Taxes are Good

page: 4 of 5

American’s Are Not Overtaxed

Saying that taxes are good does not necessarily mean that all levels of taxation are good. Taxes could certainly be too high and prove to be too much of a burden on taxpayers. And this is exactly what anti-government crusaders like to argue. They maintain that Americans are horribly overtaxed and it is getting worse all the time. For example, when the Republicans took over Congress in the 1990s, David Keating of the National Taxpayers Union described our taxes problems this way: “If we don’t seize on this revolutionary moment to rein in taxes and rein in entitlements, we could be looking at a government headed for financial oblivion…and a populace that is so over-taxed and so desperate that we could be talking about real revolutions.”6 This kind of anti-tax rhetoric is used to fan the fires of resentment against government – particularly the federal government and its income tax. And there is resentment aplenty, with many Americans feeling fed up with being “sucked dry” by the government tax collectors.

But many people greatly exaggerate the tax burden in this country. Here is a quick quiz:  Guess what percentage of Americans pay over 20% of their household income in federal income taxes? Polls show that most Americans put that figure at 38%.  But the real figure is shockingly lower:  less than 1%. According to the Congressional Joint Committee on Taxation, over 85% of us pay less than 10% of our income in federal income taxes. The average middle-class family now pays less than 5% of their income in federal income taxes – a historical low. How is this possible? Because many people are too poor to pay income tax, and many of the rest of us have deductions and credits that reduce our effective tax rate to much less than the official tax rate for our income group. In any case, the point is most of us tend to wildly overestimate how much everyone is paying in taxes.

Also, even a cursory examination of the facts shows that Americans are taxed relatively lightly compared to most other Western countries, and that our tax burden has not been skyrocketing at all. Table 1 makes it clear that Americans carry much less of a tax burden than the citizens in virtually every comparable Western European country. We pay the lowest taxes as a portion of Gross Domestic Product than any of these nations – usually by a very large amount. For example, we would have to increase tax revenues by almost 60 percent to match those of France, and by 40 percent to catch up with the Dutch. So it makes little sense to maintain that we are overtaxed in this country.

 

Table 1: Total Tax Revenue as a Percentage of GDP: 2009

 

Country

Taxes as % of GDP

Denmark

48.2

Sweden

46.4

Italy

43.5

Belgium

43.2

Austria

42.8

France

41.9

Iceland

41.4

Netherlands

39.1

Germany

37.0

United Kingdom

34.3

Canada

31.1

Spain

30.7

Switzerland

30.3

United States

24.0

 

Source: Revenue Statistics 1965-2009, OECD 2010.

 

Nor is it true that our taxes have been increasing at a precipitous rate. To see this we merely need to consider how tax revenues as a percentage of GDP have changed over the last several decades. This is a good measure because it takes into account economic growth and inflation, and so it gives us a much broader and more accurate picture of how much government is receiving in taxes. These figures, as shown in Table 2, indicate that the government take has changed relatively little in the last 40 years – either on the federal or the state and local level. In fact, we’ve had a remarkably stable rate of taxation. In 1970, total government receipts were 28.3% of the GDP while in 2007 they still only amount to 29.2%. In contrast, many other Western nations had substantial increases in their taxes during this same period. Between 1975 and 2003, Austria went from 37.4% to 43% and Italy from 26.1% to 43.4%, for instance.7 In any case, the figures for the U.S. show that conservative claims of an increasingly greedy government taking more and more money out of our pockets in taxes are simply false. Given these facts – that we are not overtaxed and our taxes are not mushrooming – the so-called “Tax Revolt” movement begins to make less and less sense

 

Table 2: Government Receipts as a Percentage of GDP: 1970-2007

 

 

1970

1980

1990

2007

State & Local Govt. Receipts

9.3

8.8

9.7

10.4

Federal Government Receipts

19.0

19.0

18.0

18.8

Total Government Receipts

28.3

27.8

27.7

29.2

 

Source: U.S. Government, Budget for the Fiscal Year 2009, Historical Tables, 2008.

 

Most of Your Tax Money Doesn’t Go to Others

Anti-government conservatives build up a lot of public resentment about taxes by suggesting that most of our tax money goes to help people other than ourselves – that it is redistributed to programs like welfare and food stamps that primarily help the poor and minorities. According to them, the government takes your money and then spends it on other people while you are left to struggle to make ends meet, pay your medical bills, send your kids to college, and so on. This argument is sometimes a thinly veiled attempt to mobilize opposition to government by fanning people’s racial and class resentments. But more importantly, it is simply not true. Most people have wildly exaggerated ideas about how much of their tax money is going to “others” in the form of welfare or foreign aid. When the public was asked to name the two largest parts of the federal budget, the leading responses were foreign aid (41%) and welfare (40%) – ahead of other choices like Social Security, defense, and health.8 This is highly delusional. Spending on foreign aid and welfare actually amounts to less than 3% of the federal budget.

What we have here, then, is another common negative stereotype about government perpetuated by the right. The idea that the government spends most of our tax dollars on “them” rather than on “us” is simply not rooted in reality. Studies have also shown that the vast majority of government dollars, which come from taxes on the middle and upper classes, are spent on benefits for the middle and upper classes, not the poor. Consider, for example, the federal money handed out in social welfare spending. In a typical year, the government spends over three times the amount of money for programs that everybody benefits from – like Social Security and Medicare – than it spends for programs aimed at the poor, such as Medicaid, welfare, and food stamps.9

Here is another quick quiz: What is the dollar value of the benefits from federal programs that the average middle-class wage earner receives? $1,000? $5,000?  A 2007 study by the Tax Foundation found that it was over $10,000.10  And that figure does not include any benefits from such so-called “public goods” programs as environmental protection and public-health efforts.  Include those and the value of federal programs rises to over $16,000 a year. And if we add in the benefits from state and local programs, the total amounts to over $27,000. So there is no question that we are all getting back a great deal in government benefits for the taxes we pay.

Taxes Are Not Hurting the Economy

Another very common criticism of taxes by conservatives is that taxes hurt the economy and that cutting them will increase economic growth. This was the argument used repeatedly by Republicans in Congress and the Bush administration as they passed a number of massive tax cuts. Conservatives are certainly correct that in principle taxation could be so high – say a 75% income tax on everyone – that it would stifle economic growth and any incentive that people have to work harder. But our current taxes are nowhere near this extreme, so the question is not whether taxes could hurt the economy, but whether our current taxes are hurting the economy.

The conservative case for our taxes hurting the economy is very straightforward. The argument is that taxes on various forms of income are a drag on worker productivity and consumer savings, and thus ultimately on economic growth. So the higher these taxes are, the more it slows the economy down. Conversely, if we cut these taxes, then people would have more incentive to work hard and save, and this would give a long term boost to the economy. Sounds logical enough. But it is wrong. There is little evidence to support this contention and plenty that contradicts it. Consider for example, the effect of tax changes on worker productivity. From 1950 to 1963, when the top individual income tax rate averaged 91.1%, productivity growth was 3.5%. From 1964 to 1980, when taxes were cut and the top income rate fell to 71.2 %, productivity did not go up as conservatives predicted, but actually went down a bit to 2.2%. And in fact, as shown in Table 3, the long-term statistics concerning tax rates and productivity show that as tax rates have fallen from the 1950s to the early 1990s, productivity fell as well. And when the tax rate went up in the later 1990s, productivity actually rose. This does not mean, of course, that tax cuts discourage worker productivity or that tax rises encourage it; but only that productivity depends on a large number of factors besides taxes. As we have seen in recent years, for example, technological changes like increases in computer use have a much more significant impact on productivity than tax rates do. But in any case, the point is that the tax-bashers are simply wrong about how tax cuts will boost worker productivity. Strike one for their side.

 

Table 3: Top Income Tax Rate and Productivity Growth in the United States 1950-2002.

 

 

Top Average

Income

Tax Rate

Average Annual

Productivity

Growth Rate

1950-1963

91.1%

3.5%

1964-1980

71.2%

2.2%

1981-1986

53.2%

2.1%

1987-1992

30.8%

1.7%

1993-2002

39.5%

2.1%


Source: U.S. Bureau of Labor Statistics (2003).

 

Conservatives are also wrong about the effects of tax cuts on investment and savings. The boost to investment predicted by conservatives after the tax cuts during the Reagan administration never took place. Between 1979 and 1989, the average rate of investment was 2.5%. From 1989 to 2000, it rose significantly to an average of 5.9%. But this was after George H. W. Bush and Bill Clinton both raised federal taxes. There is also little evidence that the Reagan tax cuts boosted savings either. Savings rates fell from 8.8% of personal disposable income in 1981 to 6.0 percent in 1986.11 Moreover, two economists who did a comprehensive survey in 1996 of the economic literature on the effects of tax cuts on savings concluded: “Virtually no empirical study suggests a large saving response by households to changes in after-tax return.”12 Strike two for tax cutters.

But what about the over-all beneficial effects of tax cuts on economic growth? Again, history is a good guide. From 1981 to 1985, after the tax cuts of the Reagan administration, the economy did grow at a good rate – averaging 2.6% a year. But between 1976 and 1980, when the tax rates were higher, it grew even faster – averaging 3.2%. Similarly, after taxes were raised by Bush and Clinton, economic growth actually picked up and averaged 3.2% between 1989 and 2000.13 So there is clearly not a strong relationship between tax rates and growth in this country. Strike three – they’re out.

Comparing the U.S. to other countries brings little solace to tax cutters either. They like to think that our growing economy outpaces those of other advanced democracies in large part because of our lower tax burden. But the research doesn’t bear any of this out. Consider the results of a study that compared tax levels and economic growth rates between 1970 and 2000 for a large number of countries.14 It did find that Denmark and Sweden, which had much higher taxes than the U.S., also did worse in terms of average growth – about 1.6% versus about 2.3% for the U.S. But how do anti-tax advocates explain Finland and Norway, which had taxes almost 50% greater than we did, but actually enjoyed higher rates of growth? In fact, the overall results of the study indicated very little correlation between taxes and economic growth – with the U.S., Italy, Canada, the United Kingdom, Germany, Belgium, France and the Netherlands having relatively similar rates of growth, but widely varying tax levels – from 27% to 42% of GDP. International comparisons, then, contradict rather than support the conservative contentions that we need to cut taxes to ensure economic growth or that high taxes hurt the economy. Clearly a country can have high taxes and strong economic growth as well. Strike four.

One economic analyst, Anna Bernasek of The New York Times, examined a wide variety of academic studies on the relationships between tax rates on productivity, savings, and growth. She concluded that the “notion that taxes are bad for the economy is just that: a notion not backed by strong evidence. And the costs of ignoring experience in favor of hope can be high: mounting deficits, decaying infrastructure, inadequate investment in public education and research. So the next time some proponent of tax reform promises king-size economic benefits, there is reason to be skeptical."15

Pages: 1 2 3 4 5