With the deadline for filing federal tax returns approaching, along with legislative discussions here about tax progressivity, the Tax Foundations recent income tax series is timely. To understand the distribution of the tax burden, it’s important to consider local, state and federal taxes. We touched on that theme earlier this week.
Yet, it’s easy to underestimate (or overlook) just how progressive the federal income tax has become. As the Tax Foundation notes here (and as shown in the graph below), a growing share of those filing returns now face zero liability.
The following chart uses data from the Internal Revenue Service to show the percentage of nonpayers (taxpayers who owe zero income taxes after taking their credits and deductions) from 1950 to 2016. Despite occasional dips, the trend has been an increase in the percentage of nonpayers, from 28 percent in 1950 to 33.4 percent in 2016. During this period, the minimum percentage of nonpayers was 16 percent in 1969, and the maximum was 41.7 percent in 2009.
As TF notes, the reduced liability stems from the growth in tax credits aimed at relieving pressure on low income taxpayers.
The growth of refundable tax credits is driving this increase in nonpayers. As the value of refundable tax credits increases, more people find themselves paying no income taxes. The following chart uses data from the Congressional Budget Office to show the average refundable tax credit rate for the lowest, second, and middle quintiles from 1979 to 2015. The average refundable tax credit rate has increased more than tenfold for the lowest quintile, from 1.2 percent in 1979 to 12.4 in 2015. The second and middle quintiles have seen increases as well…
While the percentage of nonpayers has decreased slightly over the last decade, it may increase again as a result of the Tax Cuts and Jobs Act. With the expansion of the standard deduction and the child tax credit, more households are expected to have their tax liabilities eliminated.
At the other end of the spectrum, the share of taxes paid by high-earners has increased over time.
As fewer Americans pay income taxes, the remaining taxpayers shoulder a greater share of the burden. As a result, the income tax burden has grown more progressive over time. From 1986 to 2016, for example, the top 1 percent’s share of income taxes rose from 25.8 percent to 37.3 percent, while the bottom 90 percent’s share fell from 45.3 percent to 30.5 percent.
Just what you’d expect under fiscal federalism.