Coronavirus Stimulus Checks Partly Responsible For Rise In People Paying No Federal Income Tax

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Stimulus checks that Congress sent out last year proved to be a lifeline for millions of Americans. However, these stimulus payments had one adverse impact as well. The federal stimulus, including the coronavirus stimulus checks that were sent out last year, was partly responsible for a significant rise in the number of federal non-taxpayers or Americans who owed no federal income tax or received tax credits from the government last year.

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Coronavirus Stimulus Checks Responsible For Spike In Federal Non-Taxpayers

Over 107 million U.S. households, or about 61% of all taxpayers, paid no taxes last year, according to a report from Urban-Brookings Tax Policy Center. In 2019, the number of households that owed no taxes was 76 million, or about 44% of all taxpayers.

Along with stimulus checks, high unemployment and generous tax credit programs were also responsible for the spike in non-taxpayers. About 21 million workers lost their jobs last year, and most were low-wage workers, who were paying a small income tax prior to the pandemic.

Following the coronavirus pandemic, Congress approved three rounds of stimulus checks, with the first one going out in April last year. These stimulus checks were refundable tax credits, and thus, reduce the tax liability in both 2020 and 2021.

Along with stimulus checks, Congress also expanded the Child Tax Credit (CTC), as well as the EITC (Earned Income Tax Credit) and the CDCTC (Child and Dependent Care Tax Credit). All these are refundable credits as well, and thus, would have eliminated the income tax liability for millions of Americans.

It is believed that households earning less than $28,000 won’t be paying any federal income tax this year. Also, about 75% of households with income between $28,000 and $55,000 would not be paying any tax as well. About 43% of middle-income households would not pay any federal tax as well, according to Forbes.

Further, Tax Policy Center (TCP) also notes that the number of households paying neither income nor payroll taxes also increased significantly.  The TCP estimates that about 20% of households paid neither federal income nor payroll taxes. Also, as per TPC “nearly everyone” paid some other taxes, such as state and local sales taxes, state income taxes, excise taxes and property taxes.

Rise In People Paying No Federal Income Tax Is A Temporary Thing

The rise in the number of non-taxpayers could be worrisome, but TPC believes that this spike is temporary, and the number of non-taxpayers will drop next year.

“As more Americans get vaccinated, they are rapidly returning to work and many low-wage workers are getting raises, which will return them to the federal income tax rolls,” the report says.

For 2021, the TCP estimates that the number of non-taxpayers would remain high at 57%. The number is estimated to drop to 42% in 2022 and remain around the same level through 2025 provided the “economy continues to rebound and several temporary tax benefits expire as scheduled,” the report notes.

The rise in the number of non-taxpayers may be temporary, but is expected to fuel the debate over higher taxes on the wealthy.