Progressive taxes and the rise of nonpayers
Democrats are eager to raise all sorts of taxes, particularly those they describe as "wealthy," and thus somehow not paying their fair-share. But far removed from this debate is the growing number of Americans who pay no income tax at all. According to the Tax Foundation, the number of people with no federal tax liability at all is slightly more than 33 percent.
What's behind this number?
The growth of refundable tax credits is driving this increase in nonpayers. As the value of refundable tax credits increases, more people find themselves paying no income taxes. The following chart uses data from the Congressional Budget Office to show the average refundable tax credit rate for the lowest, second, and middle quintiles from 1979 to 2015. The average refundable tax credit rate has increased more than tenfold for the lowest quintile, from 1.2 percent in 1979 to 12.4 in 2015. The second and middle quintiles have seen increases as well.
What kinds of credits are involved?
Average refundable tax credit rates, and therefore the percentage of nonpayers, began to climb dramatically after the Tax Reform Act of 1986, which increased the value of the standard deduction and almost doubled the size of the personal exemption. The creation and expansion of credits such as the Earned Income Tax Credit, the Child Credit, and various energy and education credits in later decades further contributed to the increase in the percentage of nonpayers. The percentage of nonpayers also spiked during the Great Recession. The so-called Stimulus package included the Making Work Pay tax credit, which reduced taxes for low- and middle-income households. Today, tax credits provide a negative income tax rate to the bottom two quintiles, causing their income to increase.
And the number of nonpayers may soon rise again:
While the percentage of nonpayers has decreased slightly over the last decade, it may increase again as a result of the Tax Cuts and Jobs Act. With the expansion of the standard deduction and the child tax credit, more households are expected to have their tax liabilities eliminated.
All of this means the federal tax code has become more progressive as fewer taxpayers shoulder a larger share of the tax burden. The result? If anyone wants to raise gobs of cash to fund Uncle Sam's budget (or even more mundane things like paying the debt), then broad-based taxes will be required.
Of course, we could also reduce the size and cost of government - and stem that rising tide of red ink today, rather than waiting for a crisis to do it for us.