It’s April 15th and We’re Lovin’ It

The Washington Post Sunday - - Out­look -

Wques­tion about taxes is: Who should pay them? Pro­gres­sives ar­gue that the gov­ern­ment should use the tax code to re­dis­tribute in­come from the wealth­i­est to oth­ers, while eco­nomic con­ser­va­tives worry that high taxes will slow the econ­omy and hurt the poor.

To a large ex­tent, the poor have been taken off the tax rolls al­to­gether, re­flect­ing the unan­i­mous view of both con­flict­ing po­lit­i­cal camps that gov­ern­ment should not un­duly stress the down and out. With the ex­pan­sion of the Earned In­come Tax Credit and child tax credit, for ex­am­ple, many poor peo­ple have neg­a­tive fed­eral taxes, of­ten to an ex­tent large enough to off­set other taxes paid else­where, such as sales taxes. In 2004, a sin­gle mother with two chil­dren and an in­come of $14,000 had a to­tal tax bur­den that was on net a sub­sidy of $1,127.33. Gov­ern­ments mailed her more money than she paid. hat about those who do pay taxes?

To an­a­lyze them more care­fully, I turned to the U.S. Depart­ment of La­bor’s Con­sumer Ex­pen­di­ture Sur­vey, which con­tains data on house­hold ex­pen­di­tures, as well as on in­come and taxes for a large sam­ple of Amer­i­cans. Us­ing it as a base, I cal­cu­lated the av­er­age taxes paid (in­clud­ing fed­eral and state in­come taxes, sales taxes, prop­erty taxes and fed­eral pay­roll taxes) for typ­i­cal fam­i­lies and com­pared that, for con­text, to the other things these fam­i­lies spent money on.

The ac­com­pa­ny­ing chart con­tains the cal­cu­la­tions for two sce­nar­ios — a fam­ily of four with an in­come of $50,000, and a fam­ily of four with an in­come of $150,000. The chart shows the av­er­age to­tal taxes paid and av­er­age ex­pen­di­tures for two years, 1983 and 2003 (the last year for which data are avail­able). Look­ing first at the av­er­age Amer­i­can fam­ily with a $50,000 in­come, a cou­ple of things jump out. First, even though the fam­ily has a rel­a­tively low in- come, the amount of money it paid in taxes at all lev­els was strik­ingly high in both years. In 1983, it paid 29 per­cent of in­come in taxes. In 2003, it paid 31 per­cent.

Taxes were eas­ily the largest bud­get item for this fam­ily in both years. In 2003, for ex­am­ple, the fam­ily spent 24.6 per­cent of its in­come on its home, and 9.9 per­cent on trans­porta­tion.

The sec­ond point worth not­ing is how lit­tle things have changed over time. Congress has been very busy tin­ker­ing with the tax code since 1983 — adding child cred­its, ex­pand­ing in­di­vid­ual re­tire­ment ac­counts, patch­ing the al­ter­na­tive min­i­mum tax, etc. — but the ba­sic take after all the ker­fuf­fle has changed very lit­tle for this fam­ily.

Look­ing now at the fam­ily with the $150,000 in­come, taxes are once again the No. 1 item in the house­hold bud­get in both years. In 1983, the gov­ern­ment’s take was 30 per­cent, com­pared with 23.7 per­cent spent on the next big­gest item, the fam­ily’s home. In 2003, the take was 30 per­cent, com­pared with 23.5 per­cent go­ing into the home.

Lots of things have changed, but one thing is con­stant: Gov­ern­ment has been rob­bing Peter to pay Peter. The sim­i­lar­ity be­tween the tax pro­por­tion for the high­in­come fam­ily and that of the mid­dlein­come fam­ily will sur­prise many. That’s be­cause the fed­eral in­come tax, which is steeply pro­gres­sive — the higher your in­come, the more you pay in taxes — gets all the me­dia at­ten­tion. But other taxes that are less vis­i­ble, such as sales taxes, hit low- er-in­come fam­i­lies with a heavy thud and quickly fill in the gap be­tween their lower fed­eral in­come taxes and the higher rates paid by those with high in­comes.

This is ev­i­dent in the cal­cu­la­tions that went into this chart. The fed­eral in­come tax in 2003 for the fam­ily earn­ing $50,000 was about $3,800, whereas it was about $17,500 for the fam­ily bring­ing in $150,000. But ev­ery­thing else worked to more than off­set this dif­fer­ence. Mid­dle­class fam­i­lies spent a larger share of their in­come and thus paid more sales tax. Gaso­line and prop­erty taxes also ate up a larger share of the mid­dle-class fam­ily’s bud­get. Fi­nally, the pay­roll tax is limited to 15.3 per­cent of in­come, so the wealthy paid a smaller share.

Gov­ern­ments at all lev­els have vo­ra­cious ap­petites for cash, but tak­ing rev­enue from the mid­dle class is a po­lit­i­cally risky ma­neu­ver; after all, that’s where the votes are. So law­mak­ers have crafted in­ge­nious ways around the dilemma, imposing hefty levies on those with lower in­comes but re­ly­ing on stealth taxes to do it. If you’re go­ing to tax wid­ows and or­phans, you’d bet­ter be quiet about it; use a sales tax.

Gov­ern­ment thus takes more from the wealthy through in­come taxes, but ex­tracts more from the poor with all the other taxes. By do­ing this, politi­cians get to pre­tend that they are vir­tu­ously re­dis­tribut­ing wealth from the richer to the poorer, and they can main­tain that fic­tion with­out sac­ri­fic­ing the cash. Voters seem to like this ap­proach.

Count­less other mi­nor fea­tures add to the tax sys­tem’s near-im­mor­tal­ity. For ex­am­ple, the mort­gage-in­ter­est de­duc­tion, an eco­nom­i­cally un­jus­ti­fi­able bauble, pleases mil­lions of home­own­ers, cre­at­ing a nat­u­ral con­stituency against change. But the most in­ter­est­ing phe­nom­e­non is the steady scale of the over­all take. If fed­eral taxes are low­ered, then peo­ple will have more money to spend, and they will end up pay­ing more in sales taxes. Be­cause of this, and more ex­plicit off­sets, gov­ern­ments at all lev­els have for some time been tak­ing a bit more or a bit less than 30 per­cent of in­come from a large frac­tion of tax­pay­ers.

Which must mean that 30 per­cent is some­thing of a magic num­ber. In fact, a re­cent re­view of polls by my col­league Kar­lyn Bow­man found that “peo­ple think Amer­i­cans should not pay more than 25 per­cent of their to­tal in­come in taxes.” If you con­sider that pay­roll taxes that go into So­cial Se­cu­rity de­liver fu­ture ben­e­fits and so may not be fully thought of as a tax, then the amount that gov­ern­ment raises from ci­ti­zens seems to be a lit­tle less than the amount they tend to think is fair.

King Ge­orge III’s taxes came to the colonies like a new species but failed to sur­vive. Un­like to­day’s gov­ern­ment, which spends tax rev­enue on parks and schools and other things that ci­ti­zens cher­ish, the king failed to pro­vide a good story about why he needed the money. But other taxes found their way here and have evolved and flour­ished.

A sim­pler, more eco­nom­i­cally ef­fi­cient code is in­dis­putably de­sir­able. Re­cently re­view­ing the eco­nomic lit­er­a­ture, Berke­ley econ­o­mist Alan Auer­bach and I con­cluded that a fun­da­men­tal tax re­form could the­o­ret­i­cally in­crease all our in­comes by an av­er­age of about 10 per­cent over 10 years, sim­ply by re­mov­ing the cur­rent in­ef­fi­cien­cies in the tax code.

But such a broad change may never hap­pen, be­cause law­mak­ers would have to ac­knowl­edge that the ex­ist­ing code was forged in a po­lit­i­cal en­vi­ron­ment. And who’s to say that pol­i­tics wouldn’t lead a re­form back to the same place again? Our poli­cies of­ten look bizarre and ir­ra­tional in iso­la­tion, but viewed as a re­sponse to the give and take of democ­racy they can ac­quire a new­found lus­ter.

The tax beast that has evolved in this land may be a mon­stros­ity, but it is our mon­stros­ity.

KHas­sett@aei.org

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