Who pays no federal income tax?

Bob Williams of the Tax Policy Center on Who pays no income tax?

Nearly half of all families and individuals will pay no income tax this year. But who are they? It turns out that whether a taxpayer is single or married, is elderly, or has children makes a big difference. Nearly 47 percent of single tax units will owe no tax, compared with about 40 percent of joint filers and over 70 percent of household heads. About 55 percent of the elderly and tax units with children will pay no tax. Two factors primarily explain the variation: differences in income and available tax preferences.

Income is an obvious driver—virtually no one with income under $10,000 pays tax after taking the standard deduction and personal exemptions. The percentage of non-taxpayers in each category falls as income rises and top-bracket taxpayers almost always pay something. Still, a small percentage of those making a million dollars or more a year pay no income tax.

Singles and household heads earn a lot less than joint filers: their average income is under $30,000 compared with nearly $75,000 for couples filing jointly and they are much more likely to avoid paying income tax. Overall, over three-fifths of units with income between $20,000 and $30,000 pay no tax, compared with just one-fifth of those with income between $50,000 and $75,000.

Filing status also matters because of differences in exclusions, deductions, and credits. Among those with income between $40,000 and $50,000, for example, nearly three-fourths of joint filers, two-thirds of households with children, and three-fifths of the elderly owe no tax, compared with less than half of household heads and less than a tenth of singles. The impact of refundable child and earned income credits and the exclusion of most Social Security benefits clearly make their mark.

Of course, most of those who pay no federal income tax DO pay taxes of other kinds. The most visible examples include payroll taxes (Social Security and Medicare) taken out of their wages, and sales taxes and excise taxes on the good they purchase. Some may pay state income taxes a well. Other high visibility taxes that at least some of them pay include property taxes (if they are home-owners).

But indirectly, and less visibly, many people who appear to pay no federal income tax (because the bottom line number on their 1040 is 0 or even negative) may in fact EFFECTIVELY be paying federal income taxes after all. Why? Because even those who are personally exempt from federal income tax on their own 1040s buy good and services sold by other people who DO pay income taxes, and the prices of those goods and services may be higher than they would be in the absence of the income tax.

That's what tax incidence analysis is all about. It's not an easy empirical question to address (because it requires estimating the demand and supply elasticities in the many complex and intersecting markets involved), but the fact is that the entire burden of a tax is generally NOT paid by the person who actually writes the check.