Misconceptions and Realities About Who Pays Taxes
By Chuck Marr and Chye-Ching Huang
Updated September 17, 2012
Close to half of U.S. households currently do not owe federal income tax. The Urban Institute-Brookings Tax Policy Center estimates that 46 percent of households will owe no federal income tax for 2011. A widely cited figure is a Joint Committee on Taxation estimate that 51 percent of households paid no federal income tax in 2009.(The TPC figure for 2009 also is 51 percent.)
These figures are sometimes cited as evidence that low- and moderate-income families do not pay sufficient taxes. Yet these figures, their significance, and their policy implications are widely misunderstood.
■The 51 percent and 46 percent figures are anomalies that reflect the unique circumstances of the past few years, when the economic downturn greatly swelled the number of Americans with low incomes. The figures for 2009 are particularly anomalous; in that year, temporary tax cuts that the 2009 Recovery Act created — including the “Making Work Pay” tax credit and an exclusion from tax of the first $2,400 in unemployment benefits — were in effect and removed millions of Americans from the federal income tax rolls. Both of these temporary tax measures have since expired.
In 2007, before the economy turned down, 40 percent of households did not owe federal income tax. This figure more closely reflects the percentage that do not owe income tax in normal economic times.
■These figures cover only the federal income tax and ignore the substantial amounts of other federal taxes — especially the payroll tax — that many of these households pay. As a result, these figures greatly overstate the share of households that do not pay federal taxes. Tax Policy Center data show that only about 17 percent of households did not pay any federal income tax or payroll tax in 2009, despite the high unemployment and temporary tax cuts that marked that year. In 2007, a more typical year, the figure was 14 percent. This percentage would be even lower if it reflected other federal taxes that households pay, including excise taxes on gasoline and other items.
■Most of the people who pay neither federal income tax nor payroll taxes are low-income people who are elderly, unable to work due to a serious disability, or students, most of whom subsequently become taxpayers.(In years like the last few, this group also includes a significant number of people who have been unemployed the entire year and cannot find work.)
■Moreover, low-income households as a group do, in fact, pay federal taxes. Congressional Budget Office data show that the poorest fifth of households paid an average of 4.0 percent of their incomes in federal taxes in 2007, the latest year for which these data are available — not an insignificant amount given how modest these households’ incomes are; the poorest fifth of households had average income of $18,400 in 2007. The next-to-the bottom fifth — those with incomes between $20,500 and $34,300 in 2007 — paid an average of 10.6 percent of their incomes in federal taxes.
■Moreover, even these figures greatly understatelow-income households’ totaltax burden because these households also pay substantial state and local taxes. Data from the Institute on Taxation and Economic Policy show that the poorest fifth of households paid a stunning 12.3 percent of their incomes in state and local taxes in 2011.
■When all federal, state, and local taxes are taken into account, the bottom fifth of households pays about 16 percent of their incomes in taxes, on average. The second-poorest fifth pays about 21 percent.