More than six out of 10 U.S households paid no federal income taxes in 2020 due to declines in income and boosts in government subsidies that wiped out tax liabilities.
According to the Urban-Brookings Tax Policy Center, 106.8 million households escaped the federal income tax. This was up from 75.9 million in 2019. Brookings estimates the number of families owing no federal income taxes for 2021 will decline only slightly to 101.7 million, or 57.1%.
And contrary to President Biden’s claim that high-income workers are not paying their fair share, and should pay more, the data show the opposite. According to the Tax Policy Center, the top 20% of taxpayers paid 78% of federal income taxes in 2020, up from 68% in 2019. Furthermore, the top 1% of taxpayers paid 28% of taxes in 2020, up from 25% in 2019. And the trend over the decades has not been kind to families experiencing improving income levels by requiring them to pay a rapidly rising share of the federal income tax burden.
For example, in 1979, the top one-fifth of income earners paid a tax rate that was approximately three times that of the bottom one-fifth of income earners. But 38 years later, the top one-fifth of income earners paid 20 times the tax rate of the bottom quintile of taxpayers.
Did shifting more of the income tax burden on to high-income earners reduce income inequality over the period? Emphatically not.
Between 1979 and 2019, the degree of income inequality, as measured by the U.S. Census Bureau’s Gini Coefficient, increased from 0.404 to 0.484 (a higher index indicates greater income inequality). But more importantly, not only has shifting the burden of income taxes from low to high-income households failed to reduce income inequality, but it has also reduced the incentive to increase earnings via higher education/training, higher hours worked, or other work activities linked to income that benefits both the household and society. Accordingly, President Biden should reconsider his economic plan, which punishes high-income workers with a greater share of income tax burdens.
Professor Ernie Goss is the Jack MacAllister Chair in Regional Economics at Creighton University.