The U.S. federal income tax system is “progressive.” That means that the more income you earn, the more federal income tax you pay. That is a feature, not a bug, in U.S. federal tax policy.
According to the latest estimates from the Tax Policy Center, 76.4 million American “tax units,” defined as individuals or a group of individuals treated as one tax-paying unit. That total represents about 44.4% of all U.S. tax units.
The Tax Policy Center estimates that there are 172 million tax units in the United States and that 95.6 million will be paying federal income tax in 2018. In general, however, many people who don’t pay federal income taxes do pay payroll taxes for Social Security and Medicare. They also pay other taxes such as sales and property taxes.
Gary Burtless of the Brookings Institution, which along with the Urban Institute comprise the Tax Policy Center, told MarketWatch that non-payers don’t escape all taxation:
Many low- and below-average-income families pay more in payroll taxes every year than they pay in federal income taxes. This means you have to be careful describing the federal tax liabilities of U.S. families. The U.S. individual income tax is quite progressive, with much heavier tax liabilities as we move up the income distribution and very low or even negative income tax liabilities at the bottom of the income distribution.
The Pew Research Center, in a 2016 study, reported that the top 0.1% of families pay 39.2% of all federal income tax while the bottom 20% pay nothing or receive more in refundable tax credits than they pay in taxes.
The Tax Policy Center also estimates that roughly one-third of workers who pay no federal individual income taxes receive net refundable credits that cover their payroll taxes, including their employer’s share. The center also estimates that about 60% of those who pay no income tax work and are subject to payroll taxes. Most of the rest are retirees whose income is too low to owe income tax.
By the Tax Policy Center numbers, 42.4 million Americans (24.7% of all tax units) will have zero or negative income and payroll taxes in 2018. Some 26.7 million (15.5% of all tax units) will pay no income or payroll taxes at all this year.