By Robert Frank, CNBC Wealth Reporter and a leading authority on the American wealthy
“The hardest thing in the world to understand is the income tax.” Albert Einstein
- More than 100 million U.S. households, or 61% of all taxpayers, paid no federal income taxes last year, according to a report from the Tax Policy Center.
- The pandemic and federal stimulus led to a huge spike in the number of Americans who either owed no federal income tax or received tax credits from the government.
- The main reasons for the spike — high unemployment, large stimulus checks and generous tax credit programs.
More than 100 million U.S. households, or 61% of all taxpayers, paid no federal income taxes last year, according to a new report.
According to the Urban-Brookings Tax Policy Center, 107 million households owed no income taxes in 2020, up from 76 million — or 44% of all taxpayers — in 2019. The main reasons for the spike — high unemployment, large stimulus checks and generous tax credit programs — will largely expire after 2022, so the share of nontaxpayers will fall next year.
61% of American households paid no federal income taxes in 2020 — up from 44% in 2019. The top quintile paid 78% of taxes. https://t.co/zB0Bz8f7B1
— Robert Frank (@robtfrank) August 18, 2021
“The COVID-19 pandemic and the policy response to it led to an extraordinary increase in the number of American households that owed no federal individual income tax in 2020”, writes Howard Gleckman, Senior Fellow at the Urban-Brookings Tax Policy Center.
The share of Americans who pay zero income taxes is expected to stay high, at around 57% this year (2021), according to the Tax Policy Center.
“Congress can raise taxes because it can persuade a sizable fraction of the populace that somebody else will pay.” Milton Friedman
In contrast, the top 20% of taxpayers by income paid 78% of federal income taxes in 2020, according to the Tax Policy Center, up from 68% in 2019. The top 1% of taxpayers paid 28% of taxes in 2020, up from 25% in 2019.
In 2021, Congress increased the size of the child tax credit, the earned income tax credit, and the child and the dependent care tax credit — all of which erased the federal taxes owed for millions of American families.
Twenty million workers lost their jobs. Many were low-wage workers who were paying very little income tax before the pandemic hit. Effectively, no household making less than $28,000 will pay any federal taxes this year due to the credits and tax changes, according to the Tax Policy Center. Among middle-income households, about 43% will pay no federal income tax.
Federal income taxes do not include payroll taxes. The Tax Policy Center estimates that only 20% of households paid neither federal income taxes nor payroll taxes. And “nearly everyone” paid some other form of taxes, including state and local sales taxes, excise taxes, property taxes and state income taxes, according to the report.
“We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” Winston Churchill
“There is a dichotomy between how capital is taxed in this country and how labor is taxed. That seems wrong to me, to have these two sources of wealth that are taxed so differently”, according to Billionaire philanthropist John Arnold.
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