Number of Americans Outside the Income Tax System Continues to Grow

Patrick Fleenor and Scott A. Hodge, Tax Foundation, June 9

One of the biggest obstacles facing President Bush’s Advisory Panel on Federal Tax Reform is the fact that America has become divided between a growing class of people who pay no income taxes and a shrinking class of people who are bearing the lion’s share of the burden.

Despite the charges of critics that the tax cuts enacted in 2001, 2003 and 2004 favored the “rich,” these cuts actually reduced the tax burden of low—and middle-income taxpayers and shifted the tax burden onto wealthier taxpayers. Tax Foundation economists estimate that for tax year 2004, a record 42.5 million Americans who filed a tax return (one-third of the 131 million returns filed last year) had no tax liability after they took advantage of their credits and deductions. Millions more paid next to nothing.

As Figure 1 and Table 1 show, the number of Americans who paid no income taxes because of the preferences in the tax code has varied greatly since 1950. While the number of these “non-payers” has averaged about 22 percent of all filers over the past five decades, it has spiked to record levels in recent years and the trend line does not appear to be slowing.

In addition to these non-payers, roughly 15 million individuals and families earned some income last year but not enough to be required to file a tax return. When these non-filers are added to the non-payers, they add up to 57.5 million income-earning people who will be paying no income taxes.

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Among the 15 million in the non-filing population, the ethnic differences are slightly more pronounced than the population as a whole. For example, 75 percent of the non-filing households are White Americans while 20 percent are African Americans and 3 percent are Asian Americans.

When we combine the populations of non-payers and non-filers and look to see what overall percentage of each group is not paying taxes, we find that: 50.7 percent of African American households pay no income taxes, 35.5 percent of Asian American households do not, 37.6 percent of White American households do not, and roughly 52 percent of Hispanics pay no income taxes.

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