The Pandemic Has Most Americans Paying No Federal Income Taxes
A minority of the population picking up the tab would be dangerous if the situation were to last.
Given my recognition that taxation is theft, or at least a thoroughgoing act of extortion, I'm generally delighted when people escape the clutches of the tax man. But news that the majority of Americans owed no income tax for 2020 and will similarly pay no income taxes for 2021 raises concerns in two counts: first, that tax obligations disappeared for so many because the economy took such a brutal hit during the pandemic; second, that the result is a situation in which a minority of the population foots the bill for the policies of politicians selected by the majority.
"The Tax Policy Center estimates that last year nearly 107 million households, or about 61 percent, owed no income tax or even received tax credits from the government," Howard Gleckman, a senior fellow at the Tax Policy Center, noted last week. "The spike is likely to be temporary, however. The share of non-payers will decline to about 102 million or 57 percent this year."
In recent pre-pandemic years, the percentage of tax returns with no income tax liability has been closer to 44 percent in Tax Policy Center's figures, though it has trended upward over time.
"The percentage of filers with no income liability has generally increased from where it was nearly 40 years ago," the National Taxpayers Union Foundation reported in 2018. "This trend is indicative of a progressive income tax code under which higher-income earners pay a larger share of taxes while low-income earners are generally shielded from significant income tax liabilities."
As the National Taxpayers Union Foundation points out, those with no income tax liability are generally less prosperous, and it's no surprise that their numbers spiked in 2020 as the economy tanked during a period of pandemic concerns resulting in both voluntary social distancing and, more concerningly, mandatory restrictions on economic activity.
"U.S. states with brief or no lockdown measures (e.g. South Dakota and Nebraska) experienced the smallest degrees of economic damage," Peter C. Earle and Amelia Janaskie concluded for the American Institute for Economic Research. "And predictably, in industries that are most sensitive to lockdown – small firms generally, where most job creation takes place; service industries, which now dominate the US economy; and more broadly any company with jobs that don't readily convert to a work-from-home basis – the result is wanton destruction and loss."
That's essentially what Gleckman found for the Tax Policy Center. He observed that, during the depths of the pandemic, 20 million mostly low-wage workers lost their jobs. In addition, economic stimulus payments flipped some struggling households from net taxpayers to owing no income tax.
No matter how much we might resent taxes, making people too poor to pay them isn't a constructive way to reduce the tax burden. In this regard, then, the news that the proportion of the population paying income taxes should rise going forward is good not because they'll fall back into the tax man's clutches, but because they'll once again be sufficiently prosperous to attract his notice.
The Tax Policy Center forecasts that the percentage of households paying no income taxes will decline to 42 percent in 2022 and hold there through the mid-2020s "assuming the economy continues to rebound and several temporary tax benefits expire as scheduled," as Gleckman puts it. He does acknowledge, though, that those benefits may not expire given significant political pressures to maintain them. Among those pressures is the fact that existing policies mean no households making under roughly $28,000 will pay federal income tax this year, and 43 percent of middle-income households will pay no federal income tax—and there's a constituency for maintaining at least some of that preferential treatment.
That points to the second concern in the surging ranks of those who owe no income taxes. That's a situation in which large numbers of potential voters choose at the ballot box among politicians but won't have to pay the full price of the resulting policies and programs. Were the proportion of non-payers to remain above 50 percent, that would the leave the tab to be picked up by an out-voted minority of the population. The folks paying the bill would find themselves in a very uncomfortable situation—essentially living life as milking cows for the rest of society—if it were to last for any length of time.
"Aside from the revenue impact of not having 58 million Americans pay income taxes, economists worry about the social and political effects of having so many people disconnected from the cost of government—a phenomenon known as fiscal illusion," Will Freeland, William McBride, and Ed Gerrish warned in a 2012 report for the Tax Foundation. "The concern is that when people perceive the cost of government to be cheaper than it really is, they will demand ever more government benefits because they either don't feel the cost directly or believe that others will be paying those costs."
But, as the Tax Policy Center emphasizes, the situation is short-term and the percentage of households paying no income tax should soon drop back to pre-pandemic figures—assuming the economy continues to improve and "temporary" measures do, in fact, prove to be temporary. Additionally, even during the pandemic, most people paid some form of tax in the form of payroll taxes, state income taxes, property taxes, sales taxes, and the like. Completely escaping the government's seemingly insatiable appetite for people's wealth is beyond the ability of most of us.
But the National Taxpayers Union Foundation's point that "the percentage of filers with no income liability has generally increased from where it was nearly 40 years ago" is worth remembering going forward even as we return (maybe) to pre-pandemic economic conditions and tax policies. Pandemic distortions aside, the cost of policies and programs implemented by officials elected by all voters is falling on a shrinking share of the population.
Overall, revelations about who is and isn't paying income taxes at the moment, and why, is a reminder that governments have an unparalleled ability to damage economies and impoverish people—especially those who are most vulnerable and have the fewest resources to fall back upon. Nothing, it seems, kills jobs and prosperity like officialdom's efforts to "help" with forceful measures during a crisis.
Those of us resistant to taxation should do our best to ensure that reform and reduction in the government's take should be widely shared across the population. That will help to avoid separating those who enjoy the benefits of government actions from those who pay the bill.
