Recent debates over the equity of the income tax system have centered chiefly on whether high-income Americans are paying their “fair share” in taxes. There has been less discussion about the growing number of Americans who pay no federal income tax—the so-called nonpayers.
IRS data reveals that in 2010, over 58 million federal income tax filers had no income tax liability after taking deductions and credits. These 58 million nonpayers represent the second highest percentage of nonpayers since 1940, behind only 2009, where nearly 42 percent of income tax filers were nonpayers.
So what is a nonpayer?
A nonpayer is an individual or couple who, after taking advantage of their legal credits and deductions, has zero income tax liability. This is not the same as those who have overpaid their taxes through paycheck withholding and then receive a portion of that withholding back after filing a tax return and receiving a refund.
There are, however, millions of other Americans who earn some income but not enough to be required to file an income tax return. Currently, the threshold for filing a tax return is $9,500 for a single person and $19,000 for a married couple. When these non-filers are added to the number of nonpayers, the total number of Americans outside the income tax system jumps to roughly 50 percent of all households by some estimates.
In the modern era, the percentage of nonpayers began to climb significantly after the Tax Reform Act of 1986, which increased the value of the standard deduction and nearly doubled the size of the personal exemption.
As the number of nonpayers has grown, so too has the number of tax filers who receive cash payments because of the expansion of refundable credits.
2009 and 2010 saw a record number of tax filers pay no income taxes because of the generous credits and deductions in the code. More than one out of every four tax filers no longer contributes to the basic cost of government because of these credits and deductions. In addition, millions of these nonpayers also received cash back through refundable credits, such as the EITC, child credit, and Making Work Pay credit.
The debate about the equity of the current tax system, should not be solely about the tax burden borne by the rich. It must include an honest discussion about how many Americans should we allow to be nonpayers and discover how to fairly divide up the basic costs of government.
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