobs or see their paychecks drop, they tend to pay fewer income taxes as well. (That's why the budget deficit tends to increase in a bad economy.) Additionally, Congress has passed a slew of tax cuts as part of its stimulus efforts. So that's skewed the number of nonpayers. When the economy's at full employment, as it was in 2007, it's usually only about 40 percent of U.S. households that aren't paying income taxes:

(Center on Budget and Policy Priorities)

3) The vast majority of households that don't pay federal income taxes are either elderly or paying payroll taxes. As you can see below, 60 percent of those who don't pay income tax are still working and paying taxes for Social Security and Medicare. Their tax liability is just too low to qualify for the income tax. Another 22 percent of non-payers are retirees.

Only about 7.9 percent of households are not paying any federal taxes at all. That's usually because they're either unemployed or on disability or students or are very poor.

(Tax Policy Center)

4) Many low-income workers don't pay federal income taxes thanks, in part, to a series of tax cuts endorsed by Republicans over the years. The graph below from the Tax Policy Center shows why so many workers who do earn income don't have to pay the income tax. They're exempt under various provisions of the tax code.

For instance, most (though not all) elderly households are excluded from paying taxes on their Social Security benefits. And low-income workers with children can qualify for the Earned Income Tax Credit or the Child Tax Credit. As Keith Hennessey explains, the latter was a major GOP initiative during the 1990s and 2000s, and conservatives used to tout them as vital poverty-reduction measures:

5) The number of people who don't pay federal income taxes tends to jump every time there's a big tax cut bill, as after the 1986 tax reform or the 2001 Bush tax cuts. There's a reason why George W. Bush was boasting, in 2004, about moving 5 million taxpayers "off the rolls." He didn't think he was creating an army of Obama voters. He thought it was good policy:

(Heritage)

6) About 30 percent of workers had a negative income tax in 2011, thanks to the Earned Income Tax Credit (EITC), which gives them a big refund. But these beneficiaries tend to leave the program fairly quickly. Many low-income workers actually receive extra money through the tax code, thanks to the EITC. Again, this is an anti-poverty program long supported by Republicans.

What research has shown, however, is that most EITC recipients only get the credit for two consecutive years or less. Many of them soon move up the income ladder and start paying taxes back into the system. One paper found that, over their lifetime, these EITC recipients pay more in taxes than they receive in benefits:

(Center on Budget and Policy Priorities)

7) Over their full lifetime, the vast majority of workers end up paying income taxes and federal taxes. As this graph  from the Hamilton project shows, it's mainly the very young and the very old who aren't paying income taxes. The vast majority of workers pay income taxes during their prime years, and an even higher percentage of Americans pay into Medicare and Social Security throughout their lives:

8) Federal taxes are just part of the picture. Most Americans also pay state and local taxes, such as sales taxes. These tend to be more regressive and hit lower-income groups harder. Here's what the system looks like when you add up all taxes:


(Citizens for Tax Justice)

 

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Dylan Matthews · September 18, 2012