Who Doesn't Pay Federal Income Taxes (Legally) - NYTimes.com

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul.

Conservatives are fond of railing against those who are able to legally avoid paying federal income taxes. The Wall Street Journal routinely refers to them as ?lucky duckies.?

Senator Orrin Hatch of Utah, the ranking Republican on the Senate Finance Committee, recently asserted that it was appalling that about half of all those who file federal income tax returns pay nothing and said this was proof that income taxes must not be raised to reduce the deficit, because the burden would necessarily fall on just half of households.

But the growth of the non-income-taxpaying population is largely a result of Republican tax policies. The earned-income tax credit is the main reason those with low incomes are largely exempted from federal income taxes. Originated by Gerald Ford, it was expanded by both Ronald Reagan and George H.W. Bush as a better way to help the working poor than raising the minimum wage, which they believed would increase unemployment.

According to the Tax Foundation, in 1974, before the earned-income tax credit was instituted, 19.2 percent of tax filers had no federal income tax liability. This rose to 25.2 percent in 1975 when the credit took effect.

During the 1990s, about 24 percent of filers had no income tax liability, but this number took a big jump during the George W. Bush administration as Republicans added a large child credit to the tax code. The percentage of filers with no income tax liability rose to 36.3 percent in 2008, from 25.2 percent in 2000.

According to new data from the Tax Policy Center, this year 46.4 percent of tax filers will have no federal income tax liability. The following table presents the data.

As one can see, almost all of those in the bottom income quintile ? those with incomes below $16,812 ? will have no federal income tax liability this year. About three-fifths of those in the second income quintile will also have no liability, 30 percent of those in the middle quintile, and 7.3 percent of those in the fourth quintile. It is not only the poor who are exempt from federal income taxation; substantial numbers of households in the middle class are also exempted.

Surprisingly, a not insignificant number of those who are clearly well off are also among the ?lucky duckies.? There are 78,000 tax filers with incomes of $211,000 to $533,000 who will pay no federal income taxes this year. Even more amazingly, there are 24,000 households with incomes of $533,000 to $2.2 million with zero income tax liability, and 3,000 tax filers with incomes above $2.2 million with the same federal income tax liability as most of those with incomes barely above the poverty level.

It is not because of the earned-income tax credit or the child credit that the ultra-wealthy are paying no federal income taxes.

One reason, undoubtedly, is that capital gains are a huge percentage of their income and they may have losses from previous years to offset any realized gains this year. Perhaps some chose to invest all their wealth in tax-free municipal bonds.

And, of course, a large industry of tax lawyers make their living advising the wealthy on how to minimize their tax liability by exploiting existing provisions of the tax law.

These data look only at legal tax avoidance; they do not account for illegal tax evasion, which is quite extensive, especially at the top and the bottom of the income distribution. Those in the middle class who have only wage income are much more limited in their opportunities for evasion.

The phenomenon of large numbers of non-federal income tax payers has long been a subject of debate. Those on the left emphasize that other taxes, such as payroll taxes, are paid by those with no income tax liability, a point I discussed last week. Those on the right often complain that it is fundamentally undemocratic for such a large percentage of the population to pay nothing to offset the federal government?s general operations. After all, everyone benefits from national military spending and other federal programs.

Perhaps the right and left can at least agree that it is unseemly for those in the top 1 percent of income distribution, with incomes at least 10 times the median income, to pay no federal income taxes. It?s not socialism to ask them to pay something.

Source: http://economix.blogs.nytimes.com/2011/06/28/who-doesnt-pay-federal-income-taxes-legally/

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