Americans overtaxed? Not so much.

Posted on: Thu, 11/19/2009 - 22:34 By: Tom Swiss

In truth, the American pastime isn't baseball, it's complaining about taxes. Ok, sure, nobody likes 'em, everybody would love to see a lower tax bill -- provided, of course, that the bill isn't lowered by sticking future generations with the debt, or by cutting vital public services.

But that's just what we've been doing. For the past few decades of conservative rule, we've been borrowing money and letting the infrastructure crumble, while lowering taxes, especially on the rich.

Many on the right say that taxes are too high, and that any rise will spell doom for our economy. The problem with that claim is that not only do most other nations have a higher tax burden and function fine with it, but that the current U.S. tax burden is historically low.

Every year, Forbes magazine publishes a comparision of the total (personal and corporate, national, local, and state) tax burdens of OECD nations. (It does include what Forbes calls "stealth taxes" -- in its words, "green and carbon taxes, for example", though many people would not call making businesses pay for the damage they do to the environment a tax; still, it's a useful comparison.)

Take a look, and notice that the U.S. is way down near the bottom of the list, with a total tax burden of 34.5% of the GDP. Only Switzerland (34.2%) and Japan (33.4%) have a comparable standard of living and a lower tax burden -- and note that both these nations also have very low military spending and a non-aggressive foreign policy. But of course that's merely a coincidence, right?

(The highest tax burdens are Norway (58.4%), Sweden (54.9%), Denmark (54.9%) and Finland (52.7%) -- three of these countries rank higher than the U.S. on the Human Development Index, and Denmark ranks 0.001 of a point below the U.S. Their high taxes don't seem to have made them hellholes.)

Ok, fine, but it's not fair to compare the U.S. against those dang foreigners, after all we're special, exceptional, God's own favored nation, the land of free enterprise with liberty and justice for all. We're proud of not providing public services that other nations take for granted, of not having government involved in health care. (Except for Medicare. And Medicaid. And the VA. And the CDC. And the National Health Service Corps. And all those local tax funded EMS systems.) Our taxes should be lower than other countries because we're special, but they're still too high -- our tax burden has been going up and up and up, right?

Well, once again reality shows its liberal bias. Our federal tax burden is at near-record lows, with the average family forking over about 9% in income taxes to Uncle Sam, down from a 12% in 1981.

Put all the federal taxes together and total federal tax burden for 2009 is 18% of GDP. (See p. 24 of the linked PDF.) It was 20.0% in 1998 and 1999, and 20.9% in 2000 (a peak values previously seen in 1944); with the Bush tax cuts, it hit a 30 year low of 16.4% in 2004 -- taking us from a surplus of 2.4% of GDP in 2000 to a deficit of 3.6% of GDP that year.

Meanwhile the state and local tax burden hasn't changed much and is currently lower then the 10+% it hit in the early 1990s.

We've faced a higher tax burden before, and the economy has run quite well; we can face a higher tax burden again.

If, that is, it's equitably distributed.

Taxes and economic justice

But there's the rub. Thanks to the right wing, taxes on the rich have come down enormously.

In 1979, the effective federal tax rate (figuring all the different taxes and accounting for all the deductions we're entitles to) for the top 1% was 37.3%. During the Reagan years, taxes on top earners fell precipitously -- see the graph here. They rose again during the Clinton years, to an effective 36.4% on that top 1% in 1995.

But then along came W: by 2005, the effective tax rate on that top 1% was back down to 31.2%.

Let's look at what the 1995 and 2005 tax rates would mean at different income levels.

In 2005, the average pre-tax income of the top 1% of households was $1.56 million. (Yes, the top people make in one year what it takes a mere millionaire a lifetime to accumulate.) So for each of the 1.1 million households in the top 1%, that 5.2% difference in the tax rate means $81,100 less tax paid -- a total tax break of $89.2 billion a year for the richest of the rich.

But wait -- didn't everyone's taxes go down? Didn't the middle class do well under this? The effective tax rate on the middle quintile (the 20% around the middle) went from 17.6% in 1995 to 14.2% in 2005, only a 3.4% difference.

Average income for the middle quintile in 2005 was $58,500: that 3.4% difference in the effective tax rate saved each household $1990 a year. With 22.2 million households in the middle quartile, the total tax break for households in the middle quartile was $4.42 billion. I.e., the total dollar amount of the tax break between the 1995 rates and the 2005 rates for the middle 20% of taxpayers, was about one twentieth that of the break seen by the top 1%!

Or to look at it another way, the average tax rate for everyone was 22.9% in 1995 and 20.5% in 2005. For 114.5 million households with an average income of $84,800, that's a total tax break of $233 billion at the 2005 rates versus the 1995 rates: 38% of that benefit went to the richest 1%.

It's time to even the score. Restore the aristocracy tax (a.k.a. the estate tax) on those who would inherit wealth and power, and put a high top marginal rates on the very rich, like the 50% that was there for most of the Reagan era -- or even the 90% that curbed the extremely rich during the socialist reign of Eisenhower.

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