Tax Break

Who pays no income taxes?

February 16, 2012

Who pays no federal income taxes?

Republicans grabbed onto a headline number last year from a respected tax policy group noting that nearly 50 percent of Americans pay no income taxes.

The statistics from the Tax Policy Center (TPC) came up again Wednesday at a hearing of the House tax-writing Ways and Means Committee, as lawmakers grilled Treasury Secretary Timothy Geithner about President Obama’s tax proposals.

“Mr. Secretary, you know the facts: the bottom half of earners in this country pay no federal income taxes,” Dave Camp, the panel chairman,  a  Republican, said.

The top Republican on the Senate cited the figure a day earlier.

The TPC is a joint effort by the left-leaning Urban Institute and centrist Brookings Institution, but its director is Donald Marron, a former member of Republican president George W. Bush’s Council of Economic Advisers.

They have crunched the numbers and reported that fully 46 percent of Americans will pay no federal income taxes in 2011. The conservative Heritage Foundation finds a similar number pay no income taxes.

It has been noted that these folks do pay payroll taxes through their paychecks and sales taxes, among others.

But who are the 46 percent that pay no federal income taxes?

The Tax Policy Center’s Roberton Williams says about half the people in this group pay no income taxes because they earn too little.

He gives the example of a couple with two children earning less than $26,400 and paying no federal income tax this year because their $11,600 standard deduction and four exemptions of $3,700 each reduce their taxable income to zero.

“The basic structure of the income tax simply exempts subsistence levels of income from tax,” he says.

What about the rest of them? TPC finds that three-fourths of the rest are households paying no income tax because of provisions that benefit senior citizens and low-income working families with children. (See related graph)

Some of the big credits include: the Earned Income Tax Credit, and the Child Credit, created under Democratic president Bill Clinton but doubled in a 2001 tax act signed by Republican president George W. Bush.

The problem of voters not paying income tax is compounded by the fact that many who do not also get non-cash subsidies from the federal government, so their true income level is higher than it appears when only counting dollar income.

Alex Brill, an economist at the conservative American Enterprise Institute, said it is important to note how the numbers not paying income taxes have grown over time.

“What concerns me is not that low-income households pay no federal income tax but that lawmakers have consistently sought opportunities to increase the number of households excluded from paying income tax,” Brill said, noting expansion of the child credit.

Since a scrubbing in 1986, the U.S. tax code has been reloaded with hundreds of new provisions - including many that benefit the very poor and the very rich. So what do you think: Is this number a surprise?

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