Nearly 50 percent of American tax filers will pay no federal income taxes in 2009. Half of them earn too little and the other half receive tax credits -- the Earned Income Tax Credit, child-care credits, subsidies for college and savings -- worth more than their tax burden, according to the Tax Policy Center. Many of these people still pay federal taxes, such as payroll taxes for Social Security and Medicare and state and local taxes.
Some criticize the fact that half the country is effectively exempt from the scourge of April 15, but there is a political and economic component to this Zero-FIT (federal income tax) phenomenon. If the Zero-FITs are a political problem, they are also a political creation. When moderate and conservative pols are reluctant to announce new spending programs for fear they will look like socialists, they execute these spending programs through the tax system. If most of these programs flipped to the spending side of the ledger, suddenly millions more Americans would owe federal income taxes. For example, the EITC -- President Ford's initiative -- is now a $50 billion program, maybe the largest component of our welfare system, and yet our politicians don't even have to call it spending. (The exemptions and deductions carved into our Swiss cheese tax regime are called tax expenditures. When the government spends a dollar, it's an expenditure. When it leaves a dollar in the hands of private earners, it's a tax expenditure.)