Just say the number 47 percent and many people
know exactly what you are talking about: It was the calculation that the Tax Policy Center did a decade ago
of the share of people who pay no federal income tax. At least among tax and
political geeks, the number became the numerical equivalent of those
celebrities who are so famous that only their first names are necessary: Sort
of the LeBron of tax policy.
For some, the number came to symbolize a class
of entitled takers who lived their lives getting government benefits while
contributing nothing to society. They were this century’s version of Ronald
Reagan’s welfare queens. That never was who the 47 percent were (after all, nearly
all of them did pay some taxes). But the implication was clear.
Age and non-payers
Now, Don Fullerton of the University of
Illinois at Urbana-Champaign and Nirupama Rao of the University of Michigan
have taken a deeper dive into the 47 percent (now 44 percent according to TPC estimates) Their findings, published in the June edition
of the National Tax Journal here and summarized in TaxNotes here (paywall)
are fascinating:
·
The likelihood of not
paying federal income tax is closely correlated to age: If you are very young
or (especially) very old, you are far less likely to pay income tax than if you
are working age. Only 11 percent of those age 25-55 do not pay federal income
tax while more than 80 percent of those age 75 or older are non-payers.
·
Relatively few people
are persistent non-payers. Among those of prime working age who do not pay
federal income tax in any given year, nearly one-third will do so for only one
year. Almost 6 in 10 will be paying income tax within three years, and just one-in-eight
are non-payers for a decade or more.
By the way, Fullerton and Rao found a similar
story when it comes to government benefits. If you include Social Security,
older adults are far more likely to receive government transfer payments than
younger people. And, of course, once they begin receiving Social Security, they
will continue to do so for their lifetimes.
Out of the workforce
But if you exclude their benefits and look
only at working age people, the pattern looks a lot like it does for taxes.
Among those who receive some government support in one year, 60 percent will
get a transfer in the following year. But five years later, only about
one-in-five still will be getting benefits. And after 10 years, only about 12
percent still get benefits.
The tax story Fullerton and Rao tell squares
with what careful researchers have known for a long time. Nearly half of those
paying no federal income tax are retirees living on Social Security benefits.
Many others worked but made too little to pay federal income tax. Nonetheless,
they still paid sales taxes, payroll taxes, and perhaps state income
taxes.
The very old do not pay income tax simply
because many make too little to reach the thresholds for owing tax and because
Social Security benefits are excluded from Adjusted Gross Income for singles
whose income is below $25,000 ($32,000 for couples). Those 65 or older do not
even have to file a federal income tax return if they make less than $13,600.
Half of those 65 or older receive Social Security benefits of about $15,000 or
less.
For their part, low-income working age people
often are in and out of the workforce. Women may work—and pay income
taxes—until they have a child. Then, they may stop paid work or work part time.
Low (or even moderate) earnings, coupled with having children, make families
eligible for the earned income tax credit and the child tax credit which often
reduce tax liability to zero—or even result in a payment from the government.
Symbolic meaning
Other low-income workers frequently face
layoffs or may work seasonal or intermittent jobs, resulting in tax liability
one year and none the next.
Fullerton and Rao looked at data over four
decades, using a study called the Panel Survey of Income Dynamics (PSID). That
panel has some problems—for example people in the survey are now older than the
overall US population—but the basic story still holds.
The 47 percent number came to take on a
bigger, symbolic meaning: Nearly half of Americans live their lives taking
government benefits but contributing nothing. Fullerton and Rao show that while
that image is politically enticing for some, it simply is false.
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