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The “Non-Payer” Non-Problem

May 4, 2011 at 4:49 PM

Citing a new estimate that 51 percent of Americans owed no federal income tax in 2009, some are calling for raising taxes on low- and moderate-income people as part of tax reform.  That would be a terrible mistake.

First, keep in mind that the 51 percent figure, from Congress’s Joint Tax Committee, was a temporary spike due to the recession (which reduced many people’s incomes) and a couple of temporary tax breaks in the 2009 Recovery Act that have now expired.  In a more typical year, roughly 35-40 percent of households owe no federal income tax.

Before raising their taxes, let’s think about who these households are:

  • Three-fifths of them, the Urban-Brookings Tax Policy Center says, are either elderly or have incomes less than the sum of the standard deduction and personal exemption — which total just $9,500 for an individual.
  • The other two-fifths are mostly low-income workers with children who benefit from the Earned Income Tax Credit.  They are working parents, some of whom have worked their way off of welfare, with incomes below twice the poverty line — or in many cases, below the poverty line.

Some people worry that because these families don’t owe federal income taxes, they don’t have enough “skin in the game” — that is, enough of a stake in ensuring that government operates as cost-effectively as possible.  That’s not true.

Working families have quite a bit of “skin in the game,” even in the narrow sense of paying federal taxes, since they pay both payroll and excise taxes.  On average, the poorest fifth of households pay 4 percent of their incomes in federal taxes, according to the Congressional Budget Office.  The next fifth pay 10 percent of their incomes in federal taxes.  (Both of these figures take into account any benefits these families receive from refundable tax credits.)

All of these families also pay significant sums in state sales taxes, and often state income taxes too.  And in many cases, they receive the EITC for only a few years and then end up paying substantial federal income taxes at other points in their lives.

Suppose that, despite these facts, you still wanted to shrink the share of households that don’t owe federal income tax.  To do that, you’d have to do things like tax poor families deeper into poverty or cut the EITC or refundable Child Tax Credit despite their proven effectiveness in promoting work and reducing poverty.  These aren’t exactly steps toward a fairer or more sensible tax system.

On the whole, the federal tax system is only modestly progressive, meaning it does a modest amount to make the income distribution less unequal.  Meanwhile, state and local tax systems — most of which are regressive — likely undo some of that limited progressivity.  There’s nothing wrong with having one part of the overall tax system that only better-off households pay and that provides some help to the families that are struggling the most.