“Freeloaders” Far From Tax-Free: Examining The Tax Burden Of Low-Income Americans


In their determination to prevent any tax increase for the wealthiest Americans, conservatives have argued that the real unfairness of our tax code is that approximately half the country did not pay income taxes in recent years due to their earnings levels and the tax credits aimed at middle- and low-income families. Though conservatives frequently describe these people as paying “no taxes,” the reality is that income taxes are only one facet of the tax code. Most of those without income tax liability still face the payroll tax, federal excise taxes, and state and local taxes. Meanwhile, one in four American millionaires paid a lower tax rate in 2006 than did 10.4 million middle-income Americans.

Despite Not Earning Enough To Incur Federal Income Taxes, Middle- And Low-Income Americans Do Pay Federal Taxes

Payroll And Excise Taxes Affect Americans At All Income Levels. From the Center on Budget and Policy Priorities:

The reality is that the income tax is one of a number of types of taxes that individuals pay, both over the course of their lifetimes and in a given year, and it makes little sense to treat it as though it were the only one that matters. Some 86 percent of working households pay more in payroll taxes than in federal income taxes. In fact, low- and moderate-income people pay a much larger share of their incomes in federal payroll taxes than high-income people do: taxpayers in the bottom 20 percent of the income scale paid an average of 8.8 percent of their incomes in payroll taxes in 2007, compared to just 1.6 percent for taxpayers in the top 1 percent of the income distribution (see Figure 2).


[CBPP.org, 5/31/11, internal citations removed]

Poorest 20 Percent Of Americans Pay 4 Percent Of Their Income To Federal Government, Face Overall Effective Tax Rate Of Over 16 Percent. From the Center on Budget and Policy Priorities: “Moreover, low-income households as a whole do, in fact, pay federal taxes. Congressional Budget Office data show that the poorest fifth of households as a group paid an average of 4 percent of their incomes in federal taxes in 2007 (the latest year for which these data are available), not an insignificant amount given how modest these households’ incomes are — the poorest fifth of households had average income of $18,400 in 2007. The next-to-the bottom fifth — those with incomes between $20,500 and $34,300 in 2007 — paid an average of 10 percent of their incomes in federal taxes. […] When all federal, state, and local taxes are taken into account, the bottom fifth of households paid 16.3 percent of their incomes in taxes, on average, in 2010. The second-poorest fifth paid 20.7 percent.” [CBPP.org, 5/31/11, internal citations removed]

Recession Caused Large Spike In Number Of Americans Paying No Income Tax. From the Center on Budget and Policy Priorities: “The 51 percent figure is an anomaly that reflects the unique circumstances of 2009, when the recession greatly swelled the number of Americans with low incomes and when temporary tax cuts created by the 2009 Recovery Act — including the ‘Making Work Pay’ tax credit and an exclusion from tax of the first $2,400 in unemployment benefits — were in effect. Together, these developments removed millions of Americans from the federal income tax rolls. Both of these temporary tax measures have since expired. In a more typical year, 35 percent to 40 percent of households owe no federal income tax. In 2007, the figure was 37.9 percent.” [CBPP.org, 5/31/11, emphasis added, internal citations removed]

Large Majority Of Those Who Escape Federal Income Tax Still Face Payroll Taxes. According to the Center on Budget and Policy Priorities, among the Americans “who don’t owe federal income tax in a given year”:

  • Approximately 70 percent are working people who pay payroll taxes. As noted above, even the low-income households in this group pay substantial federal income taxes over time. The main options to force these people to pay federal income tax in years when their incomes are low include cutting the EITC or the Child Tax Credit, which would tend to reduce work incentives and increase child poverty and welfare use, and lowering the standard deduction or personal exemption, which could tax many low-income working families into, or deeper into, poverty.
  • An additional 17 percent of people who did not pay federal income taxes in 2009 are people aged 65 or older. The main option to make these individuals pay federal income tax would be to subject their Social Security benefits to taxation.
  • The remaining 13 percent consists largely of students, people with disabilities, the long-term unemployed, and others with very low taxable incomes. To make these people pay federal income taxes, policymakers would have to tax disability, veterans’, and similar benefits or make full-time students and the long-term jobless individuals borrow (or draw from any available savings) to pay taxes on their meager incomes.


[CBPP.org, 5/31/11, internal citations removed]

For 60 Years, Payroll Taxes On Working People Have Increased And Corporate Taxes Have Decreased In Importance To Overall Federal Revenues. From the Urban Institute and Brookings Institution’s Tax Policy Center:



Changes in the shares of the various taxes in total federal revenue reflect these historical shifts. The individual income tax has consistently provided nearly half of total federal revenue since 1950, while other revenue sources have waxed and waned. Excise taxes brought in 19 percent of total revenue in 1950 but only about 3 percent in recent years. The share of revenue coming from the corporate income tax dropped from about one-third in the early 1950s to less than a tenth in 2010. In contrast, payroll taxes provided two-fifths of revenue in 2010, four times its one-tenth share in the early 1950s. [TaxPolicyCenter.org, 9/13/11]

Meanwhile, A Quarter Of American Millionaires Pay A Lower Tax Rate Than Millions Of Middle-Income Earners

One In Four American Millionaires Pay A Lower Overall Tax Rate Than That Faced By 10.4 Million Middle-Income Americans. From the Congressional Research Service: “The results of this analysis show that the current U.S. tax system violates the Buffett rule in that a large proportion of millionaires pay a smaller percentage of their income in taxes than a significant proportion of moderate-income taxpayers. Roughly a quarter of all millionaires (about 94,500 taxpayers) face a tax rate that is lower than the tax rate faced by 10.4 million moderate income taxpayers (10% of the moderate-income taxpayers). Tax reforms that are consistent with the Buffett rule would likely include raising tax rates on capital gains and dividends. For example, the President has proposed allowing the 2001 and 2003 Bush tax cuts to expire for high income taxpayers and taxing carried interests of hedge fund managers as ordinary income as tax reforms that observe the Buffett rule. Research suggests that these tax reforms are unlikely to affect many small businesses or to deter saving and investment.” [Congressional Research Service via House.gov, 10/7/11]

  • 400 Wealthiest Americans Paid Average Income Tax Rate Of 18.11 Percent In 2008. From the Center for American Progress: “The average federal income tax rate of the richest 400 people in the country in 2008 was 18.11 percent. In 2007 it was 16.62 percent. That is only a little more than just the payroll tax on wages—normally 15.3 percent on a worker’s first $106,800 in wages, counting both the share that workers pay directly and the share their employers pay, which comes out of their wages—let alone the federal income tax on those wages. The tax rates paid by the ‘Fortunate 400’ have plummeted since the mid-1990s, when their average effective rates were about 30 percent.” [Center for American Progress, 9/20/11]
  • In 2005, Wealthiest 1 Percent Paid Less Than 20 Percent Effective Income Tax Rate. From the Congressional Budget Office: “CBO’s previous estimates show an effective individual income tax rate of 19.4 percent in 2005 for the 1 percent of the population with the highest income. There was little variation among subgroups in the top 1 percent, except for people in the top 0.01 percent, whose effective individual income tax rate was 17.0 percent in 2005. That lower rate results from the combination of a large share of income (44 percent) from capital gains among households in that group in 2005 and a lower tax rate on capital gains than on other income.” [CBO.gov, December 2008]