COVID-19 Relief Measures Make US Tax System ‘More Progressive’: Tax Foundation

The Internal Revenue Service (IRS) building in Washington on April 15, 2019. (Zach Gibson/Getty Images)

The U.S. income tax system is “very progressive,” and it’s increasingly taking on the role of providing social benefits to households, according to the Tax Foundation.

Lower household income and tax relief measures introduced during the pandemic allowed more Americans to pay no federal income taxes in 2020. And President Joe Biden’s Build Back Better plan aims to extend these measures, making the tax system even more progressive, Garrett Watson, senior policy analyst at the Tax Foundation, wrote in a report.

The share of tax filers who owe income taxes dropped last year because of several federal relief measures, including the expansions in the child tax credit (CTC) and earned income tax credit (EITC).

According to preliminary estimates from the Urban–Brookings Tax Policy Center released last week, nearly 61 percent of U.S. households paid no federal income taxes in 2020, up from 44 percent in 2019.

The data show that out of 176.2 million individuals and married couples who could file a tax return, 144.5 million of them actually filed and about 107 million paid no federal income taxes last year, compared to 75.9 million in 2019.

The share of households that owe zero income tax is projected to remain high at nearly 57 percent in 2021, according to the estimates.

“The large portion of households paying no income tax illustrates that the U.S. income tax system is quite progressive, and that the tax system is increasingly being used to provide social benefits to households,” Watson wrote.

He says the share of tax filers who pay no income taxes has increased since the 1990s, “largely due to expansions in refundable tax credits, which can more than offset tax liability for low-income households.”

The Biden administration significantly expanded the CTC for the 2021 tax year. As part of the $1.9 trillion COVID-19 relief package signed into law in March, for example, the annual CTC was increased to $3,000 per child from ages 6 to 17, and $3,600 for children under 6. Before this, the maximum annual credit was $2,000 for every child under 17.

The Biden administration is pushing to renew an expansion to the CTC, which is set to expire at the end of the year. It also announced its intention to extend or make permanent several tax credits, including the EITC, child and dependent care tax credit, and premium tax credit.

If the administration succeeds in maintaining these enhanced tax credits, it will keep the share of people paying no income tax elevated going forward, Watson said.

“Biden’s proposals would also raise tax rates on high earners, generally making an already progressive tax system still more progressive,” he said, challenging Democrats’ argument that the rich people don’t pay their fair share in taxes.

The first monthly payment from the enhanced child tax credit started in July, benefiting 39 million families. Biden touted the CTC relief payments, calling it “one of the largest-ever single tax cuts for families.”

“It’s a reflection of our belief that the people of this country who need a tax cut aren’t the folks at the top,” he said on July 15 during a speech at the White House.