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Why Some Tax Units Pay No Income Tax

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Document date: July 25, 2011
Released online: July 27, 2011


About 46 percent of American households will pay no federal individual income tax in 2011, roughly half of them because of structural features of the income tax that provide basic exemptions for subsistence level income and for dependents. The other half are nontaxable because tax expenditures— special provisions in the tax code that benefit selected taxpayers or activities—wipe out tax liabilities and, in the case of refundable credits, yield net payments from the government. Provisions that benefit senior citizens and low-income working families with children particularly affect households with income under $50,000 but other factors make higher-income households nontaxable.

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Just 54 percent of all tax units will pay federal individual income tax in 2011, leaving about 46 percent paying no federal income tax or receiving a net refund. The significant fraction of tax units that do not pay income tax has become a topic of public debate. Some commentators have suggested that the large share paying no income tax is mostly the result of tax expenditures (sometimes referred to as "loopholes" or "tax earmarks"). If that were so, nearly all tax units would pay income tax under a reformed income tax with no tax expenditures. In fact, however, even with all tax expenditures repealed, standard income tax provisions that exempt a basic amount of income would still leave many units nontaxable.

These standard income tax provisions include personal exemptions for taxpayers and dependents and the standard deduction. These provisions are part of the basic progressive income tax structure that intend to exempt subsistence levels of income from tax and to adjust for differences in ability to pay based on family size.

Of all nontaxable units, half would still owe no tax in 2011 if all tax expenditures were repealed and only these standard income tax provisions applied. The other half owes no tax because of tax expenditures. Those proportions vary across income categories. Virtually all nontaxable units in the lowest income group pay no tax because of the standard income tax provisions alone, but this share diminishes rapidly with income and nearly all nontaxable units with incomes above $30,000 pay no tax because of tax expenditures (see chart 1 and table 1).

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