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Are Taxes in the U.S. High or Low?

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The following article by Bruce Bartlett appeared in the Economix section of The New York Times here. Mr. Bartlett has served as an economic adviser in the White House, the Treasury Department and Congress.

Historically, the term “tax rate” has meant the average or effective tax rate — that is, taxes as a share of income. The broadest measure of the tax rate is total federal revenues divided by the gross domestic product.

By this measure, federal taxes are at their lowest level in more than 60 years. The Congressional Budget Office estimated that federal taxes would consume just 14.8 percent of G.D.P. this year. The last year in which revenues were lower was 1950, according to the Office of Management and Budget.

The postwar annual average is about 18.5 percent of G.D.P. Revenues averaged 18.2 percent of G.D.P. during Ronald Reagan’s administration; the lowest percentage during that administration was 17.3 percent of G.D.P. in 1984.

In short, by the broadest measure of the tax rate, the current level is unusually low and has been for some time. Revenues were 14.9 percent of G.D.P. in both 2009 and 2010.

Yet if one listens to Republicans, one would think that taxes have never been higher, that an excessive tax burden is the most important constraint holding back economic growth and that a big tax cut is exactly what the economy needs to get growing again.

Just last week, House Republicans released a new plan to reduce unemployment. Its principal provision would reduce the top statutory income tax rate on businesses and individuals to 25 percent from 35 percent. No evidence was offered for the Republican argument that cutting taxes for the well-to-do and big corporations would reduce unemployment; it was simply asserted as self-evident.

One would not know from the Republican document that corporate taxes are expected to raise just 1.3 percent of G.D.P. in revenue this year, about a third of what it was in the 1950s.

The G.O.P. says global competitiveness requires the United States to reduce its corporate tax rate. But the United States actually has the lowest corporate tax burden of any of the member nations of the Organization for Economic Cooperation and Development.

Revenue Statistics of O.E.C.D. Member Countries, 2010
If taxes are low historically and in comparison with our global competitors, how are Republicans able to maintain that taxes are excessively high? They do so by ignoring the effective tax rate and concentrating solely on the statutory tax rate, which is often manipulated to make it appear that rates are much higher than they really are.

For example, Stephen Moore of The Wall Street Journal recently asserted that Democrats were trying to raise the top income tax rate to 62 percent from 35 percent. But most of the difference between these two rates is the payroll tax and state taxes that are already in existence. The rest consists largely of assuming tax increases that no one has formally proposed and that would be politically impossible to enact at the present time.

Ryan Chittum, in Columbia Journalism Review, responded with a commentary that called the Moore analysis “deeply disingenuous.”

Nevertheless, one routinely hears variations of the Moore argument from conservative commentators. By contrast, one almost never hears that total revenues are at their lowest level in two or three generations as a share of G.D.P. or that corporate tax revenues as a share of G.D.P. are the lowest among all major countries. One hears only that the statutory corporate tax rate in the United States is high compared with other countries, which is true but not necessarily relevant.

The economic importance of statutory tax rates is blown far out of proportion by Republicans looking for ways to make taxes look high when they are quite low. And they almost never note that the statutory tax rate applies only to the last dollar earned or that the effective tax rate is substantially lower even for the richest taxpayers and largest corporations because of tax exclusions, deductions, credits and the 15 percent top rate on dividends and capital gains.

The many adjustments to income permitted by the tax code, plus alternative tax rates on the largest sources of income of the wealthy, explain why the average federal income tax rate on the 400 richest people in America was 18.11 percent in 2008, according to the Internal Revenue Service, down from 26.38 percent when these data were first calculated in 1992. Among the top 400, 7.5 percent had an average tax rate of less than 10 percent, 25 percent paid between 10 and 15 percent, and 28 percent paid between 15 and 20 percent.

The truth of the matter is that federal taxes in the United States are very low. There is no reason to believe that reducing them further will do anything to raise growth or reduce unemployment.


4 Responses to “Are Taxes in the U.S. High or Low?”

  1. Frank says:

    The rest of the world taxes consumption though Value Added Tariffs (I know, the actual term is value added taxes). I call VAT’s tariffs because in actual practice this is what they are – tariffs on imports.

    VAT’s are tariffs on imports because WTO rules make consumption taxes “border adjustable.” In other words, a nation that uses consumption taxes can choose to rebate VAT taxes collected on domestic products to domestic producers making exports tax free. Taxes on imports are sent to the nation’s treasury making imports more expensive. America taxes are called “direct taxes” which are embedded in the price of the product and rebating to domestic producers is not allowed.

    This disadvantage for America makes our products much more expensive internationally and is much more damaging than the level of taxation on the nation as a whole. So how we tax is far more important than the level we choose to tax ourselves.

  2. China Watcher says:

    It takes a lot of money spent on accountants, lawyers and lobbyists to hold the corporate tax burden to just 1.3 percent of GDP. The absurd complexity of the corporate tax code — more than 3,000 provisions — is the result. A simpler corporate tax — starting with a high zero tax bracket — would be smart policy for the United States if a) it provided for expensing of investment (100 percent write-off in year one) and b) was accompanied by a parallel simplification of the personal income tax as well as the VAT that Frank favors. While we’re at it, we could eliminate some 20 other taxes collected by the Feds. Only a genuine, fundamental reform of the entire federal tax system will help effect the genuine, fundamental restructuring of the American economy that we desperately need.

  3. Joel Ross says:

    If our effective tax rate is so low historically, why don’t the Dem’s or Independents or some group really jump on pointing that out? Some tax increase, especially with reform as mentioned in the above comments would not be such a terrible burden, and we must use all measures to get our massive debt under control.

    • Joel Ross says:

      Of course the best steps to take are trade balancing measures (countervailing measures for currency manipulation, etc.) which CPA champions, and VATs which are paid by foreigners.

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