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Who are the 47 percent?
BY CHELYEN DAVIS
By now nearly everyone has heard of Republican presidential candidate Mitt Romney’s comments, in a surreptitious video from a private fundraiser, referring negatively to the 47 percent of Americans who pay no income tax.
But who are these people, and why aren’t they paying income tax?
A majority of them are low-income workers, senior citizens and families with children, according to tax data. More than 70 percent of those with no tax liability in 2011 had incomes of $30,000 or less.
The numbers come from a 2011 report from the non-partisan Tax Policy Center, which says that about 76 million households in the U.S. paid no federal income tax last year.
That’s not to say they didn’t pay other taxes—payroll deductions for Social Security, for example.
The Tax Policy Center report says that exemptions for low incomes or dependents accounted for about half of the households that didn’t pay any federal income tax in 2011. That means half of the 47 percent didn’t make enough to have an income tax liability.
The other half—around 38 million—benefited from tax expenditure provisions in the tax code that negated those people’s tax liabilities. Such tax expenditures include tax benefits for the elderly, who get an extra standard deduction and benefit from the fact that a portion of Social Security benefits aren’t taxed. Those elderly taxpayers account for about 44 percent of the 38 million.
Also on the list of those benefiting from tax expenditures are people who get credits for their children, and people who work but don’t make enough to offset their tax exemptions. Credits for children and the working poor account for 30 percent of those 38 million.
The tax expenditure category also includes people who get deductions for education and reduced rates on capital gains or dividend taxes.
According to the Tax Policy Center’s report, what kind of tax exemption benefits a taxpayer most varies by income.
For those making less than $50,000 a year, the tax benefits for the elderly, children and poor are the most used. Child and education credits, and itemized deductions, most benefit those with income between $50,000 and $100,000. Those with incomes higher than $100,000 get the most use out of itemized deductions and reduced rates on dividends and capital gains.
Itemized deductions accounted for about 5 percent of the 38 million; education credits were 5.6 percent and capital gains and dividends rates were 1.3 percent.
Somewhere between 4,000 and 7,000 households with a million dollars or more in income paid no income tax, according to Tax Policy Center data. About 490,000 households with more than $100,000 in income had no tax liability in 2011.
The conservative-leaning Tax Foundation also analyzed those who pay no income taxes, making a distinction that 41 percent of people who do file a tax return end up with no tax liability, leaving about 9 percent who don’t file a return at all.
Both groups also point out that some households receive more money back from the IRS in tax credits and refunds than they would have paid in, because some tax credits are refundable.
It’s important to note that that is different from simply getting a refund because you overpaid your taxes.
According to the Tax Foundation, the Joint Committee on Taxation—a congressional committee—reported in 2010 that the number of Americans getting more refundable credits than their share of payroll taxes increased from 11.8 million in 2000 to 23 million in 2009 and 2010.
That increase is due to tax changes like the Making Work Pay credit and lower-income thresholds for child credits, the Tax Foundation says.
Employers pay half of workers’ payroll taxes; according to the Joint Committee on Taxation, about 15.5 million tax returns showed more in refundable credits than their total payroll taxes from the worker and the employer.
Overall, the number of Americans with no federal income tax liability has grown in recent decades. According to the Tax Foundation, in 1990, 21 percent of tax returns had no tax liability; in 2010, that number was 41 percent.
The increase is driven by the government’s expansion of tax credits, the foundation said. In 1986, Congress increased the value of the standard deduction and the personal exemption, a change that lowered taxable income for everyone.
The Tax Foundation also points to more recent expansion of tax credits; it says that in 1990, the combined value of individual tax credits was about $20 billion, and in 2011 it was $224 billion.
While most of the people who have no tax liability—as well as those who get money back from the government—are low-income, the number of middle-income people who have no tax liability has also grown.
The foundation said the median income of nonpayers has risen by 40 percent in the past nine years. In 2001, only 1 percent of those with no tax liability made between $50,000 and $75,000. In 2009, 12 percent of those earners had no tax liability.
Under 2011’s tax laws, the foundation said, a married couple with two children can make $47,000 per year and still probably be a nonpayer of federal income taxes.
The Tax Foundation broke that example down. Say the family’s adjusted gross income is $45,000 a year. Subtract the standard deduction of $11,600, and a personal exemption of $14,800. That leaves a gross income of $18,600, and a tax liability of $1,940. Subtract $2,000 for two child tax credits, and $214 for the earned income tax credit (a credit given only to those working). By that point, the family not only owes nothing in income taxes, they get a $274 refund.
Chelyen Davis: 540/368-5028