TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Saturday, December 5, 2009

1/3 of Tax Returns Filed Pay Zero Tax (and 1/2 of Those Get "Refunds")

The Tax Foundation reported yesterday that 46.6 million people who filed tax returns in 2007 had a zero or negative tax liability -- 32.6% of the 143.0 million tax returns filed. In about half of these cases, substantial additional money was "refunded" to the tax filer.  15 million people do not earn enough to file a tax return, so 61.6 million people do not pay federal income taxes.

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Comments

"that's a pretty good trick?" really? because being in line for a EITC seems like it'd be so much fun.

anyway, i'll bite. let's get rid of all additional exemptions for dependents and child credits. and throw out mortgage interest deductions.

Posted by: s | Dec 5, 2009 7:29:55 AM

I appreciate this post, because it is a warning of the one-sided distortions that can pass as "news." This story is pure pandering to a target audience and skips important sound bite facts in favor of sound bite repetition. (Who gets the credits? What dollar amount? To struggle to keep a straight face and take the argument on it's face, how do the applicable credits [which I suspect go to the working poor] compare to other credits distorting one's stake in government spending? [e.g., mortgage interest credit]?) For a piece supposedly concerned about citizen's awareness of tax policy, it sure doesn't add much to citizen's awareness of tax policy.

Posted by: Milesjamie | Dec 5, 2009 7:40:25 AM

I would withhold an opinion on this "fact sheet" as it omits a material disclosure. There is a difference between a taxpaying "person" and a taxpaying "entity".

I don't really want to dignify any FOX Spews propaganda with a response, but if their point is that people who don't pay taxes, don't have a stake in government, then why not find a few extra dollars to squeeze out of the several thousand corporations, trusts and estates that don't pay a dime in taxes.

Ultimately, this is merely another pot shot at the progressive tax system, and should be treated as such.

Posted by: John | Dec 5, 2009 10:50:28 AM

Its a very nice trick. I like the way you presented it, with the help of a video. Simple but the best.

Posted by: Tax Help | Dec 5, 2009 1:19:43 PM

Those people, however, do pay lots of other taxes that are far more regressive (payroll, state and local income taxes, property taxes, utility taxes).

As a total percent of income, the bottom 50% of tax payers pay more of their income in some form of taxes than the top 50%.

Posted by: someguy | Dec 6, 2009 7:43:18 AM

MilesJamie - Mortgage interest "credit"? If you don't understand the difference between a tax credit and a tax deduction, "I struggle to keep a straight face" while considering your opinion or awareness of tax policy.

Posted by: JSR | Dec 6, 2009 7:45:02 AM

"money for nothing" crowd -vs- "skin in the game" crowd

Posted by: RM3 Frisker FTN | Dec 6, 2009 7:54:44 AM

Maybe the "rich", anyone who is forced to pay in at the end of the year,
should have their wages taxed at between 50 to 75%. That way they'll be as
equal financially as the "working poor".
Or the IRS could cook the books by making the no income population file
tax returns for a 'cooked' tax refund. You might call that buying votes.

Italy here we come!

Posted by: Cluebyfour | Dec 6, 2009 8:03:10 AM

MilesJamie thinks this is pandering and doesn't add much to citizen's tax policy awareness. Sorry that your left clicker is disabled. If you could have clicked on the posted link you would have gone to a site showing it was during the Bush term that non-payers increased dramatically. Short posts don't need to tell the whole story; they can be just are pointer. It is the viewer/readers job to search out the details.

Posted by: Claude Hopper | Dec 6, 2009 8:11:25 AM

Milesjami-

You missed the point ... It does not matter why they are not paying taxes ... the paying base is small is the point

Posted by: simone | Dec 6, 2009 8:53:02 AM

"anyway, i'll bite. let's get rid of all additional exemptions for dependents and child credits. and throw out mortgage interest deductions."

Sure, we want circular flows of money (taxes at even the lowest levels on income, which then are turned right back into handouts).

A single flat tax on all taxable income, no "luxury" or death tax, and no deductions other than a per taxpayer* & dependent one*.

The whole tax return on a postcard.

Then phase it in over ten years so tax professors, tax preparers, and tax lawyers can gradually find productive work.

*If you think that's somehow "unfair", consider if the taxpayer is supporting a dependent, the govt isn't.

Posted by: Tom Perkins | Dec 6, 2009 9:01:10 AM

This illustrates perfectly, once again, that the democrats class warfare has succeeded beyond their wildest dreams. Redistribution of income is an evil that must be defeated. Freedom to succeed or fail on your own initiative has been an integral part of the success of this country.

Posted by: liberpublican | Dec 6, 2009 9:16:53 AM

I thought I read that the number is almost 50%, or is that the percentage of households?

Posted by: JimYoYo | Dec 6, 2009 9:19:41 AM

Ok S- I'll play along, I'll give you the mortgage deduction and you give me flat tax and zero capital gains. Deal? The issue is that income tax collection is being used to distribute funds via credits to people who make no net contribution. Lets get rid of all the distortions and allocate an equal % of income tax to all vs a progressive tax. If the richest 10% make 50% of the money they pay 50% of the tax. Whats wrong with that? If congress wants to allocate all of that 50% to the working poor through legislation, let them.

Posted by: Rob | Dec 6, 2009 9:22:21 AM

Having had first hand experience with a family member who qualified for the EITC in 2008 I can say that it is a flawed program. My sister in-law qualified and promptly took a 2 week vacation to Brazil with her teen age daughter and had enough left over to take a couple more trips during the summer. I have worked for close to 35 years and I don't have the money or the time (because I am busy working) to go on a two week vacation. Seems pretty unfair to me. BTW, my wife and I barely make $100,000 between us (she is a Psy.D.) and we still get nailed with the AMT. So the argument to reduce deductions falls on deaf ears (BTW, how many people who got "tax cuts" end up getting nailed by the AMT, effectively nullifying any tax cuts?).

Posted by: Tim Geithner | Dec 6, 2009 9:32:29 AM

Mortgage Interest is a deduction not a credit and it has encouraged some really stupid behavior (mostly among the working poor).

Posted by: Will | Dec 6, 2009 9:34:07 AM

The 2 previous posters clearly illustrate why this country is headlong in the toilet.
Defending the idea that people that do not pay any income tax somehow get an income tax refund is incomprehensible.

Fiscal idiots, just like their leader.

Posted by: JayBay | Dec 6, 2009 9:34:10 AM

What happened? Did the taxprof start a new "Point Missing" event for the next Olympics?
As hard as it may be to believe, many people's view of taxes is dependent on how much [or whether] they pay.
Personally, I think EITC is a good idea, as are *some* other credits, but surely it is not a bad idea to keep one's eye on precisely who is paying and who is receiving, no?
I'd also go with dropping the mortgage deduction, or at least phasing it out at higher levels and ending it for 'second homes.' I currently get the deduction, but it didn't really influence my purchasing decision. It mostly benefits, I think, real estate agents and home sellers [in good times] since it seems to intend to increase home prices.

Posted by: JorgXMcKie | Dec 6, 2009 10:05:16 AM

Also you need to know what year the figures are from. 2007 and some in 2008 were social security recipients filing for the supplement - these folks don't normally file at all.

I volunteer for the VITA/TCE program for low income people. Many of the filers are students recovering the taxes that they paid THAT THEY DON'T OWE.

Most of the EITC recipients have children and remember that the crucial thing here is Earned Income. These are not freeloaders, they are working. However, the lapse of the Bush tax cuts will push some of these folks into a higher bracket, since the 10% bracket will disappear. Many times the credits only barely balance out the tax due.

Posted by: fiona | Dec 6, 2009 10:08:00 AM

It doesn't matter who gets the credits, or who isn't paying taxes. What matters is that a full third of the country isn't financially invested in our government. They can support any preposterous idea because they have no stake in it, it costs them nothing. Government is "free" to such people, and the services government provides are "free".

That's a dangerous proposition, and while I have issues with a flat tax, what I've written above is, in my opinion, the *strongest* reason to support one.

Posted by: Darren | Dec 6, 2009 10:27:00 AM

Wow, there sure seem to be a lot of "rich" haters out there.

Posted by: joy | Dec 6, 2009 10:41:15 AM

This is a good reason to support the fair tax or something similar. Everybody pays into the system and then everybody will have the "right" to complain about the government.

Posted by: JD | Dec 6, 2009 10:44:20 AM

Considering the value of what the hacks at Fox New contribute, I find it amazing that their income is sufficient to cause them to pay taxes.

The obvious solution to so many people not paying taxes is to double the minimum wage. That should eliminate a lot of the whining about the EITC.

Posted by: WD Kebschull | Dec 6, 2009 10:53:09 AM

someguy already pointed it out, but... what kind of poor excuse for an academic engages in the obvious ideological trickery of pretending that payroll taxes aren't taxes, or somehow don't really count as much, perhaps because the people paying them don't count as much? It's blatant class warfare, and it's disgustingly dishonest.

JayBay: Defending the idea that people that do not pay any income tax somehow get an income tax refund is incomprehensible.

It's a refund against their payroll taxes to make them less ridiculously regressive; you don't get more in EITC than you paid in via payroll taxes. You wouldn't have a problem with incomprehension if you didn't have a problem with thundering ignorance.

Posted by: grendelkhan | Dec 6, 2009 11:02:02 AM

My personal opinion is: if you don't pay taxes, you should not have the right to vote on any issues related to tax increases. Or hell, the right to vote in general. If you're just going to vote for who's going to give you the most money (without having a stake in it), it's pretty much BS.

Bread and circuses....

Here in Cincinnati, where things like library and school levys pass (raising property taxes)- the people who are voting YES on these issues are the "renters". Well, they all just raised my property taxes, without having to pay any themselves. Great...

Posted by: Frank | Dec 6, 2009 11:18:51 AM

The "skin in the game" idea is correct. The non payers get the attitude that they will support any government boondoggle...such as this health care monster. They will never see the cost.

I have berated my congressman many times over Bush cutting the low paid out of paying some taxes. They need to at least pay some token income tax to keep the attitude of being part of the system. People tend to pay more attention if they have some stake. Perhaps some sort of minimum rate simply as a public citizen.

Posted by: bill | Dec 6, 2009 12:32:12 PM

I remember one year we filed without asking or putting down for the EITC because I assumed we hadn't earned enough money to qualify. The IRS mailed us a check for over $2000 anyway, which while were in college was a great thing at the time, but I knew that something was wrong if my husband could work one summer and part the rest of the year and get that much money back for no reason other than what our family size and income bracket told the IRS about our situation. With 4 kids, we get our income tax back and then some, but the way I look at it is that we will never live to see our social security or medicare, so we take the money and run while it's still worth something.

Hopefully one day we will go to a flat tax!

Posted by: pive | Dec 6, 2009 12:35:52 PM

The most pernicious thing that has happened to our society is the emergence of a large number of voters who pay no taxes. Since they don't pay anything toward the cost of government programs, why would they care how much they cost? Simple answer: they don't, and consequently vote for every freebie every demagogic pol coming along will offer.

TANSTAAFL, guys and gals. If America lets the people who don't have to pay for government goodies determine what goodies they get, those who do pay for them are going to do whatever it takes to get out from under the crushing load. Go Galt, go foreign, cheat on taxes, whatever. In a system that depends on voluntary compliance for well over 90% of the filers, this is a recipe for absolute disaster.

We've got some damned hard political decisions to make, most of which involve realizing that we can't afford what we've got now, much less anything more. Health care entitlements, cap and trade, second stimulus--any one of these tsunamis will sink us financially. Unfortunately, we now have at the helm the least experienced, most incompetent POTUS since James Buchanan, and his advisers are worse.
Hang on tight, folks, it's going to be a hell of a downhill trip!

Posted by: mac | Dec 6, 2009 2:47:08 PM

JD said: "The obvious solution to so many people not paying taxes is to double the minimum wage." Please tell me this is sarcasm! In case it isn't, remember that small businesses, which employ most minimum-wage workers, generally have fragile profits that take a hit every time the minimum wage is increased, which causes the loss of minimum-wage jobs. Lose-lose all around!

I agree with those who say that people who pay no federal income taxes should have no vote in federal elections. I would also say that corporations that pay no federal income tax should be permitted no voice (lobbying) with federal legislators.

Posted by: MochaLite | Dec 6, 2009 6:32:29 PM

I've started coming around to the idea that there should be a consumption tax, not an income tax. We're already used to the idea (i.e. sales tax) and such a tax would have a broad base, i.e. everyone, recognized exceptions for lower-income people (e.g. no tax on foods), and would be levied on those purchases that people complain about (e.g. EITC earner taking vacation to Brazil). I'm sure there are still some problems with it, but overall, it seems fairer to me than income tax.

Posted by: hah | Dec 7, 2009 4:40:23 AM

Amen, grendelkhan -- "the obvious ideological trickery of pretending that payroll taxes aren't taxes, or somehow don't really count as much, perhaps because the people paying them don't count as much? It's blatant class warfare, and it's disgustingly dishonest."

Look, people pay taxes through withholding and/or by making estimated tax payments. Anybody who looks at that paycheck and sees the grim arithmetic that $9/hr * 40hrs = maybe $300 and tries to figure out how to eat, pay rent, pay for gas to get to work, etc. for another week -- they know all about taxes!

Posted by: cathyf | Dec 7, 2009 2:01:28 PM

Oh, and another thing -- how do you classify people on unemployment? They pay income tax on their benefits, but not payroll taxes. With deductions for dependents, etc., they can easily end up paying a lot less tax than workers who earn the same amount working at a low-wage job.

Posted by: cathyf | Dec 8, 2009 6:00:42 PM

hah, the reason we tax income rather than consumption is because a consumption tax is by its nature flat at best, and likely regressive. Apocryphal stories of EITC recipients traveling to Brazil (no doubt in their taxpayer-funded flying Cadillacs) are not a sound basis for public policy.

Posted by: grendelkhan | Dec 9, 2009 7:56:11 PM