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Roberton C. Williams
July 6, 2009

Pruning the Income Tax Rolls

Last year’s election campaign sparked a major debate over refundable tax credits. Barack Obama insisted they were the only way to make tax benefits available to low-income households. (If you have no tax liability, you get a cash payment.)  Critics countered loudly: How can you cut taxes for people who don’t pay them? And there are a lot of non-taxpayers—under 2008 law, the Tax Policy Center estimated 38 percent of all tax units would pay no income tax in 2009.

February’s stimulus bill created new refundable credits and expanded existing ones for 2009 and 2010. Those changes, combined with the economic downturn, wiped out income tax liability for another 9 percent of tax units. As a result, 47 percent will pay zero or negative tax this year (see table). However, once the stimulus and the Bush tax cuts expire, the share of individuals and families paying no tax will fall to 37 percent. As income grows with the economy, about 34 percent will pay no tax by 2019.

However, Obama’s 2010 budget would extend the refundable credits and thus nearly maintain the 2009 count of non-taxpayers at 46 percent.

Of course, refundable credits are just a way to use the tax system to distribute social welfare. We could do the same thing through direct spending. In that case, more people would pay income tax, but the net outcome would be no different.

Stay tuned: my next TaxVox post will show the distribution of non-taxpayers across income categories and types of units.

Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.

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