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More than 100 million U.S. households, or 61% of all taxpayers, paid no federal income taxes last year, according to a new report.
The pandemic and federal incentives resulted in a huge increase in the number of Americans who either owed no federal income tax or received tax credits from the government. According to the Tax Policy Center, 107 million households owed no income tax in 2020, up from 76 million – or 44% of all taxpayers – in 2019.
“It’s a really big number,” said Howard Gleckman, a senior fellow in the Urban-Brooking Institute’s Tax Policy Center at the Urban Institute. “It’s really ephemeral too.”
Gleckman said the main reasons for the surge – high unemployment, extensive economic controls and generous tax credits – will largely run out after 2022, so the proportion of non-taxpayers will start falling again from next year.
The percentage of Americans who do not pay income taxes is expected to remain high this year at around 57%, according to the Tax Policy Center. It is expected to drop back to 42% in 2022 and stay at around 41% or 42% through 2025, “assuming the economy continues to recover and several temporary tax breaks expire as planned,” Gleckman said.
Although fleeting, the large number of non-taxpayers will fuel the debate in Congress about higher taxes for the rich. Many Democrats say the rich are not paying their fair share, citing a number of recent articles in ProPublica showing that billionaires like Jeff Bezos and Carl Icahn did not pay federal income taxes in certain years. The $ 3.5 trillion reconciliation bill in Congress is expected to include increases in capital gains taxes, a higher top ordinary income rate, a higher corporate tax rate, and other measures aimed at those earning $ 400,000 or more.
Some Republicans argue that the tax structure is already progressive and relies heavily on the income of a small group of high earners and corporations at the top, while many Americans pay little or no tax. The percentage of Americans who do not pay federal income taxes has been about 44% over the past decade, according to the Tax Policy Center.
The top 20% of taxpayers paid 78% of federal income taxes in 2020, up from 68% in 2019, according to the Tax Policy Center. The top 1% of taxpayers paid 28% of taxes in 2020, up from 25% in 2019.
The Tax Policy Center said rising unemployment and economic controls were the main reasons behind the surge in non-taxpayers last year. For 2021, Congress increased the child tax credit, earned income tax credit, and child and dependent tax credit – removing federal taxes for millions of American families.
No household earning less than $ 28,000 will pay federal taxes this year due to the loan and tax changes, according to the Tax Policy Center. About 43% of middle-income households do not pay federal income tax.
Income tax equalization payments last year for many families in terms of dollars have been small, Gleckman said.
“Imagine if someone owed $ 1,500 in income tax in 2020 until they received two stimulus payments – $ 1,200 in April and $ 600 in December,” he said. “That put them in the non-payers category. While the payments resulted in a large percentage increase in their after-tax income, the dollar amount of their tax cut was only a tiny fraction of a high-income applicant who received a tax cut from. got, say, $ 30,000 in 2017 [Tax Cuts and Jobs Act]but still owed some taxes. “
Federal income taxes do not include wage taxes. The Tax Policy Center estimates that only 20% of households have not paid federal income tax or wage tax. And “almost everyone” paid a different form of tax, including state and local sales taxes, excise taxes, property taxes, and state income taxes, the report said.