The Tax Foundation reported last week that more than 143 million individual income tax returns were filed in 2007, and 46.6 million of those returns had a zero or negative tax liability, setting a new record for the number of “non-payers.” This group represented almost one out of every three tax returns filed in 2007 (32.6 percent, see chart above), and reflects tax filers whose exemptions, deductions, and credits wiped out any federal income taxes that would have been due. According to the Tax Foundation, every dollar withheld from the paychecks of the “non-payers” during the year was refunded, and in about half of the cases, substantial additional money was refunded to the tax filer. There were an additional 15 million people in 2007 who did not earn enough income to file a tax return, bringing the total number of Americans who paid no federal income taxes to more than 61 million, or 39 percent of the tax-eligible population (158 million including filers plus non-filers).
Tax Foundation economist Scott Hodge reports that “the percentage of tax returns with no liability was fairly low in the 1960s (only 16 percent in 1969) and again in the early 1980s (17.9 percent in 1984). A record had been set every year since 2002, as tax cuts throughout the Bush years, especially the refundable child tax credit, pushed low-to-middle income people off the tax rolls.”
What are the implications of a rising number and percentage of “non-payers”?
1. American Enterprise Institute economist Alan Viard commented on Fox News that “there’s concern that when you have so many people not paying the most visible tax—the individual income tax—you might lose a certain check that otherwise would be in place on government spending.”
2. It also means that the burden of income taxes is falling on a shrinking percentage of income tax filers who actually pay taxes, especially higher income groups. As the chart below shows (data here), the top 1 percent of taxpayers paid 40.42 percent of all income taxes collected in 2007 ($451 billion), the highest share in modern history for that group, and more for the first time ever than the entire bottom 95 percent of taxpayers, who paid $439 billion, or 39.4 percent of the total.
Bottom Line: Taken together, the data in these graphs challenge the rhetoric that the Bush tax cuts were “tax cuts for the rich,” by showing first that there were more Americans, both in total numbers and as a share of the total, who paid no tax after the Bush tax cuts than before. One could even argue that the Bush tax cuts of 2001 and 2003 were actually huge “tax cuts for the poor and middle class” because they helped to increase the number of “non-payers” by more than 14 million Americans between 2000 and 2007. Secondly, the tax burden on “the rich”—the top 1 percent of taxpayers—reached a record high in 2007 of more than 40 percent, and was higher after the Bush tax cuts than before.