In the July Contemporary Economic Policy is “Who Pays No Tax? The Declining Fraction Paying income Taxes and Increasing Tax Progressivity” by David Splinter (Joint Committee on Taxation). Here is the abstract:
Using federal individual income tax data, this paper presents the first long‐run estimates of the fraction paying no income tax. Between 1985 and 2015, the fraction of working age adults paying no tax increased from 20% to 36%. A decomposition shows that almost all of this increase resulted from changes in tax policy, especially from more generous tax credits. Increasing tax progressivity over the last three decades also resulted from more generous tax credits. The substantial federal tax changes enacted in 2017 are forecasted to temporarily increase both the fraction paying no tax and individual income tax progressivity.
One interesting takeaway from the paper is the historical context of these figures. Of course, the income tax started out vary narrow, but after it broadened it has hovered in that 30-35% range much of the time. Here is the fraction paying no tax from Splinter’s Figure 1:
Splinter uses a shift-share decomposition to attribute the fluctuations in the share of non-payers to tax policy changes, demographic changes, and income distribution. The big driver, as noted in the abstract, turns out to be the tax policy changes (converting 2015 tax burdens into 1985 counterfactual tax burdens with changes to the EITC, new tax credits, and indexing of personal exemptions and standard deductions. These policy changes seem to account for much, about 13 of the 16 points, of the increase from 1985 to 2015. Working age distributions and household formation don’t do much work.
For all the attention put on top marginal income tax rates, it is also quite interesting to observe the correlation between the fraction paying no tax and individual income tax progressivity (as measured by the Kakwani Index), as in Splinter’s Figure 6:
And yes, you are reading correctly that the TCJA increased individual income tax progressivity, as the big-ticket potentially regressive elements were in revisions to corporate income and estate taxes.
David Splinter has several interesting pieces along these lines for subjects related to income inequality and income mobility, so his website is worth checking out. Here is Vox coverage last year of his back-and-forth with Saez and Piketty.