Amid complaints that nearly half of tax filers in the U.S. won’t pay federal income taxes this year, this has been lost: Those making $75,000 to $100,000 a year are the fastest-growing share of people who don’t pay federal income taxes.
Not working poor people — but those who are firmly middle class.
They still make up less than 1 percent of the total number of income-tax filers who pay no tax at all, but their overall number has exploded, from fewer than 5,000 not paying taxes in 1996 to nearly 500,000 in 2009, the most recent year of available data.
The lowest-income Americans — those who make less than $25,000 a year — account for the largest number of those not paying any federal income tax: 76 percent as of 2009. But that share has been decreasing for years. Meanwhile, the percentage of nontaxable returns has been growing for people with higher incomes. As of 2009, more than 20,000 filers making more than $200,000 a year — 1,470 of whom had adjusted gross income of more than $1 million — owed no income tax, a Detroit Free Press analysis showed.
On Wednesday, Senate Democrats were talking up an added 5 percent tax on millionaires, a proposal Republicans almost certainly will block. But as the debate on tax revenue continues, the question of who pays — and who does not — is certain to keep coming up.
Tax breaks can add up for some. Consider child care credits, interest deductions, breaks for paying college tuition and caring for elderly people.
In recent years, the tax code has exploded with more ways for Americans to be forgiven part of their income tax burden, so much so that more Americans seem to avoid paying taxes at all.
Well, there are still those pesky Social Security and Medicare payroll taxes, as well as various state and local sales taxes that are harder to avoid. But more middle- and even upper-income taxpayers are avoiding federal income taxes.
In recent months, estimates that as many as half of all U.S. tax filers might owe no federal income tax at all this year have caused critics to argue the issue of fairness — especially as President Barack Obama and Democratic members of Congress push for higher taxes on wealthier earners.
With that in mind — and in response to readers’ comments — the Detroit Free Press looked into who doesn’t pay, and why.
QUESTION: So the reports that half the U.S. doesn’t pay taxes are true?
ANSWER: No, they’re not. According to the nonpartisan Tax Policy Center in Washington, D.C., 46 percent of tax filers will owe no federal income tax this year. But when you figure in payroll taxes — such as those for Social Security, Medicare and unemployment — more than 80 percent of tax filers pay some kind of federal tax. And that doesn’t include sales taxes, state taxes, local taxes, gas taxes, etc., which catch just about everyone.
Q: But almost half the filers don’t pay federal income tax. How come?
A: It’s because of the way the tax code is written. In 2010, a married couple filing jointly didn’t have to pay any income taxes if their income was less than $18,700; couples older than 65, if their income was $20,900 or less. And even if you make more than that, the standard deduction — which goes up each year — and a myriad of other deductions and tax breaks reduce income tax exposure. In 2009, the most recent year for which Internal Revenue Service data is available, filers with adjusted gross income of less than $30,000 made up 83 percent of all the nontaxable returns. According to the Tax Policy Center’s calculator, a couple with two kids younger than 13 that makes $30,000 would get $5,000 back under current laws.
Q: Is that fair?
A: Depends on your definition. Roberton Williams, a senior fellow at the Tax Policy Center, said, “Fairness is very much in the eye of the beholder.” Increased child tax credits put more money in the pockets of working families. Higher income earners may be more likely to pay income taxes, but other kinds of breaks — such as those on mortgage interest and capital gains — help them more. And the tax code has been written to provide breaks to elderly people and their caretakers — 44 percent of the tax filers who have their income taxes zeroed out by tax breaks (not counting those whose income isn’t high enough to require that they file in the first place) are elderly.
Curtis Dubay, an analyst at the conservative Heritage Foundation in Washington, said there should be concerns about people who “are receiving government services and paying nothing for them,” because they have “no interest in limiting the size and growth of government because it won’t cost them anything.” But there is some agreement that it doesn’t help to tax to lowest wage earners and that the real question is about middle-income earners and whether they pay or not.
Q: Isn’t it poor people who aren’t paying?
A: No, at least not them alone. A Free Press analysis of IRS data shows that, in 1996, people with incomes of less than $30,000 made up 99.5 percent of all the nontaxable returns. In 2009, that group made up 76 percent of those returns. On the other hand, people making more than $30,000 went from less than 1 percent of nontaxable returns in 1996 to 17 percent in 2009.
Q: But $30,000’s not a big income — is most of that growth among nonpayers coming near the bottom of that scale?
A: Much of it is. The number of nontaxable returns for filers with incomes of $30,000 to $40,000 went from about 85,000 — about a third of 1 percent of the total — to 4.8 million, or 8 percent of the total, by 2009. That’s an increase of more than 5,000 percent. (By way of comparison, the overall number of tax returns went up by about 17 percent, and the total number of nontaxable returns doubled in that time.)
But the percentage increase was even bigger for higher wage earners. Nontaxable returns from people with income between $75,000 and $100,000 went from 4,025 in 1996 to 476,624 in 2009 — an increase of almost 12,000 percent. More than 1,400 millionaires didn’t pay income taxes in 2009, either.
Q: Why the change?
A: Tax cuts and tax breaks. As Clint Stretch, tax policy expert at Deloitte, explains it, the tax cuts won by President George W. Bush in 2001 and 2003 not only reduced income tax rates, they doubled the child tax credit from $500 to $1,000; eliminated the marriage penalty by giving couples twice the standard single deduction (rather than a slightly smaller amount), increased the earned income tax credit, cut capital gains taxes and more. All of those items — as well as breaks like those for mortgage interest, charitable deductions and medical expenses — can mean a huge savings.
But it didn’t stop there. President Barack Obama added other breaks, too, like the Making Work Pay credit — worth $800 to a couple or $400 to an individual filer — as well as the American Opportunity Credit for college, worth up to $2,500 per student, on top of the $4,000 tuition and fees deduction. “Mathematically, you’re not going to pay taxes” if you have a modest income and qualify for a lot of those breaks, Stretch said.
Q: If we get rid of those breaks, will more people pay?
A: Yes, but that would have a lot of other effects, as well — some of which are difficult to predict. Let the child tax credit decrease and Obama’s Making Work Pay credit expire, and it takes money out of people’s pockets. Reduced spending by families could further slow the economy. Reduce the mortgage-interest deduction, and people may choose to use more of their savings — potentially reducing spending on other items — or restrict themselves to less-expensive homes, holding down the housing market. And if people have to spend more on college, without the breaks offered there, or if senior citizens pay more in taxes, that money can’t be used in the consumer market.
Q: Did the recession play a role in the increase?
A: It did, and it does. As of 2009, the total number of tax returns had increased slightly over 2006. But the number of taxable returns actually fell — by close to 12 percent, or more than 10 million returns — during that period. Total adjusted gross income (AGI) fell by 5 percent, a drop of about $400 billion to $7.6 trillion. By comparison, from 1996 to 2006, the total number of returns rose by 18 million — about 15 percent — and the total number of taxable returns rose by 1.8 million — 2 percent. That’s modest growth, but during that period, total AGI nearly doubled, from $4.5 trillion to more than $8 trillion. In short: More people making less with more deductions and bigger exemptions means more nontaxed returns.
Q: But the trend was already in that direction?
A: Yes. In 1996, 76 percent of all returns were taxed. In 2006, 67 percent were taxable. But the recession deepened the trend. In 2009, 58 percent were taxable, 42 percent were not — and the Tax Policy Center estimates 46 percent will be nontaxable this year.
Q: Is it likely to continue?
A: That’s unclear. Obama wants to extend some of his and Bush’s tax cuts for middle- and lower-income earners, but there’s very little political chance of Republicans in control the House allowing higher taxes for higher earners — even those making $1 million or more annually — to be enacted. But a stalemate could lead to the Bush-era tax cuts — including the child tax credit, capital gains cut and more — expiring at the end of next year, which would lower the number and the amount of the breaks.
There is talk of reforming and simplifying the whole system. In the meantime, Len Burman, a tax policy expert who has worked for the Treasury Department and the Congressional Budget Office, said that although almost everybody pays some kind of tax, “over the last 30-40 years, there’s been a shift toward providing more and more public services through the tax system.”
From a political standpoint, that has been easier than raising taxes to fund new programs. And changing that will be difficult, politically.
As Burman asked rhetorically when GOP presidential candidate and Texas Gov. Rick Perry said he was “dismayed” by the number of Americans not paying income taxes, “So you’re going to raise taxes on middle-income people?”
HOW TAX GOES TO ZERO:
Using the Tax Policy Center’s tax calculator (http://calculator.taxpolicycenter.org), the Detroit Free Press looked at several scenarios in which middle-class earners could avoid paying federal income tax:
—Filing status: Married filing jointly
—Age: 45 for both filers
—Dependents: Three younger than 18, two younger than 13 (one in college)
—State and local tax payments: $9,700
—Charitable contributions: $1,000
—Mortgage interest: $11,000
—IRA/401(k) deductions: $15,000
—Medical expenses: $8,000
—College expenses: $12,000
—Child care expenses: $6,000
—Total tax liability: -$74
—Filing status: Married filing jointly
—Age: 65 for both filers
—Income: $50,000 (combination Social Security, pension and taxable interest—)
—State and local tax payments: $5,000
—Charitable contributions: $1,000
—Mortgage interest: $4,000
—Medical expenses: $10,000
—Total tax liability: $0
—Filing status: Married filing jointly
—Age: 40 for both filers
—Dependents: Two younger than 18, both younger than 13
—Total tax liability: -$37
Source: MCT Information Services