Here we go again.
The Tax Policy Center estimates that for 2013, 43% of all tax household will not pay any federal income tax. That figure is down from 2010 when it was 47%. Actually the percentage has been decreasing since 2009 when it hit a haul all time high of 50% The Tax Policy Center estimates that by 2022 the percentage will be back down to about 34% (It was 37% in 2007 before the recession and all the tax cuts.).
If 47% sounds familiar, it should. It was a big issue during 2012 election. While the Tax Policy Center figure only covers federal income tax, too many people missed the federal income tax part. Their basic argument was that the almost half of the population was not paying taxes at all. Not true! Taxpayers who didn't pay federal income taxes were still paying all the other taxes. This means that they're paying sales tax, state and local income tax, property tax, gasoline excise taxes and sin taxes on cigarettes and alcohol. On top of those taxes, another 29% of tax households will pay payroll taxes for Social Security and Medicare in 2013. The few remaining that are not paying payroll taxes are generally retired or have income under $20,000 for the year.
The reason this large percentage of the taxpayers are not paying federal income tax is because they have a combination of low income and they qualify for a variety of exemptions and deductions and credits which reduces their tax liability to zero. 86.4% of household paying no tax will have income under $50,000 (67% have income below $30,000). Using 2012 figures, a married couple with two children making $35,000 will have a taxable income of $7,900 after their married filing joint standard deduction and four exemptions are subtracted from their income. The tax on $7,900 will be $792. They can then use the child tax credit to reduce that $792 down to a zero tax liability. All of this is perfectly legal.
The U.S. tax code is not simply about raising revenue to operate the government. It has also become a tool to bring about certain social behaviors. The mortgage interest deduction is designed to encourage home ownership. Individual Retirement Accounts and the retirement saver credit help taxpayers save for retirement. There are several ways the tax code helps with education costs. These deductions and credits are available to anyone who qualifies for them. There is no law that says you can’t use them to reduce your tax to zero.
It's easy to hear about the number of taxpayers not paying federal tax and try to make them villains. But most are hardworking people who are taking advantage of deductions and credits available to anyone who qualify. They are our parents, grandparents and children. And I bet most would be willing to have a tax liability in exchange for more in their paycheck.