58 Million Wage Earners Pay No Federal Income Tax

58 Million Wage Earners Pay No Federal Income Tax
July 1, 2004

According to the Washington, DC-based Tax Foundation, "a record 44 million tax returns filed in 2005 will be correctly demanding the return of every dollar (or more) that is being withheld from their paychecks during 2004."

"In other words," said Tax Foundation economist J. Scott Moody, "after taking all the available credits and deductions, they will owe no income taxes and Uncle Sam may well owe them."

The number of zero-tax filers is growing rapidly because of the Bush tax cuts, the Tax Foundation reported. In 2000, 29 million people had no federal income tax liability; that figure will reach 44 million in 2004, a 50 percent increase. (See accompanying figure.)

Number of Zero-Tax Filers

"In addition to these zero-tax filers, roughly 14 million individuals and families will earn some income but not enough to be required to file a tax return," noted Moody. "When these non-filers are added to the zero-tax filers, they add up to 58 million income-earning households who will be paying no income taxes," he said.

Even 58 million is an undercount, Moody noted, because one tax return often represents several people. When all of the dependents of these income- producing households are counted, roughly 122 million Americans--44 percent of the U.S. population--are entirely outside of the federal income tax system.

Portrait of Zero-Tax Filers

Considering how fast the population of zero-tax filers is growing, it is important for lawmakers to have a better understanding of who they are. Tax Foundation economists employ a sophisticated database, combining IRS tax return data with Census household data, to gain insights into the economic and demographic profiles of these Americans.

"Broadly speaking, the 44 million zero-tax filers are low-income, young, female-headed households, part-time workers, and beneficiaries of the $1,000 per-child tax credit" said Moody.

  • The 44 million zero-tax filers will be largely low-income. Seventy-five percent will earn less than $20,000 in 2004, and 97 percent will earn less than $40,000.
  • Zero-tax filers in 2004 will be overwhelmingly young. Looking at the age of the primary breadwinner on these tax returns, only 22 percent are 45 years old or older. More than one-third (36 percent) are younger than age 25, and 56 percent are younger than age 35.
  • The racial or ethnic composition of the 44 million zero-tax filers will roughly mirror the demographics of American tax filers as a whole. For example, white Americans are 83 percent of total taxpayers; the percentage of zero-tax filers who are white is 79 percent. African-Americans are roughly 13 percent of total taxpayers and 17 percent of zero-tax filers.
  • Some 54 percent of 2004's zero-tax filers will be single women or families with children where the principal wage earner is a woman. That will leave 46 percent of zero-tax filers in 2004 who will be men or families in which a man is the major breadwinner.
  • The overwhelming majority of tax returns that will pay no income taxes will be filed by single individuals or heads of household (an unmarried individual with children). Due in large part to their young age, 43.5 percent of these filers are single, while 27.6 percent are single parents.
  • Zero-tax filers tend to be working part-time or full-time for only part of the work year. Forty-two percent will be working part-time or hardly at all, while another 20 percent will be working full-time but less than 50 weeks out of the year.
  • The occupations of zero-tax filers are difficult to generalize because of the large number of categories government statistics tend to group them in. However, due again to their young age, 20.2 percent of these filers are classified as "children" or "students" rather than by their occupations. The other leading categories of occupations are "other services" (17.2 percent), "administrative support" (11.8 percent), "sales" (11.4 percent), and "precision production" (7.6 percent).
  • In 1997, Congress enacted a $500 per-child tax credit and expanded the Earned Income Tax Credit (EITC) for low-income workers. The 2003 tax cuts increased the value of the child credit to $1,000. These two tax credits, especially the child credit, have had a powerful effect on reducing, and in many cases eliminating, the income tax liability for millions of Americans. Of the 44 million tax returns that will pay no income taxes, 34 percent will claim the EITC and 50 percent will claim the child credit.

Scott Hodge is president of the Tax Foundation. His email address is shodge@taxfoundation.org.