The old “half of Americans pay no taxes” line.

It’s a little out of health policy, but too good to pass up. One of my friends likes to throw this line in my face all the time. Let’s first of all, accept that it just isn’t true. Every American pays some taxes, be it sales tax, business tax, payroll tax, state income tax, etc. This line only applies to federal income taxes. When you add in other taxes, we have a progressive system, but everyone pays.

But “half of Americans pay no federal income taxes”? That’s pretty much true. So who are these people? Donald Marron breaks down a report from the Tax Policy Center:

Low incomes (or, if you prefer, the standard deduction and personal exemptions) account for fully half of the people who pay no federal income tax.

The second reason is that for many senior citizens, Social Security benefits are exempt from federal income taxes. That accounts for about 22% of the people who pay no federal income tax.

The third reason is that America uses the tax code to provide benefits to low-income families, particularly those with children. Taken together, the earned income tax credit, the child credit, and the childcare credit account for about 15% of the people who pay no federal income tax.

Taken together, those three factors — incomes that fall below the standard deduction and personal exemptions; the exemption for most Social Security benefits; and tax benefits aimed at low-income families and children — account for almost 90% of the Americans who pay no federal income tax.

So half of them are too poor to owe taxes (and you have to be pretty poor for that to happen), another fifth or so are elderly people living on social security. Child care credits for reasonablly poor people add in another 15%.

That leaves about 10% of people who manage to use other deductions and/or loopholes to get under the tax line. Some of them make a decent amount of money; I personally know some.

But about 90% of people who don’t have to pay federal income tax don’t because they are poor, perhaps with children, or elderly and on fixed incomes. And, they still pay other taxes.

Which of these “lucky duckies” should we go after first?

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