The persistence of paying taxes

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Remember the 47 percent of people cited during the 2012 presidential campaign as not paying taxes? An Indiana University professor says we should look beyond that one-year snapshot.

That wider perspective offers a very different tax-paying picture.

“A one-year look at tax data is interesting but doesn’t give the full picture of what is happening over time,” says Bradley Heim, an associate professor at Indiana University’s School of Public and Environmental Affairs. “It misses the in- and out-flow in the taxpayer population.”

So Heim, along with Ithai Z. Lurie and James Pearce of the Treasury’s Office of Tax Analysis, examined Internal Revenue Service and other government data over a 10-year period.

They found that while paying taxes is quite persistent, the reverse isn’t necessarily so. Individuals who now aren’t paying income taxes are reasonably likely to eventually join the taxpaying ranks.

Adding up positives and negatives

Those of us paying taxes are seen as being in a positive tax position. Yes, positive is from Uncle Sam’s point of view, not necessarily ours. And we are likely to keep paying taxes.

“Positive payment status is persistent,” says Heim, who previously was a Treasury Department economist. Essentially, this is the tax equivalent to the physics’ law that a body in motion stays in motion. Once you start paying taxes, you’re likely to keep doing so for a while.

On the other side are individuals who pay no taxes or get money back, thanks to refundable tax credits. They are in negative tax territory.

And that negative position is not as fixed, according to Heim and his U.S. Treasury Department colleagues in their paper “Who Pays Taxes? A Dynamic Perspective.”

Their study suggests that a negative taxpayer is reasonably likely to become a positive taxpayer in subsequent tax years.

Running the numbers

Overall, they found that about 90 percent of individuals who have positive total taxes one year also have positive taxes the next year. However, only 74 percent of zero taxpayers and 68 percent of negative taxpayers stay in their nonpayment groups the next year.

Viewed over a slightly longer period, they found that approximately 95 percent of those who pay positive taxes in a given year will, on average, pay positive taxes in the next four years.

Meanwhile, around 65 percent of those who pay no taxes in a given year will pay no taxes on average over the next four years. About 70 percent of those who have a negative liability will have a negative liability on average over the next four years.

Loss on the positive side

But the news isn’t all good for the federal treasury.

Heim’s study also found that the positive tax segment, while persistent, actually declined substantially over the last decade.

In 2001, around 62 percent of Americans were in positive income tax territory. But from 2002 to 2007, that percentage dipped into the upper 50s.

Then, proving that taxes don’t operate in a vacuum, the Great Recession hit in 2008. As people lost jobs or took ones that paid less, they paid less in taxes and in some cases became eligible for tax breaks for lower wage earners. Also during the study period, tax law changes — rate cuts, rebates, expanded credits — were enacted that affected individuals’ tax liabilities.

Only 48.7 percent of taxpayers were in a positive income tax position in 2008. As the economy has recovered, it inched up, reaching 53.3 percent in 2011.

Meanwhile, those in the zero or negative tax segment hit some of its highest levels during those four years.

“Is that a good thing or bad thing? It depends on what you think the tax system should be doing,” says Heim.

It’s also a question that’s being debated on Capitol Hill and possibly a subject for a follow-up tax study or two.

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Veteran contributing editor Kay Bell is the author of the book “The Truth About Paying Fewer Taxes” and co-author of the e-book “Future Millionaires’ Guidebook.”