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Shocking: How Many Owe NO Income Tax

By JLP | September 26, 2008

Get this:

Under current tax laws, IRS statistics for 2006 show that 45.6 million tax filers, essentially one-third of all filers, have no tax liability after taking their credits and deductions. “For good or ill,” notes the Tax Foundation, “this is a dramatic 57 percent increase since 2000 in the number of Americans who pay no personal income taxes.”

That’s a qoute from a recent article at Don’t Mess With Taxes called “44% of US Taxpayers Could Owe $0″.

And consider the fact that in 2006 one third of filers owed no tax – there are millions more who didn’t file, most of whom would probably also owe $0 due to low incomes and tax credits.

Here’s the crazy part: According to the Tax Foundation,

“If all of the Obama tax provisions were enacted in 2009, the number of nonpayers would rise by about 16 million, to 63 million overall, or 44 percent of all tax returns. And if all of the McCain tax proposals were enacted in 2009, the number of nonpayers would rise by about 15 million, to a total of 62 million overall, or roughly 43 percent of all tax filers.”

Assuming that 6-7% of people working in America fail to file tax returns (which I think is a safe assumption, though I admit I’m pulling it out of nowhere) that means that very soon HALF of our population will owe $0 in income taxes – and the other half will be footing the bill for everybody.

Check out the very interesting article at Don’t Mess With Taxes (linked above). The author quotes Scott Hodge, who wrote the paper for the Tax Foundation, who very astutely sums it up:

“It is time for a serious public discussion of whether it is desirable to have so many Americans disconnected from the cost of government and what the consequences are of using the tax system as a vehicle for social policy.”

More from Meg at The World of Wealth

Topics: Miscellaneous | 35 Comments »


35 Responses to “Shocking: How Many Owe NO Income Tax”

  1. Bee Says:
    September 26th, 2008 at 5:05 pm

    As the divide between “The Have’s” and “The Have Not’s” grows, this shouldn’t any surprise! The sad thing is that so many people aren’t making enough to contribute!

  2. Tim Says:
    September 26th, 2008 at 5:15 pm

    Rather than seeing how people are disconnected from the cost of government, perhaps the problem is that these people are living below our poverty line.

    We can either increase their salaries, thus reducing ours and also decreasing our tax burden, or we can continue our current system of trickle down system of having government to subsidize the poor by not making them pay taxes.

    We have the choice… either we have to live with slightly lower (and more equalized) salaries for all -or- continue this increasing disparity in wages so fewer people up to have to pay for the rest.

  3. Grumble Says:
    September 26th, 2008 at 7:05 pm

    I earn minimum wage and I pay federal (and state) income tax. What am I doing wrong?

  4. Andy Says:
    September 26th, 2008 at 7:27 pm

    You forgot:
    Payroll taxes
    Sales taxes
    Excise taxes
    (all of those are regressive and so poorer people pay more as a % of their income)

  5. Lord Says:
    September 26th, 2008 at 7:38 pm

    People are very ignorant of income distribution. The working poor are the most numerous. The wiki article on this is a good introduction, http://en.wikipedia.org/wiki/Household_income_in_the_United_States

  6. Ryan Duff Says:
    September 26th, 2008 at 9:56 pm

    I have a hard time believing that 44% get every cent of federal income tax withheld back at the end of the year. Are you sure that’s not 44% don’t owe anything extra at the end of the year? Last year I paid $4300 in federal income tax and only got $3500 back between me and my ex-wife (I don’t remember how much she paid, but probably close to $4000). Even after all the tax credits and deductions, we still paid in close to $5000. Either I’m wrong, or you’re average middle-class Americans are 100% of that other 56% that pays income tax. The 44% would have to be lower and upper class only.

  7. Kitty Says:
    September 26th, 2008 at 10:01 pm

    I think it is a combination of several factors – yes there is more unemployment, but there probably is a fair amount of people who are way too “creative” on taxes.

    I think there are three main groups:

    Poor and unemployed. I’d imagine that some of the rise is due to rising unemployment because of this crisis and people willing to take lower paid jobs.

    Aging population. Retired people, even those that aren’t poor, are living on savings withdrawals and interest. Social security benefits aren’t taxable unless the combined income of a couple (for example) is over 34K. Depending on how assets are distributed, the taxable income can be low even with a certain amount of assets.

    The last group are people who use “creative accounting” and questionable deductions. I used to work with a woman some years ago whose boyfriend was a pretty successful business owner. She told me her boyfriend had small taxable income. I have no idea how – the business was pretty successful. She tried to explain it to me, but it seemed too complicated – something about his deciding on the salary he pays himself from the business and how it can be anything including $0. I didn’t quite get it because she claimed it was all legal, and I couldn’t see how it could possibly be. But then I’ve always worked for a large corporation and know nothing about taxes for businesses.

  8. Mo Says:
    September 27th, 2008 at 1:43 am

    My wife and I won’t be paying a penny to the federal government for the 2008 tax year. I make $13/hr and she works part time for minimum wage. We’ve been able to sock away a few thousand this year into our Roth IRA, start up an online brokerage account, and contribute to my 401K at work. Plus we don’t have a penny of debt. I think we’re at a nice income level (although very low) where we don’t owe anything because of some nice tax credits… such as not making enough so we will actually get a credit back for a certain percentage of our IRA contributions. See tax form 8880. I’m sure there are plenty of people like us, but I find it hard to believe that roughly 1/3 of tax filers don’t pay a penny.

  9. Preston Says:
    September 27th, 2008 at 2:28 am

    Mo, what area of the country?

    When I made $11.32/hr it was ridiculously hard to make due. We got extremely lucky when we found a place for $650/month (when the average was in the 800’s without washer/dryer)

  10. Don Says:
    September 27th, 2008 at 7:27 am

    I’m not certain that I won’t owe $0 federal tax next year, although I suppose some of that money was delivered early in the form of the stimulus check. Personally, I’m divided on the issue. I’m glad to have gotten the check in the sense that no one wants to turn down “free” money. But I personally, think that anyone at my income level or greater should be paying taxes.

  11. Lazy Man and Money Says:
    September 27th, 2008 at 1:54 pm

    As Andy says, there are a lot of other taxes that people pay. But again, the richest pay the majority – it’s always been that way.

  12. Dianne Says:
    September 27th, 2008 at 7:36 pm

    Most, if not all, of those that don’t owe any federal taxes get a big refund by earned income credit based on their low income. Free money every year, and the amount they qualify for grows each year. So they don’t pay any tax and get govt refunds. Their children get free medical care, etc.

  13. JT Says:
    September 27th, 2008 at 7:45 pm

    The difference between the Obama plan and the McCain plan, is that under the McCain plan, most of the tax cuts will continue to go to the wealthiest taxpayers as has been the case for the last 8 years, while the Obama plan will help the middle class.

  14. Mo Says:
    September 27th, 2008 at 10:14 pm

    Preston – We live in Eastern Washington. We could rent for under $400/month but we decided to get a nicer place… $600/month. We do plan to improve our situation and earn more money in the coming years, but we are actually quite happy and able to save at our current level.

  15. Meg Says:
    September 28th, 2008 at 11:42 am

    For those of you that find the data “hard to believe,” read the report! One third of 2006 FILERS paid ZERO in income taxes!

    This isn’t so much about “the rich pay more.” We know that, it’s always been that way. This is about HALF the country footing the entire tax bill and the other half paying NOTHING – and even getting money in many cases.

    So Obama wants to “help” those who are already paying NOTHING into the tax pool by making the rich pay even more and GIVING the “poor” and “middle class” even bigger handouts. I just think these numbers need to be more widely understood. Under his plan (and McCain’s too) nearly HALF of our country will pay NO federal income taxes!! Does no one else think this is shocking?

  16. Preston Says:
    September 28th, 2008 at 1:07 pm

    Meg:

    It may be shocking, but I don’t think there is an argument to be made for making them pay anything, even if it is $1, or something like that, as I’ve heard before.

    It would probably take more money to process small contributions than it would benefit (I’ve heard suggestions that say ‘just make them pay $5 or something’). At any rate, yes, it is shocking.

    On the one hand, I’d really like to take this approach to the economy: Remove the chaff – cut programs like crazy. I’ve worked in Gov’t for my entire professional life and I am convinced that most agencies can take at least a 40% cut in budget and still operate if they had high performers in those positions. Unfortunately, inefficiency in workers and processes is what causes the huge costs.

  17. Kitty Says:
    September 28th, 2008 at 2:34 pm

    I think that before we jump to conclusions that all of the people who owe nothing in taxes are working poor, we need to understand the breakdown – how many are retirees, how many are students working part time, how many are tax evaders and how many are working poor.

    Additionally, given the current economic situation, increasing taxes in any form is a pretty bad idea. It is going to further stifle growth. Do you really think that increasing taxes on a large corporation isn’t going to hurt the employees in the US? I work for a large international corporation, and while I don’t particularly like that some of the jobs go to our Chinese and Indian locations, I think increasing tax on the corporation is going to hurt my job security in the US rather than help it. I also think it will hurt lower paid workers even more.

    When people look at company profits just when they look at company’s bad decisions they tend to identify the whole company with rich executives and top shareholders and totally forget regular people who work for the company and all of the small investors who own shares via index fund in their 401K. In the past whenever my employer reported bad earnings for a couple of quarters, the next step was cutting costs which in plain terms meant layoffs. The layoffs were greater among lower paid and lower skilled workers than among higher skilled workers. Taxes would cut into earnings which means there will be fewer benefits for employees and more layoffs.

    I do agree with Preston about government waste. Even without inside knowledge that he has, how often do we hear that the government “lost” this amount or that amount where the amount lost sounds astronomical to all of us. Sure some things may be pocket change to the government – like 50-something million they wasted on sending “you may qualify for a rebate” notes. While small amount from the government perspective this was indicative of bad money management like a “latte factor” but on a government scale. I wonder how much money could be saved simply by better money management.

  18. Anonymous Says:
    September 28th, 2008 at 8:34 pm

    I am not sure I am using the right math term. What is the Mean or average family income in the United States ? In my situation, I was able to deduct 21,000 dollars with my exemptions and standard deduction. I paid taxes but to exclude this amount from the get-go means to me that the United States is a great place
    to live. Really, the government does a half way decent job letting people(seniors which I am, students, wage earners ) to get by without excessive taxation.

  19. Grumble Says:
    September 29th, 2008 at 12:52 am

    Dianne said:

    Most, if not all, of those that don’t owe any federal taxes get a big refund by earned income credit based on their low income. Free money every year, and the amount they qualify for grows each year. So they don’t pay any tax and get govt refunds.

    That doesn’t answer my question, if so many people are paying zero income tax, why am I paying income tax on minimum wage?

  20. Grumble Says:
    September 29th, 2008 at 12:53 am

    Meg said:

    This isn’t so much about “the rich pay more.” We know that, it’s always been that way. This is about HALF the country footing the entire tax bill and the other half paying NOTHING – and even getting money in many cases.

    So why am I paying income tax on minimum wage?

  21. Meg Says:
    September 29th, 2008 at 10:30 pm

    OK Grumble, first of all I’m not sure I believe that you earn minimum wage and still pay federal income taxes. Are you remembering to subtract any refund you get from the amount of taxes you had withheld all year? Or do you live in one of those areas where the state/local government has mandated a really high minimum wage? Or do you work more than 40 hrs a week (so that while you may earn the minimum wage each hour, your annual income is higher than that term would imply)? Or do you have another source of income than your minimum wage job?

    Having kids or owning a home or having medical problems or having tuition expenses can qualify you for even more deductions/credits, so if you don’t fall into any of those categories and take no deductions then I suppose it might be possible to earn a “minimum wage” and still pay a very small amount of taxes. But like I said, I find it hard to believe.

  22. Squeezer Says:
    September 30th, 2008 at 10:58 am

    well its because of all the poor income earners and the child tax credits

  23. Mickie Says:
    September 30th, 2008 at 7:28 pm

    Kitty Says:
    September 28th, 2008 at 2:34 pm

    I think that before we jump to conclusions that all of the people who owe nothing in taxes are working poor, we need to understand the breakdown – how many are retirees, how many are students working part time, how many are tax evaders and how many are working poor.

    What difference does it make what the breakdown. It is an “income” tax. Does it matter whether I am a student or a senior making X number of $$ per year. And actually the student will pay more tax on the same AGI than the senior because mom & pop are claiming him. Tax evaders aren’t filing. We know that the top 50% of the tax payers pay 97% of the tax. And that is an AGI of less than $32,000. We know that the top 25% of the taxpayers, who pay over 86% of all taxes starts at $64,702, which is not exactly wealthy.

  24. thomas Says:
    October 5th, 2008 at 2:04 pm

    this makes me want to vomit.

  25. Old Marine Says:
    October 10th, 2008 at 5:37 pm

    OK, Hold on a minuit and let me see if this is correct. I pay for lunch and you cover the tip. figure 20.00 for lunch and 3.00 for a tip. If we both get 1/2 off your upset because my 1/2 of the discount is larger?
    the top 25% ot the 1040’s filed last year (above $62,068 earn 67.52% of the total income and pay
    85.99% of the total tax bill.

  26. JIM Says:
    October 11th, 2008 at 7:03 pm

    According to something I heard today, the tax cuts aren’t really tax cuts…there will be more tax CREDITS. Americans don’t like the term welfare…so instead we give tax CREDITS. And I agree that some people can use the current tax credits, but in the new plan one of the tax credits is for buying a hybrid car. Is this going to help anyone that really needs the help?

  27. Bill Says:
    October 15th, 2008 at 9:03 am

    Here is a site that will explain who (by age,income,race,etc.) who are exempt from paying taxes and those who are even getting refunds (receiving more than they even owed) due to tax credits.http://www.taxfoundation.org/research/show/542.html

  28. JC Says:
    October 16th, 2008 at 9:18 pm

    So….My question is….. How can Obama reduce taxes for 95% of americans when only 56% of the people actually pay taxes. I know people that pay in 3K per year and get back over 5K. By “cutting taxes” is he now going to give those people 6k and call it a tax cut?

  29. Robert Says:
    October 22nd, 2008 at 1:33 am

    For those of you who are so fiscal-responsibility-minded, I have a welfare program for you to cut: It’s called the over-bloated military budget. It right now stands at roughly a half a trillion dollars every year and it keeps growing. It adds up to more than the rest of the worlds military budgets COMBINED. Cut it by about 90 percent. 50 Billion ought to be enough. It will help to stop invading resource-rich 3rd world countries.

  30. Ruth Says:
    October 22nd, 2008 at 2:45 am

    “…in the new plan one of the tax credits is for buying a hybrid car. Is this going to help anyone that really needs the help?”

    No. It is the method of social engineering used by political parties to craft society. It has NOTHING to do with helping the ‘poor’

  31. JON Says:
    April 7th, 2009 at 7:12 pm

    WHY DISCUSS AND DEBATE THE IRS WHEN IT IS NOT LAW. NEVER WAS RATIFIED AND NEVER WILL BE. THE IRS HAS ALOT OF GUNS AND CODE BUT NO LAW.

    END OF CONVERSATION.

  32. JON Says:
    April 7th, 2009 at 7:12 pm

    WHY DISCUSS AND DEBATE THE IRS WHEN IT IS NOT LAW. NEVER WAS RATIFIED AND NEVER WILL BE. THE IRS HAS ALOT OF GUNS AND CODE BUT NO LAW.

    END OF CONVERSATION.

  33. Aaron Says:
    April 16th, 2009 at 11:57 am

    That article from the Tax Foundation is garbage. They are serving their own corporate agenda. The tax filers (which by definition makes them “inside” the tax system) they are including have paid taxes up front into the system via payroll deductions.

    The title should read tax payers have learned how to match their payroll deductions to their actual tax owed. They still pay their hard earned money into the system.

    This is about the most outrageous example of misleading information that gets recycled by news outlets and journalists that just don’t know any better! Get your facts straight before you regurgitate propaganda!

    Don’t take my word for it. Find out for yourself.

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    June 5th, 2009 at 8:17 pm

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  35. Dazedays Says:
    April 24th, 2010 at 7:32 pm

    Make $250,000 a year and you can afford to pay taxes. It’s not society’s fault you spend 1300 a month on each of your 3 car payments, $4500 on your mortgage and thousands on whatever you want. (including high paid professionals to advise you on how to pay the least amount of taxes.) now take the average 50,000 a year earner. They can hardly eat, can’t afford medical insurance, and pay rent rather than own. Your right, the lower class should pay taxes!? Taxes should be forced on the rich and given to the poor. Consider it a kickback. It’s the poor that make the rich rich anyways.

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