Credits Help Take More Than Half the Households Off Income Tax Rolls

Published May 17, 2011

More than half of the nation’s households paid no federal income tax in 2009, according to an analysis by Congress’s Joint Committee on Taxation.

At a Senate Finance Committee hearing on May 3, committee chairman Sen. Max Baucus (D-Mont.) said millions of American believe tax “loopholes” and tax benefits exist mainly for the wealthy. This perception, he said, makes it difficult to create a fairer tax system.

Ranking Committee member Sen. Orrin Hatch (R-Utah) remarked at the hearing, “How Washington politicians hope to determine this fair share in an even-handed way that does no harm to our economy and job creators remains a mystery to me.”

Higher Incomes, Heavier Burdens
IRS data show the top 5 percent of income earners in 2008 – the latest year of full data available — paying 59 percent of the income tax burden despite earning 34 percent of the taxable income. The top 1 percent of earners paid 38 percent of the income tax burden on just 20 percent of the nation’s taxable income.

“A couple of interesting things worth noting,” said Pete Sepp, executive vice president of the National Taxpayers Union, “are that the percentage of Americans paying no or little tax was rising even during the Bush years, when the tax system was supposedly favoring ‘the rich.’All the while, the share of federal income tax shouldered by the top 1 percent of earners kept increasing until tax year 2008, when the recession took its toll on investment income especially.”

He said, “If the rich did indeed get richer and the poor got poorer during the Bush Administration, it certainly wasn’t because of our federal income tax system. If anything, the system worked in the opposite direction.

“Also of interest, to my mind, is that even when including federal non-income taxes [such as excise taxes on gasoline and diesel fuel, cigarettes and alcohol, capital gains taxes, etc.] our system still excludes a large portion of the population from paying much.”

Tax Cost Shifts
Sepp cited recent data from the Congressional Budget Office showing the lowest-income fifth of American households paid an effective overall federal tax rate of less than five percent, the next fifth — the “working class” — paid less than 11 percent. The top fifth shouldered a 25.1 percent tax rate.

“Our elected officials are making it a deliberate act of policy to expand the Earned Income Credit and other tax-saving provisions to the point where more and more families’ income tax liabilities are being wiped out entirely, and sometimes even more,” Sepp said, forcing everyone else to shoulder higher tax burdens to make up the difference.

Ryan Ellis, tax policy director at Americans for Tax Reform, had mixed thoughts regarding the news that more than half the households ended up paying no federal income tax.

“On the one hand, it’s a good thing that Presidents Reagan, Clinton, George W. Bush and Obama have so cut taxes on the lower end that half of the population now pays no income tax,” Ellis said. “Good for them.”

‘Problematic’ Credit Payments
He added, though, “For many of these people, they are getting refundable credit payments, which is different and far more problematic.”

Ryan also said that as the number of persons who pay no federal income taxes grows, “more and more of the tax burden is being borne by fewer and fewer productive families and businesses. That creates a moral hazard.”

He added that taxes remain a political issue with most of the 51 percent who had no effective federal income tax burden in 2009 because they “still consider themselves to be taxpayers, because they are for many things besides income tax. They get mad at high property taxes, payroll taxes for bankrupt entitlement programs, etc. So they are still part of the taxpayer movement, even if the most onerous tax – income — is something they don’t end up paying.”

Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of Budget & Tax News.