Bruce Bartlett Says Our Taxes Are Not Too High
April 17th, 2009 . by economistmomIn response to the “tea party” movement around Tax Day, Bruce has explained (over the past couple weeks in his Forbes column) that U.S. taxes aren’t really too high. Not on an international basis, either quantitatively…
[T]otal 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…
…or when you consider that you get what you pay for (high-tax countries tend to have much more generous government services):
[O]ne can’t look just at the taxes people pay here or elsewhere without looking at what they get in return. It doesn’t automatically follow that the places with the lowest taxes are the best places to live and work. This is obvious when we think about where to buy a house. We always look at the quality of local schools as a major factor and are willing to pay higher property taxes in return for good schools. The same is true at the national level as well. Higher taxes may pay for services that people value and thus are not as burdensome as they might appear at first glance.
And this week Bruce points out that the current U.S. tax burden isn’t high from an historical perspective, either:
[I]n 2007, the most recent year available, the median family paid 5.91% of its income to the federal government in the form of income taxes. This is half the tax rate paid in 1981 before the Reagan tax cut took effect. Although the 2007 rate is up very slightly from its 2003 low point, it is still well below the rate that prevailed from the 1950s through the 1990s…
Some may wonder about marginal rates–the tax on each additional dollar earned. This year, the median family will face exactly the same marginal tax rate it has faced since 1987: 15%. This is down substantially from the 1970s, when the median family paid as much as 25% on the marginal dollar of income.
Thus, it is hard to find evidence that taxes are rising or unusually high. This is confirmed by poll data. According to Gallup, only 46% of Americans think their federal income taxes are too high–the lowest percentage recorded since 1961. In 2000, 65% of people thought their taxes were too high; last year the figure was 52%.
Love the cross-country perspective. Mindful of the need to avoid oversimplifications, I think we learn a lot about ourselves by looking at other countries’ experiences. Of course I’m hard-wired (and paid!) to think that way.
[I]n 2007, the most recent year available, the median family paid 5.91% of its income to the federal government in the form of income taxes. This is half the tax rate paid in 1981 before the Reagan tax cut took effect. Although the 2007 rate is up very slightly from its 2003 low point, it is still well below the rate that prevailed from the 1950s through the 1990s…
That pretty much agrees with the data that I’ve seen. As can be seen from the first graph at this link, the effective tax rates of the bottom four quintiles have all decreased since 1981 and the effective tax rate of the top quintile has remained fairly stable.
In any case, it seems like I always feel more optimistic after reading Bruce Bartlett. I believe that our system requires at least two strong parties, each with thoughtful people expressing their views. Bruce Bartlett has always seemed to be an especially independent and rational thinker on the right. He was one of the first that I recall who did not buy into the “all tax cuts pay for themselves” myth. That’s not to say that he hasn’t supported certain tax cuts. But he has always seemed to do so based on honest numbers. That seems to fit in very well with the general tenor of this site. Thanks for posting the observations of he and others like him.
FYI, the data I used are not weighted averages. They simply take the median family income and use current tax law to calculate a tax rate.
Thanks to B. Davis. Too bad no one will employ me to do this sort of analysis.
FYI, the data I used are not weighted averages. They simply take the median family income and use current tax law to calculate a tax rate.
True, my data doesn’t even show the median tax rate. The blue line in the first graph shows the mean of the 3rd quintile. That’s different from the median of the 3rd quintile which I believe would be the median. In any case, my data shows similar trends as yours does.
Thanks to B. Davis. Too bad no one will employ me to do this sort of analysis.
That is too bad. Have you ever thought of creating a site which contains the analysis that you do for your columns? There is obviously a need for the very complex analysis done by academics and professional economists. However, I’ve long thought that there is also a need for basic analysis of economic and budget matters that can be understood by the average person. That was part of the reason that I started my site. In addition, I think that it’s critical to provide easily verified sources (via links, if possible). This allows the reader to judge the believability of the source and to verify and recrunch the numbers if desired. I noticed that you did provide clear links in the couple of columns of yours that were referenced in economistmom’s post. I also think that a site which contained your analysis would receive a good amount of traffic. In any event, thanks for your informative columns.
Everytime I see the “other countries pay higher taxes” argument to support raising our taxes, I’m reminded of the age-old advice from mothers everywhere “Just because your friends are jumping off a cliff, doesn’t mean you should too”.
@Jon Biggar: Yes, definitely a good comparison. Living in England or the Netherlands is exactly the same as jumping off a cliff. Those countries are a true horrorshow. I don’t know how anyone can stand to live there. They, like, speak a whole different language over there in Holland, do you really want to learn another language?
And OMFG, they have dikes! Talk about the gay agenda…
Wait, it’s not those kind of dikes, but ones like we have in New Orleans. I’ll bet ours are much better.
There’s something I don’t understand. Gene Steuerle recently publicly said the fiscal problem is spending, and no possible tax increases can solve the problem, “If spending is always growing faster than the economy, you never catch up”. And he’s no tea party guy.
Keith Hennessey just illustrated this reality for the long term in in pictures. CBO just illustrated this reality for the short term in a picture now on Mankiw’s blog (April 21 entry) which shows Obama’s budgeted spending as a percentage of GDP from the end of the recession to 2019 shooting right up at a 30 degree angle.
Moreover, a number of respected budget analysts recently cited at Tax Analysts (not a tea party publication!) now say tax increases could be outright bad by politically legitimatising and “enabling” this completely unsustainable spending course. (Sorry, but the one link per comment rules here prevents links to all these sources.)
For instance, should Congress restore pay-go budget rules that require new spending programs to be financed by new taxes, you can bet it would proclaim this to be proof positive of its “fiscal responsibility”, relieving it of need to do more — even as pay-go rules take the country straight to 20%-of-GDP deficits and economic collapse in about three decades.
Similarly, a tax hike that serves as a “down payment” on a big new program, as Obama has proposed for his national health care, will only increase the budget gap. A “down payment” isn’t going to cover the cost of national health care any more than a down payment on a house covers the cost of the house.
So here’s what I don’t understand: Since the problem is huge spending increases in the long term, and big spending increases in the short term, and no possible tax hikes can begin to cover either, (and tax hikes might even be bad by politically enabling this unsustainable course of spending) … why are so many “budget hawks” totally ignoring spending cuts, while going on and on about the need for tax hikes … in particular getting hyper over, examining and parsing the trivial sized proposed Obama hikes only on incomes over $250k? As if hikes that small are going to do anything meaningful to the budget gap (except enable the gap via justifying Obama’s planned spending increases?).
Since spending clearly is the overwhelming problem, why are there no specific proposals for serious spending cuts? Is it because spending cuts are very unpopular and have no natural constituency (as opposed to tax hikes?) and deficit hawks don’t want to be politically ignored? Face it, true “deficit hawks” are going to politically marginalized whatever happens — so they might as well speak truth to both power and the masses, instead of try to be popular with anybody.
Here. I’ll go first by making a simple, clear, and entirely credible proposal to cut spending permanently by near 2 points of GDP:
Adjust the Social Security benefit formula *today* so that future benefit cost will never exceed the payroll tax. Do it by a combination of deferring the retirement age a little longer and means-testing the richest 15% or so of retirees out of part of their benefits. This is entirely politically plausible — Congress already started both processes in the 1983 reform, so this just expands on present policy.
Moreover, how is it even avoidable? The 1983 changes were made in the face of a much smaller revenue shortfall than will hit in the 2020s. The political incentives Congress faces are the same. So how can we not expect more of the same?
Hey, if “tax cuts for the rich” are so bad, then don’t tax hikes on the poorer to fund cash transfers to the rich have to be even worse? What progressive is going to vote for that in 2020?
If we recognize that progressive reality of the future today, then even liberals could start getting a handle today on the spending cuts needed to close the budget gap meaningfully. (In fact, a WaPo editorial just suggested something like this.)
That near 2 pts of GDP is nothing to sneer at. And if we adopted the same simple, fair and reasonable principles to Medicare — retirement age starts a little later, and “‘the rich’ pay for their own care, rather than be carried by those much poorer than them” — we’d well more than double that saving and be off to a real good start!
But, hey, that’s just my idea, anyone who doesn’t like it can come with your own. But … come up with your own!
Because IMHO, any “deficit hawk” who just proposes little tax hikes — in fact, who fails to try to use any proposed tax hikes to lever larger real and specific spending cuts through the political process (the same deal as was used to close the spending gap in 1983) — just isn’t serious, and doesn’t deserve to be taken seriously.
As the analysts at Tax Analysts are saying these days, pre-Bush “baselines” and “paygo rules” and such ilk, even if fully enforced, only lead the nation straight to fiscal calamity and 20% of GDP deficits.
What is needed now for real effect is “Percentage-of-GDP deficit targeting”. Nothing else will save the national credit rating. Try doing that without real spending cuts.
Jim,
I, too, favor means testing of Social Security and Medicare, among other measures, to reduce projected long-term spending, but I think there are a number of implicit premises in your comment that should be elaborated upon and examined.
First, an argument from someone that we cannot (or should not) solve our long-term fiscal imbalance problem entirely on the tax side is, of course, not equivalent to an argument that tax increases should not be part of the solution, nor even equivalent to an argument that we should solve the problem mostly on the spending side, let alone equivalent to an argument that tax increases would exacerbate the problem. As I pointed out to Keith Hennessey on the thread to which you linked, to say, as he did, that “America’s long run fiscal problem is spending growth, not taxes”, is misleading both as diagnosis and as implied prescription. It implies a false dichotomy, as I explain here http://keithhennessey.com/2009/04/16/americas-long-run-fiscal-problem-is-spending-growth-not-taxes/comment-page-1/#comment-336 and http://keithhennessey.com/2009/04/16/americas-long-run-fiscal-problem-is-spending-growth-not-taxes/comment-page-1/#comment-338 .
Most well-informed, honest people within the broadly-defined ideological mainstream of American acknowledge that the solution will – and should – be a combination of higher revenues (well above historical averages as a percent of GDP) via both growth and higher tax rates and/or new taxes (e.g., carbon; VAT; whatever) AND substantially reduced spending vs. current long-term projections. I don’t know which falsely self-proclaimed “deficit hawks” to whom you are referring – who are focusing exclusively on tax increases and ““totally ignoring spending cuts” (reducing projected long-term spending), so perhaps you should identify whom (what groups, types or individuals) it is to whom you are referring. If you are referring to much of our political leadership, hyperpartisans/ideologues among the public and/or the media personalities and sources that feed them a constant supply of red meat for profit, then I’d agree that they are not worthy of the label “deficit hawk” *, and I’d add that that point applies to both “sides” – those who insist, without legitimate supporting argumentation and proposals, that we can solve the problem entirely on the tax side and those who do the same re: the spending side. But if you are referring to anyone outside of such groups, please clarify. [* although for a given level of spending (more on that below), it is generally more fiscally responsible to pay for it (or pay for more of it) concurrently via taxation rather than exacerbate already unsustainable projected levels of debt-to-GDP, unless, as you point out, the tax increase card can be used effectively as a negotiating tool, holding out on tax increases even at the expense of greater deficits or the threat thereof, in order to achieve spending reductions – a big “IF” which could turn out to be as irresponsible as tax cuts ostensibly adopted with a “Starve the beast” rationale) ]
Re: whatever was said by those “respected budget analysts” cited at Tax Analysis, first, please provide link to that particular content in your next comment. It is unclear what it is you are saying their point is and what the supporting arguments are. Is the argument regarding “enabling” essentially the “Don’t feed the beast” argument (cousin of the extreme version of “starve the beast”), meaning the premise that any incremental revenues will only cause an equivalent amount of incremental spending rather than deficit reduction (ceteris paribus)? If so, where is the analytical, empirical or theoretical support for that contention? The question of such “Granger causality” (a.k.a., the “tax-spend hypothesis” or the “revenue-expenditure nexus”) has been a subject of a number of papers (including some meta analyses), and my impression from what I’ve read thus far is that, although incremental revenues may induce some incremental spending, there is not strong support for the hypothesis of a roughly dollar-for-dollar relationship (all incremental revenues causing equivalent incremental spending rather than any significant deficit reduction). I realize that a more precise question would include the impact on GDP along with the impact on revenue and spending, to gauge impact on debt-to-GDP, but my point still applies – if their argument is that tax increases will just “feed the beast” and won’t reduce our long-term fiscal imbalance (or make it even worse because it would cause equivalent incremental spending combined with lower GDP (ceteris paribus), where’s the supporting argument?
I should also note that intuitive and empirical arguments can be (and have been*) made that higher taxation actually increases political pressure lower spending (and lower taxation lowers this pressure to lower spending) because higher taxation makes taxpayers more aware of the cost of spending (as opposed to financing more of the spending via borrowing, thus deferring the cost to taxpayers). I’m not contending that such is the net direction of the relationship, only pointing out another source for skepticism regarding the extreme version of the “Don’t feed the beast” argument which implies that no deficit reduction would result from higher revenues via tax increases. [*http://www.cato.org/pubs/policy_report/v26n2/cpr-26n2-2.pdf and http://www.nber.org/papers/w13548 ]
Lastly, re: “Percentage-of-GDP deficit targeting”, I’m just wondering if you are saying with should reject Keynesianism altogether and stick to annual deficit targets regardless of economic cycle considerations, or if you are not advocated such rigidity, but simply more explicit goal-setting per that metric, perhaps with procedural impediments to overriding (e.g., requiring deliberate, conspicuous, widely-supported legislative action to override).