Who Pays Income Taxes?

It has often been repeated by conservative strategists and pundits like Karl Rove and Sean Hannity that close to half of Americans don't pay income taxes. But is that true?

Well, not exactly. It's true that 47 percent of American households didn't owe federal income taxes in 2009, up from 38 percent in 2007, according to the Tax Policy Center, a Washington, D.C.-based think tank (in 2008 it was a whopping 49 percent). For this current tax year, it's likely to be around 45 percent. 


The recent jump in the number of those who didn't owe federal income taxes reflects a reckoning of the economic recession, resulting in smaller incomes and tax liabilities for many Americans. But also, between stimulus programs signed into law by Presidents George W. Bush and Barack Obama, income tax rates have been lowered at every income level. That's made it easier for many households to qualify for enough credits, deductions and exemptions not only to reduce their liability but in many cases to eliminate it altogether.

Typically, just over a third of the nation's households — including students, working-poor families and many of the elderly — don't end up owing income taxes because their annual pay is just too low. Six in 10 nonpaying households make less than $20,000 a year, according to the TPC.

Yet in the middle-income bracket, a family of four making $50,000 or more a year can escape having to pay federal income taxes, as long as there are two children younger than 17, based on analysis from Chicago-based consulting firm Deloitte Tax LLP. That has happened with the help of tax credits for everything from college expenses to retirement savings, which were expanded when Obama signed the economic-recovery package last year.

In other words, blame middle-class tax-relief policies.

However, the wealthiest taxpayers have also received a break in income tax. Under Bush, the highest tax rate was reduced to 35 percent from 39.6 percent, while the second highest was lowered to 33 percent from 36 percent.


Again, this is just dealing with income taxes — the largest source of revenue for the federal government.

The vast majority of households, however, still pay other taxes. More than two-thirds of households who don't owe income taxes do pay Medicare and Social Security payroll taxes — and about half owe payroll taxes that exceed their refundable credits. Everyone is also paying excise taxes on gasoline, aviation, alcohol and cigarettes, as well as state and/or local taxes on sales, income and property, if they own a home.


Even so, the debate concerning income taxes likely will only get more complex and louder. The federal government collected $915 billion in income tax during fiscal year 2009. The Congressional Budget Office estimates that the government will see only $891 billion in revenue in the current fiscal year that ends Sept. 30.   

Democratic congressional leaders have decided to wait until after the November midterm elections to vote on whether to preserve middle-class tax cuts that will soon expire. Obama continues to champion keeping taxes low for low- and middle-income households and increaseing them for the wealthy, who, he argues, have fared much better over the last decade.


Last year Obama broadened some tax credits and unveiled new ones — all of which were aimed at helping low- and middle-income households. His Making Work Pay Tax Credit offers as much as $800 to couples and $400 to individuals. The expanded Child Tax Credit gives $1,000 for each child under 17, and the Earned Income Tax Credit was boosted above $5,500 for low-income families with at least three children.

There have also been tax savings for college, new home purchases and upgrades of an existing home with energy-efficient appliances. Also, if the credits exceed the amount of income taxes owed, households will receive a refund from the government for the difference.


The proliferation of the expanded tax credits has totaled close to $1 trillion annually. 

In the end, everyone has benefited from tax cuts over the years, says Clint Stretch, managing principal at Deloitte Tax. "The argument now is over who got too little or too much or was it almost right," says Stretch. "It's almost like Goldilocks."


Monee Fields-White is a Chicago-based writer who covers a wide array of topics, including business and economic news.

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