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Taxes? What Taxes?

Summary:
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: “the Tax Policy Center (TPC) released estimates on the portion of households with no federal income tax liability, finding that in 2020, about 60.6 percent of households did not pay income tax, up from 43.6 percent of households in 2019. Much of the 2020 increase was due to pandemic-related factors, but the growing share of households paying no income tax should be kept in mind when evaluating the progressivity of the

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Per the Tax Foundation, the chart below shows that since 1980, the share, each year, of tax filers who owe no income tax.

Taxes? What Taxes?

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:

“the Tax Policy Center (TPC) released estimates on the portion of households with no federal income tax liability, finding that in 2020, about 60.6 percent of households did not pay income tax, up from 43.6 percent of households in 2019. Much of the 2020 increase was due to pandemic-related factors, but the growing share of households paying no income tax should be kept in mind when evaluating the progressivity of the federal income tax system and proposed tax hikes on higher earners.”

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:

TPC also found that extending these more generous credits would increase the number of households who pay no income tax from 42 percent to 45 percent in 2022. Notably, “the largest percentage increase would be among households with annual income between about $100,000 and $180,000.” The share of households not paying income tax in that income group would rise from about 4.5 percent under current law to 10.5 percent if the APRA credits were extended.”

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.

Veronique De Rugy
Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University and a nationally syndicated columnist. Her primary research interests include the U.S. economy, the federal budget, homeland security, taxation, tax competition, and financial privacy. Her popular weekly charts, published by the Mercatus Center, address economic issues ranging from lessons on creating sustainable economic growth to the implications of government tax and fiscal policies. She has testified numerous times in front of Congress on the effects of fiscal stimulus, debt and deficits, and regulation on the economy.

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