Taxes Paid by the 47%

You have probably heard the statistic that 47% of households paid no federal income tax last year.  Sometime this statistic is disingenuously stated as 47% of households paid no tax.   There are probably very few, if any, households that pay no tax, since in addition to the federal income tax, there are payroll taxes. state and city income taxes, property taxes, sales taxes and more taxes.

Roughly two-thirds of the households that didn’t pay federal income tax did pay payroll taxes.  Of the remaining third that didn’t pay payroll taxes over half are elderly.  Only about 5% of those who paid no federal income tax are non-elderly with income over $20,000.  From these statistics it is fair to conclude that if you didn’t pay any federal income tax you were likely either elderly or had a very small income.

It is estimated that about 80% of households owe federal income tax before taking special tax breaks.   That leaves about 27% that paid no federal income tax due to taking tax breaks.  Although those with a lower income are able to use tax breaks to eliminate their federal tax liability those with higher incomes benefit even more from tax breaks.  “Tax breaks like the mortgage interest deduction, state and local tax deductions, deduction for charitable contributions and exclusion of contributions to pensions, 401(k) plans and employer-sponsored health insurance are much, much bigger and disproportionately flow to those with higher incomes. ”  Tax breaks are worth about 7-8% of income for low and middle income households.  For households in the top 20% tax breaks are worth about 11% of income.

Eliminating all these tax breaks would mean that a lot of the 47% would pay federal income tax.  It would also mean that most of the 53% would pay more federal income taxes.  That is probably not the result that those who complain about the 47% want.

I don’t think it is bad policy for the old and/or poor to not have to pay federal income tax.  The elderly have presumably already paid their fair share of taxes. Both Republican and Democrat Presidents have passed or expanded measures such as the EITC to help keep the poor off the tax rolls.  Only a small minority of those who don’t pay federal income taxes are the “welfare queen” type.

If you’re still concerned about such a large percentage of households having no federal income tax liability, there is good news.  It is estimated that only about 40% of households will have no federal tax liability for the 2012 tax year.

12 thoughts on “Taxes Paid by the 47%”

  1. I do average people’s returns. The amount of refundable credits on a tax return is high. Easy for someone to get $5,000.00

    Owner Cel Financial Services
    IRS Registered Tax Return Preparer
    Registered bonded California CTEC Tax Preparer

  2. I don’t think it’s necessarily fair that there are so many people that don’t pay any share of taxes, but I can understand it in certain situations. Thanks for breaking down the numbers a little further.

  3. Getting rid of refundable tax credits (child tax credit, college tuition tax credit, EITC) would significantly reduce the percentage of those not paying Federal income tax. I think its “unfair” to get a tax refund that exceeds the amount withheld, which many of the 47% get.

    I’d also get rid of subsidizing college tuition, which significantly inflates the price of education and causes students to take on too much debt. But this is probably a comment for a different post 🙂

    • If you make the EITC and child tax credit non-refundable then you reduce people’s incentive to work. If making those non-refundable causes people to work less or quit working then you might end up with even less tax revenue.

      I think financial aid should have a much lower maximum cap. I think that would lead to colleges reducing tuition or at least slowing the rate of increase. Plus, it would limit how much debt students could get in. Also, if private student loans were made bankruptable that would to a lot less of them being issued and the amounts would be more reasonable.

      • You’re saying when people get a lower tax refund, they “work less or quit working.” If you’re right, the government shouldn’t increase taxes on the rich either, since they will work less or quit working and “you might end up with even less tax revenue.” 🙂

        • Thank you for breaking this down.

          As someone who was on disability, it’s infuriating to hear people generalize about moochers. I received $800 a month. You better believe I would have loved to be working and making my own way. And that includes paying taxes.

          The only reason I’m off SSA disability is because I found a unicorn of a job. I have an employer who lets me work from home and around my health problems. Otherwise, I would still be living in poverty.

          • I know that there are some who abuse the disability program but considering the benefits are so low I have to think it is a small minority of disability recipients. Most people are not going to want to have to live on such a small amount of money.

  4. I enjoyed reading the numbers as you have given them. I have entered the unemployment ranks and since the Casino I worked at has closed its doors on over 100 employees we are now considered dislocated workers and we are placed in a different group of unemployed workers with benefits. Today I went to the local Community College and I am now able to take some computer classes to help in my job search.


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