A Taxing Subject

There was a table set out under a tree in front of the house, and the March Hare and the Hatter were having tea at it: a Dormouse was sitting between them, fast asleep, and the other two were using it as a cushion, resting their elbows on it, and the talking over its head. `Very uncomfortable for the Dormouse,’ thought Alice; `only, as it’s asleep, I suppose it doesn’t mind.’

The table was a large one, but the three were all crowded together at one corner of it: `No room! No room!’ they cried out when they saw Alice coming. `There’s PLENTY of room!’ said Alice indignantly, and she sat down in a large arm-chair at one end of the table.

`Have some wine,’ the March Hare said in an encouraging tone.

Alice looked all round the table, but there was nothing on it but tea. `I don’t see any wine,’ she remarked.

`There isn’t any,’ said the March Hare.

`Then it wasn’t very civil of you to offer it,’ said Alice angrily.

`It wasn’t very civil of you to sit down without being invited,’ said the March Hare.

`I didn’t know it was YOUR table,’ said Alice; `it’s laid for a great many more than three.’

`Your hair wants cutting,’ said the Hatter. He had been looking at Alice for some time with great curiosity, and this was his first speech.

`You should learn not to make personal remarks,’ Alice said with some severity; `it’s very rude.’

from Alice’s Adventures in Wonderland: A Mad Tea Party
by Lewis Carroll

I’ve taught Macroeconomics for a very long time.  Tax policy of course is also part of the curriculum so I always get to spend at least a week on U.S. taxes.    One of my favorite lectures is to disabuse people in the U.S. of the notion they are ‘over taxed’.   You probably saw that I didn’t exactly get on the Tea Party band wagon.  I’m not worried about my taxes.  I am worried about the huge amount of deficit spending going on and I’m worried about the quality of government I get in return for my taxes .  I’m more worried about loosing my constitutional right to privacy.  I’m also worried about my tax dollars going to religious organizations and other spurious uses.

Several other economists used their blogs on Tax Day for the purpose of showing folks that the U.S. has extremely low taxes compared to the kinds of things we expect and get from the Government. I’d like to share some of that with you.

The first blog was that of former Clinton Labor Secretary Robert Reich who entitled his rant “A Short Citizen’s Guide to Kooks, Demagogues, and Right-Wingers On Tax Day”.  Here’s a few highlights with some interesting numbers showing some interesting facts about U.S. Taxes.  Notice how some of the worst taxes are actually the state and local taxes.

No one likes to pay taxes, so tax day typically attracts a range of right-wing Republicans, kooks, and demagogues, all of whom tell us how awful we have it. Herewith a short citizen’s guide (that is, a citizen’s guide that’s short rather than a guide for short citizens) responding to the predictable charges:

1. “Americans pay too much in taxes.” Wrong: The United States has the lowest taxes of all developed nations.

2. “The rich pay too much! The top ten percent of income earners pay over 72 percent of all income taxes!” Misleading: The main reason the rich pay such a large percent is they’ve become so much richer than the bottom 90 percent in recent years. If you look at what they pay as individuals — the percent of their incomes over and above the highest rate below them — you’ll see a steady decline over the years. When Republican Dwight Eisenhower was president, the marginal rate on the highest earners was 91 percent (after deductions and tax credits, closer to 50 percent); by 1980 it was still up there, at 70 percent (an effective rate of closer to 45 percent); under Bill Clinton, it was 38 percent (an effective rate closer to 28 percent).

Look at the after-tax earnings of families and you’ll see what’s really going on. Between 1980 and 2000, the after-tax earnings of families at the top rose more than 150 percent, while the after-tax earnings of families in the middle rose about 10 percent. The Bush tax cuts of 2001 and 2003 raised the after-tax incomes of most Americans by a bit over 1 percent — but raised the after-tax incomes of millionaires by 4.4 percent.

3. “The bottom 60 percent pay only 3.3 percent of the taxes!” Misleading again. Most Americans are paying more in sales taxes than they ever have. Property taxes have also been rising at a steady clip. And Social Security taxes have also risen (thanks to the Greenspan Commission), while earnings over about $100,000 aren’t subject to Social Security taxes. So-called “sin” taxes (mostly beer and cigarettes) have also skyrocketed. All of these taxes take a bigger bite out of the paychecks of people with lower incomes than they do people with higher incomes.

A far more interesting set of comparisons comes from Forbes.com and “Tax Tea Party Time?” written by Bruce Bartlett.   Yes that’s Forbes Magazine’s website.  Bartlett has the tables that I always show my classes that compare the tax rates of the U.S. to those countries with similar standards of living. He takes the Tea Party folks straight on with facts.

The irony of these protests is that federal revenues as a share of the gross domestic product will be lower this year than any year since 1950. According to the Congressional Budget Office, the federal government will take only 15.5% of GDP in taxes this year, compared to 17.7% last year, 18.8% in 2007 and 20.9% in 2000.

The truth is that the U.S. is a relatively low-tax country no matter how you slice the data.

If you take a good look at Bartlett’s tables you’ll see this bottom line from table 1:

… total taxation (federal, state and local) amounted to 28% of the GDP in the U.S. in 2006. Only four of the 30 OECD countries had a lower tax ratio. Taxes averaged 35.9% for the OECD as a whole and 38% in Europe. Citizens of Denmark and Sweden paid very close to 50% of their total income in taxes.

Again, to me, the issue isn’t paying taxes. Taxes are part of what you pay to be a citizen of a country.  I don’t dislike taxes, I dislike lousy government.  I lived in Minnesota which is a very high tax state.  I live in Louisiana which has a rather high sales tax but practically nonexistent income and property taxes compared to what I’ve paid in the past to Minnesota, Nebraska, and Iowa.  I really didn’t mind paying high taxes in Minneapolis (actually I lived in Edina) because I had a great library, great schools, great parks, clean and well kept streets, and tons of other things that made my life just down right pleasant.  I was happy to pay for that.  I’m much more upset about paying lower taxes down here in Lousiana because it’s pretty obvious that it’s not doing any good.  We have lousy schools, lousy roads, lousy infrastructure, and really lousy politicians who usually find ways of getting tax money to their relatives and friends.  Again, to me, it’s an issue of getting what you pay for.

One of the things that you  really have to think about when you think of Federal taxes is how large our military spending is compared to the rest of the world.    A huge portion of our federal budget goes to sustaining the largest spending on military of any country.  Many countries don’t take on this kind of burden.  Most folks in the U.S consider a strong defense department budget a necessity. Those same folks are usually the ones that complain about their taxes.

One other thing I like to point out is the infinitesimal amount we pay on aid to foreign countries.  This is another one of those myths I bump into when I teach about our taxes.  Compared to other countries, our aid to foreign countries is a really small portion of our overall GDP.  It’s usually less than 1/2 of 1 % of the US Federal Budget.  Here’s some numbers from Forbes again and Bartlett again.  This states the view from the percentage of money we spend versus the amount of income our country creates annually.

The claim of stinginess, however, comes from a different calculation — foreign aid as a share of national income. In 2003, U.S. foreign aid came to just 0.34 percent, well below the world leading Dutch at 2.44 percent. Other big contributors are Ireland (1.83 percent), Norway (1.49 percent), and Switzerland (1.09 percent). The U.S. would have to triple foreign aid just to reach the lowest of these contributors.

The first thing one notices when looking at the big foreign-aid contributors is that they all spend very little on national defense. According to the Stockholm International Peace Research Institute, in 2002, the Netherlands spent just 1.6 percent of its gross domestic product on defense. Norway spent 2.1 percent, Switzerland spent 1.1 percent, and Ireland spent a piddling 0.7 percent. By contrast, the U.S. spent 3.4 percent — and this was before the Iraq war. It’s easy to be generous with foreign aid when another country is essentially providing your defense for free.

Again, however, notice the last line.  A huge amount of this has to do with the fact that many of these countries don’t fund their defense at the level the U.S. does and can spend their money on different things.  It’s very difficult to separate  our high levels of government spending and our deficit spending from our defense budget.

The last thing I’d like to point to is this thread by our very own PUMA and friend Cinie who has actually looked at the manufactured grass roots (aka astroturf) of the Tea Parties and the Tea Party detractors.   Think you’ll find it a worthwhile read.

Oh, one more fact.  The POTUS responsible for the biggest tax increase in the US was Ronald Reagan.