Who are the 47% That Pay No Federal Income Taxes?

by JT McGee

47% of people pay no Federal income taxes. But who are these 47%? Are they all fast food workers who earn minimum wage?

Nope!

Let’s focus on what matters: legal tax evaders come in every shape and size. Here’s some raw data:

Look at the right column, the percentage of people in any given income bracket that pay no federal income taxes. There are a few interesting things here:

  1. Decent incomes; zero taxes – In my neck of the woods, you can do just fine on an income of $40,000-$50,000 as a single. You’d be doing far better than the median household in my area. Seeing as real estate is cheap here – the most important variable separating starvation and living it up is real estate- you certainly won’t feel broke. And yet 3/10 people who earned $40-50,000 in 2011 paid no federal income taxes. Nearly one out of every six people (or couples) who earned between $50,000 and $75,000 paid nothing in income taxes.
  2. Muni bonds mess this up – Municipal bond distributions are not taxed as income. As baby boomers retire, they will plow wealth into municipal bonds and other fixed-income products. Naturally, the percentage of people paying taxes will decline even in moderate income brackets. It’s quite possible to make $1 million per year in municipal bonds and pay $0 in Federal income taxes. Of course, you will also earn a below-market pre-tax return on your municipal bond investments, since yields are bid down due to the inherent tax savings.
  3. So do post-tax savings vehicles – Roth IRA and 401k distributions are not taxed as income. Therefore, changing demographics makes it certain that more people will pay zero dollars in taxes on any level of income.
  4. FICA matters – FICA taxes are horrendously regressive, attacking those who earn less than $106,800. All too often this tax is forgotten. If we’re being honest with ourselves, it probably should be forgotten – people get way more out of Social Security and Medicare than they ever pay in. Still, we cannot forget that everyone at any income level pays FICA taxes.
  5. More than 52 million people/households make less than $20,000 in AGI – How is this possible? I know plenty of full time college students who make more than $20,000 in adjusted gross income. Income inequality is worse than I thought.

Are you as surprised as I am that so many $40-75,000 earners pay nothing in federal income taxes?

{ 1 comment… read it below or add one }

Daniel September 19, 2012 at 11:59

There’s really not enough data here. We can’t tell if that 30% of people making 40-50K/year are singles or are single moms with 3 kids.

Most people making under $50K are not the ones making savvy financial moves to shield their money from taxes, so I’m more hesitant to think they’re abusing the rules than say, people who are making $75-100K/year

Reply

Leave a Comment

*

Previous post:

Next post: