February 16, 2012
The 51%: Half U.S. Households Pay No Federal Income Tax
This is an excerpt from Executive Insight Briefing, produced every Thursday by the National Journal’s Daily Briefings Team.
While much of the tax debate in the last year has focused on wealthy Americans, a new discussion has begun that focuses on the other end of the spectrum, fueled by a startling statistic.
Fully 51 percent of U.S. households, roughly 35.5 million people, pay no federal income taxes at all, according to a Joint Committee on Taxation estimate.
The number can be laid at the feet of the Earned Income Tax Credit, as National Journal’s Nancy Cook reports. The decades-old provision allows working families making $49,000 a year with three children or $41,000 with one child to get a refundable tax credit (working couples with a combined income of less than $18,700 are also eligible). The size of the credit depends on marital status and family size. And the refunds – by design – sometimes exceed what people pay in taxes.
In 1975, the year the credit was enacted, 6,215 families received an average credit of $200, costing the government nearly $1.25 million, according to congressional data. By 2009, the last year for which numbers are available, 27 million families and individuals claimed a credit. The average credit for families with children was $2,770. The annual cost was roughly $52.8 billion. The rate of overpayment errors has reached as high as 23 percent, according to IRS data from 2001 to 2006.
Though the system was created in the Nixon administration and expanded during the Reagan administration, Republicans have begun a crusade to get a larger percentage of the population to pay a tax bill, even if it is a small one. “I don’t want the truly poor to pay anything, but you can’t tell me that 51 percent of all Americans are the truly poor,” said Sen. Orrin Hatch, a Utah Republican and ranking member on the Senate Finance Committee. “Everyone needs to have some skin in the game and recognize that they are part of the government.”
Democrats, however, say the program has lifted millions of families out of poverty, while supporting work over welfare. They also argue that the 51 percent figure is often misunderstood, since most of those people pay payroll taxes.
The two viewpoints will clash most openly in the presidential election, where President Obama has offered policies to increase taxes on the wealthy and a message focused on income equality. Can Republicans, who have fought Obama’s tax-the-rich strategy, successfully counter with an argument to raise taxes on lower-income Americans?
As Cook writes, “For a country furious about the direction of the economy and frightened about safeguarding America’s place in the global pecking order, the question of fairness is not easily answered.”