Many Americans Don’t Pay Income Taxes

Here’s an interesting article from the National Taxpayers Union, based on IRS data, showing that well over a third of people who file income tax returns have no tax liability, or a negative tax liability.

In 1985, in the middle of the Reagan years, less than 20% of income tax returns showed no tax liability, whereas in 2010, during the Great Recession, more than 40% of tax returns came from filers who owed nothing.  The most recent data, from 2012, shows that 35.8% of returns were filed by people who had no liability.

One reason, in addition to complying with tax law, for someone with no tax liability to file a return is that many taxpayers receive refundable tax credits, such as the Earned Income Tax Credit and Additional Child Tax Credit, so that many people not only don’t pay income taxes, they actually get money back from the tax system.  Refundable tax credits run about $100 billion a year.

Meanwhile, in 2011 the top 10% of income earners paid 68% of all income taxes.  I’ve seen libertarians argue both for and against tax systems in which many people pay no taxes, and the bulk of taxes are paid by a few.

One argument is that when when most voters pay little or no taxes, government has a tendency to grow too big as most people support more government programs for them, paid for by others.

Another argument is that taxation is undesirable (maybe immoral, if taxation is theft), so any time taxes can be reduced or eliminated for anyone, that’s a good outcome.

What do you think?  Is the fact that well over a third of those who file income tax returns owe no taxes desirable, or undesirable?

Randall G. Holcombe is Research Fellow at the Independent Institute and DeVoe Moore Professor of Economics at Florida State University. His Independent books include Housing America: Building Out of a Crisis (edited with Benjamin Powell); and Writing Off Ideas: Taxation, Foundations, and Philanthropy in America .
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