The percentage of Americans who pay no federal income tax is falling, thanks to an improving economy and the expiration of temporary Great Recession-era tax cuts. In 2009, the Tax Policy Center estimated that 47 percent of households paid no federal income tax. This year, just 43 percent will avoid the tax.
TPC’s 2009 estimate went viral during the following tax season and then played a supporting role in last year’s presidential election. Many commentators misinterpreted the estimate as saying that nearly half of all households paid no tax at all when, in fact, nearly everyone pays something. Even if they don’t pay federal income tax, Americans almost all pay Social Security and Medicare payroll taxes, state and local sales taxes, excise taxes, or some other levy.
This new TPC whiteboard video explains what’s really going on and why the number of people paying no federal income tax is falling.
The new TPC estimates project that the fraction of households with no federal income tax liability will continue to fall over the next decade. By 2024, only one-third will pay no income tax.
Of the 43 percent of households that will owe no federal income tax this year, nearly half will be off the rolls because their incomes are too low. The rest won’t pay because preferences wipe out the taxes they would otherwise owe. Many of those preferences, such as the Earned Income Tax Credit and the Child Tax Credit, are social policy run through the tax code. If those provisions were considered spending rather than tax cuts, many more people would be counted among income tax payers. (Indeed, for budgetary purposes, much of the value of those tax credits is considered an outlay.)