Impacts & Indicators

"I hear that almost half of all Americans don’t pay income taxes, is that true?"

Statistics showing that an estimated 47 percent of American households did not pay income tax in 2009 have found their way into the talking points of many Republicans — and even some Democrats — over the past few months.

The estimate comes from a study by the nonpartisan Tax Policy Center, which is operated by the Urban Institute and the Brookings Institution.

The center found that while 47 percent paid no federal income taxes in 2009, most households did pay Medicare and Social Security payroll taxes. Only about 14 percent paid neither income or payroll taxes. Most of those people are elderly, though about 6 percent of non-elderly Americans pay neither income nor payroll taxes.

The vast majority of those with no tax liability are elderly or are low-income families.

Tax Policy Center experts have pointed out that this number is also connected with the recession. The combination of lower incomes and the extension of certain tax credits and tax cuts enacted through the 2009 stimulus helped to decrease the number of people paying federal income taxes.

The large number of people not paying federal income taxes is also related, they say, to the fact that policy makers of both parties have long made conscious decisions aimed at removing low-income working families from the income tax rolls.

One of the ways they have done this is through the Earned Income Tax Credit. The EITC, which was first put in place in 1975 and has been expanded by administrations of both parties since, is designed to encourage and reward work as well as offset payroll and income taxes for low- and moderate-income working people.

Approximately 25 million families benefit from the federal credit, which is available for working families with children that have annual incomes below about $35,000 to $48,000.
 
Policy makers use the income tax code to encourage or subsidize several behaviors deemed beneficial to society and the economy. The resulting loss of income from deductions and credits and other subsidies are called tax expenditures.

"What are tax expenditures?"

In his press conference last week, House Speaker John Boehner said that, in order to lower the corporate tax rate, a goal for Republicans, “we have to look at the tax expenditure side – the deductions, credits, and other gimmicks that may be in the tax code that have accumulated over the last 30 years – as a way of finding a way, finding which of those are appropriate, which aren’t, and using those savings in order to lower the corporate tax rate.”

Tax expenditures are revenue losses attributable to provisions of tax law that allow for special exclusion, exemption, or deduction or provide for a special credit or deferral of tax liability. The associated loss in revenue totals is estimated as equaling around $1 trillion each year.

Almost everyone benefits from these provisions. They include the mortgage interest deduction, deductions for nonbusiness state and local taxes and charitable contributions, and the exclusion of employer contributions to medical insurance premiums and medical care and contributions to retirement plans.

While some of these tax provisions, such as the mortgage interest deduction, primarily benefit higher-income taxpayers, others, such as the earned income tax credit and the child tax credit provide greater benefit to lower-income taxpayers.

There are indeed dozens of these expenditures benefiting both individuals and corporations covering a variety of policy areas, from education and training to housing and transportation. 

http://www.congress.org/news/2011/05/16/congress_qa_income_tax