The Inclusive Economy
Why Do Half of Households Pay No Federal Income Tax?
By Michelle Nguyen on 04/20/2012 @ 06:00 PM
The conclusion of tax week mostly brings the nation a collective sigh of relief, but it is also a good time to dispel common myths about our federal tax system.
An oft-cited statistic is that 51 percent of households paid no federal income tax in 2009, and this figure is sometimes used as evidence that low- and moderate-income families do not pay enough taxes. If we take a closer look though, we can unpack this statistic for a better understanding of the real story.
The Center on Budget and Policy Priorities (CBPP) helps us do this in a recently updated report. While it is true that 51 percent of households paid no federal income tax in 2009 and that that number dropped to 46 percent in 2011, what does it mean that nearly half the country does not pay federal income tax?
Right off the bat, it is important to understand that these figures refer only to the federal income tax and NOT all federal taxes. Other significant types of federal taxes are unaccounted for in those figures, such as the payroll tax. When calculating the percent of households who do not pay any federal income tax or payroll tax in 2009, the numbers come out to only 17 percent, which is a huge drop from 51 percent. During normal economic times, this figure decreases to 14 percent, for reasons I explain below. Furthermore, these percentages do not even include state and local taxes that households pay, which brings to mind a blog post that fellow CFEDer Ethan Geiling wrote about regressive state tax systems and the disproportionate tax burden that the poorest 20% pay relative to wealthiest 1%. This data can also be found in the 2012 Assets & Opportunity Scorecard.
Moreover, the percentage of households that don’t pay federal income taxes drops to about 40 percent in normal economic times. The 51 percent and 46 percent figures are simply an indication that, during a recession, there are more households with low or no income. Moreover, these numbers reflect policy changes at the time that relieved a family’s tax burden during the economic downturn, such as the “Making Work Pay” tax credit, and these temporary tax measures have since expired.
I hope this post helps shed some light on an often misunderstood issue. For more information about who these households are and the full CBPP report, read it here.