Having a European background, we’re somewhat bemused by the apocalyptic terms the tax debate is often expressed in in the US. Any increase in Federal taxing and spending is met with very dire predictions from some quarters. The figures, however, seem to paint a more optimistic picture..
We just published an article elsewhere which argued:
- The quality of government is more important than it’s size, as there are examples of well functioning, dynamic (even innovative) economies whose public sector is 1.5-2 times that of the US (in % terms)
- There are forces at work in rich economies that automatically increase the size of the public sector, and by and large these are unavoidable and/or positive (the latter because tastes tend to favour public goods as economies get richer).
All of this seems inoffensive to European economists, but we’ve got instantly branded a ‘partisan hack’. Apparently we hit on some cultural sensitivities. Acknowledging the different cultural heritage of the US, let’s instead look at some figures.
Turns out that taxes are really quite low for middle incomes, even adding pay-roll taxes, astonishingly low for European standards. So we say to our American friends, we acknowledge the different cultures, but from a European point of view, it’s somewhat hard to understand what this tax revolt is all about. Although, perhaps somewhat surprisingly, we do agree with the critics like Mr. Armey on one point..
Americans’ Tax Burden Near Historic Low
Despite Obama’s Pledge, Some Fear Future Hikes As Debt Grows
By Lori Montgomery
Washington Post Staff Writer
Thursday, April 16, 2009
As thousands of anti-tax protesters rallied across the nation yesterday and the president promised tax cuts for most, new data showed that the federal income tax burden is already hovering near its lowest level in three decades for all but the wealthiest Americans.
The nonpartisan Congressional Budget Office estimates that the average family forked over barely 9 percent of its earnings to the IRS in 2006, the most recent year for which information is available. The effective tax rate hit its all-time low in 2003 and has since crept up only slightly.
Middle-class families — to whom President Obama has delivered even more tax relief since he took office in January — have fared especially well, according to the CBO. The middle fifth of taxpayers, who earned an average of $60,700 per household in 2006, paid just 3 percent in federal income tax that year, down from a high of 8.3 percent in 1981.
With federal income taxes so low for so many families, a majority of those surveyed by Gallup last week said the amount of federal income taxes they pay is either “too low” or “about right,” compared with 46 percent who said their tax bills are “too high” — one of the most positive assessments of the federal tax burden since Gallup began asking the question in 1956.
Gallup analysts said the poll results may also reflect confidence in Obama’s pledge not to raise taxes on families making less than $250,000 a year, a vow he repeated yesterday in a tax-day speech at the Old Executive Office Building. Obama presented nine taxpayers who he said were better off because of tax breaks enacted in the recent economic stimulus package, including a tax credit for working families worth up to $800 this year.
“We start from the simple premise that we should reduce the tax burden on working people, while helping Americans go to college, own a home, raise a family, start a business and save for retirement,” Obama said. “Those goals are the foundation of the American dream, and they are the focus of my tax policy.”
Still, thousands of protesters marked the day federal income taxes were due by attending hundreds of “tea parties” from Florida to Hawaii, organizers said. The rallies were promoted by FreedomWorks, a conservative nonprofit group led by Richard K. Armey, a lobbyist and Texas Republican who once served as House majority leader.
In a pre-rally telephone interview from Atlanta, where he was preparing to speak on the steps of the statehouse, Armey conceded that “the federal tax rate right now is at a good level.” But, he said, “there are very few people who believe Obama will be content to leave it at that.”
Armey said the real target of the protesters’ ire is not the current tax rate but the much higher one that will be needed to pay for trillions of dollars in financial-sector bailouts; the stimulus package, which is projected to add nearly $800 billion to the federal debt over the next 10 years; and Obama’s ambitious health-care and education initiatives, which are projected to raise the debt by trillions of dollars more.
“There’s no way he can do the spending he does and cut taxes for most people,” Armey said. “People know that spending inevitably means more taxes.”
The White House stuck to its own low-tax message yesterday, as Obama repeated his “clear promise that families that earn less than $250,000 will not see their taxes increase by a single dime.” Asked whether Obama is confident that he can stick to that pledge throughout his administration, press secretary Robert Gibbs told reporters: “He is. He is. He is.”
To add heft to that promise, the White House released a lengthy list of tax breaks included in the stimulus package to benefit college students, car buyers, first-time home buyers, families with children, poor people and others — all told, about 120 million households.
Overlooked was one big drawback for the nation’s finances: More people are likely to pay no income taxes at all.
According to the most recent IRS statistics, about 45 million households — a third of all filers — owed no federal income tax after taking their credits and deductions in 2006. This year, with the profusion of new credits in the stimulus package, about 65 million households — or 43 percent of all filers — are likely to owe no income taxes, according to a new analysis by the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution.
Of course, even filers who have no income tax liability still pay federal taxes, due in large part to the payroll tax, which funds federal insurance programs like Social Security. According to the CBO, taxpayers shelled out an average of 7.5 percent of their earnings in payroll taxes in 2006.
But if the recession lingers and Congress and the White House consider another economic stimulus package, that tax could temporarily disappear, as well. Economists say one of the first items that should be considered is a payroll-tax holiday.
——[End of Article]——-
It might come as a surprise to some, but we think Mr. Armey has a point. We can’t see how taxes are going to stay this low unless the economy makes a truly dramatic recovery, and some of the tax increases will probably be on people below that rather generous $250,000 income line.
On the other hand, even if the tax on average families goes up a couple of points, it’s still very low compared to many other countries, and in no way would that choke the economy.
Public goods like healthcare, roads, defence, administration (all those new regulatory bodies to prevent financial markets and institutions going off the deep end again, or new Katrina’s wreaking havoc…), police, and, especially, education cost money, and increasingly so. But it’s worth it, as long as Government stays relatively lean and efficient. Bigger Government isn’t necessarily worse Government.