Just say the number 47 percent and many people know exactly what you are talking about: It was the calculation that the Tax Policy Center did a decade ago of the share of people who pay no federal income tax. At least among tax and political geeks, the number became the numerical equivalent of those celebrities who are so famous that only their first names are necessary: Sort of the LeBron of tax policy.
For some, the number came to symbolize a class of entitled takers who lived their lives getting government benefits while contributing nothing to society. They were this century’s version of Ronald Reagan’s welfare queens. That never was who the 47 were (after all, nearly all of them did pay some taxes). But the implication was clear.
Age and non-payers
Now, Don Fullerton of the University of Illinois at Urbana-Champaign and Nirupama Rao of the University of Michigan have taken a deeper dive into the 47 percent (now 44 percent according to TPC estimates) Their findings, published in the June edition of the National Tax Journal here and summarized in TaxNotes here (paywall) are fascinating:
- The likelihood of not paying federal income tax is closely correlated to age: If you are very young or (especially) very old, you are far less likely to pay income tax than if you are working age. Only 11 percent of those age 25-55 do not pay federal income tax while more than 80 percent of those age 75 or older are non-payers.
- Relatively few people are persistent non-payers. Among those of prime working age who do not pay federal income tax in any given year, nearly one-third will do so for only one year. Almost 6 in 10 will be paying income tax within three years, and just one-in-eight are non-payers for a decade or more.
By the way, Fullerton and Rao found a similar story when it comes to government benefits. If you include Social Security, older adults are far more likely to receive government transfer payments than younger people. And, of course, once they begin receiving Social Security, they will continue to do so for their lifetimes.
Out of the workforce
But if you exclude their benefits and look only at working age people, the pattern looks a lot like it does for taxes. Among those who receive some government support in one year, 60 percent will get a transfer in the following year. But five years later, only about one-in-five still will be getting benefits. And after 10 years, only about 12 percent still get benefits.
The tax story Fullerton and Rao tell squares with what careful researchers have known for a long time. Nearly half of those paying no federal income tax are retirees living on Social Security benefits. Many others worked but made too little to pay federal income tax. Nonetheless, they still paid sales taxes, payroll taxes, and perhaps state income taxes.
The very old do not pay income tax simply because many make too little to reach the thresholds for owing tax and because Social Security benefits are excluded from Adjusted Gross Income for singles whose income is below $25,000 ($32,000 for couples). Those 65 or older do not even have to file a federal income tax return if they make less than $13,600. Half of those 65 or older receive Social Security benefits of about $15,000 or less.
For their part, low-income working age people often are in and out of the workforce. Women may work–and pay income taxes–until they have a child. Then, they may stop paid work or work part time. Low (or even moderate) earnings, coupled with having children, make families eligible for the earned income tax credit and the child tax credit which often reduce tax liability to zero–or even result in a payment from the government.
Other low-income workers frequently face layoffs or may work seasonal or intermittent jobs, resulting in tax liability one year and none the next.
Fullerton and Rao looked at data over four decades, using a study called the Panel Survey of Income Dynamics (PSID). That panel has some problems—for example people in the survey are now older than the overall US population–but the basic story still holds.
The 47 percent number came to take on a bigger, symbolic meaning: Nearly half of Americans live their lives taking government benefits but contributing nothing. Fullerton and Rao show that while that image is politically enticing for some, it simply is false.