Q: Do 40 percent of Americans pay no taxes?
A: About 38 percent of households have zero or negative income tax liability, but they pay other federal taxes.
Towards the end of the campaign, John McCain and prominent conservatives like Lou Dobbs claimed that Barack Obama’s proposed tax plan would amount to welfare because it offered a tax credit to the 40 percent of Americans who pay no taxes. We’ve already looked into the claims that Obama’s tax plan is a welfare handout (in short, it’s primarily a matter of how you define "welfare," but Obama’s plan doesn’t look any more like welfare than McCain’s). But what about that 40 percent with no tax liability? Can it really be true that more than a third of the country pays no taxes at all?
According to the Urban-Brookings Tax Policy Center, it is true that 38 percent of "tax units" — which can be singles, couples, or families — are projected to have zero or negative income tax liability in 2009. About 60 percent of these households make $20,000 per year or less.
However, being exempt from income tax does not mean you’re exempt from federal taxes. Everyone who works is liable for payroll taxes, contributions to Medicare and Social Security that come out of every paycheck. There are also excise taxes on some goods and services, most notably the 18.4 cents per gallon tax on gasoline. The Congressional Budget Office found that earners in the lowest quintile, where most of those with no income tax liability fall, shouldered 4.3 percent of the payroll tax burden in 2005 and 11.1 percent of the excise taxes. Their effective tax rate (which is calculated by dividing taxes paid by total income) in those categories, according to the CBO, was in fact significantly higher than the rate of the top quintile, although that top one-fifth of the population had a much higher effective tax rate for individual and corporate income taxes.
— Jess Henig
Congressional Budget Office. "Historical Effective Federal Tax Rates: 1979 to 2005." Dec. 2007.
Urban-Brookings Tax Policy Center. "Distribution of Tax Units With Zero or Negative Income Tax Liability by Cash Income Level, 2009." 15 Aug. 2008.