Originally published 9/29/21
(Note that this is pre-pandemic. The Corona Virus has seriously disrupted our economy and altered government spending and taxation in a way that we hope is temporary. Consequently, I am using pre-pandemic figures.)
All of us pay too much taxes. At least, that is what we are told. Taxes are perhaps the most contentious thing about our government. It drives a political wedge between the haves and the have-nots. Moreover, having to give away money influences many of our opinions and even our values. It can make a Conservative person even more Conservative. Rather than say how much is the right amount and who should have to pay it, we will look at some facts of the matter, and Conservative and Liberal opinions on it. There is overlap with the topic of government spending, which is covered in greater detail in its own section.
How much are we talking about?
How much do we pay in taxes? If you include income tax, Social Security and Medicare taxes, the “average” single American in 2018 paid about $17,596 out of an income of $59,485, or 29.6%. (Bird, 2019) However, for those average income earners, only a fraction of their taxes are income taxes. Most of what they pay are “Payroll Taxes,” i.e., Social Security and Medicare taxes. (Peter G. Peterson Foundation, 2020)
Too high? Who says?
In 2017 survey, 62% of Republicans thought their taxes were too high. This improved remarkably to just 45% after the 2017 Tax Cuts and Jobs Act. Only 39% of Democrats thought their taxes were too high. (Carter, 2018)
Grover Norquist, advisor to the George Bush presidency and president of “Americans for Tax Reform,” states that we pay too much. (Norquist, 2019). Conservative former US Senator Jeff Flake believes that the maximum marginal rate should be reduced to 25%. (Flake, 2013)
“Taxation is theft!”—or not. Nearly ¾ of government spending is for Defense and Veterans Affairs, Social Security, and Medicare/Medicaid.
On the far end of the spectrum, we hear Conservatives repeat a popular meme: “Taxation is theft!” That statement deserves a little attention. Let’s take a brief look at how the money is spent. (Government spending is discussed in greater detail in its own section.)
The outlay of the US government for 2019 was $5.1 trillion. Over a quarter of it was for the military (18% for defense, 8% for veterans’ affairs) (Government Accountability Office, 2020), which Conservatives generally approve.
Social Security, accounting for 22%, (Government Accountability Office, 2020) is also something that Conservatives approve, particularly those who are less wealthy. (Republican views, 2014) That brings us up to nearly half of government expenditure, so maybe they will amend their statement to say, “Half of Taxes is Theft!”
The Department of Health and Human Services, which is mostly Medicare, accounts for another 24%. (Conservatives don’t want to give up Medicare, either.) (Kiley, 2018) Then there’s the interest on the Federal debt (8% of government outlay, which, as we have seen so far, is owed mostly for things Conservatives actually want and expect).
That leaves just 20% of federal spending that Conservatives might disagree with. (20% OF TAXES IS THEFT!) This remaining 20% includes education, transportation, science, agriculture, international affairs, the treasury, Justice (Oh, they want Justice!), and Homeland Security (ditto). (Government Accountability Office 2020)
That brings us to Welfare. For the 2011 federal budget, Republican Senator Jeff Sessions authored a Congressional Research Service report, titled “Welfare Spending—The Largest Item in The Federal Budget.” (Sessions, 2012) He listed 83 items, which he referred to as “welfare,” totaling about $1 trillion. He concedes that the spending was “primarily Medicaid and CHIP.” These are federal assistance for health care for the poor and for poor children. He did not include federal assistance for health care for adults over age 65 (Medicare), because it ceases being welfare on ones 65th birthday, and because it is a federal entitlement, with a very strong voting lobby behind it.
Sessions’ list also included items for food and housing assistance, education (including work study), and jobs programs. 4 are specifically for seniors, 2 for the developmentally disabled. In fact, a large majority of the items were for things consistent with Conservative core values, none of which puts money in the hands of the recipients. The people receiving the money are the health care providers, grocers, apartment owners, teachers and administrators.
Also included was The Supplemental Nutrition Assistance Program (SNAP), which provides benefits to help people in low-income households purchase food (i.e., food stamps.) In 2010, SNAP benefits averaged about $4.30 per person per day, for households whose average total household income was about $8,800/year. Nearly 45 million recipients, one out of every seven U.S. residents, received SNAP benefits in an average month in fiscal year 2011 (CBO, 2012), in the aftermath of the 2008 recession.
So, how about those welfare checks (TANF) that are what Conservatives are really complaining about? 0.54% of government spending in 2015. (Kearny, 2017)
0.54% OF TAXES IS THEFT!
On the other side. . .
2020 Democratic presidential candidate Bernie Sanders’ plan would require $44 trillion in new taxes, and Elizabeth Warren’s plan would raise federal spending 50%. (Wolf, 2020) Ms. Warren further advocated for an “ultra-millionaire tax,” which would take 2 cents of every dollar above $50 million from the wealthiest American families. (McLaughlin, 2019)
Is the current tax rate enough?
High as they are, in 2019, taxes and revenues were about $1 trillion short of spending, increasing the federal debt by that much. (Government Accountability Office, 2020)
Moreover, our tax rate is less than the average of the countries of the Organization for Economic Cooperation and Development (OECD), which was 36.1%. (Bird, 2019).
32nd place
As of 2018, US taxes were equal to 24% of GDP. That puts us down at #32 out of 36 member nations of the Organization for Economic Cooperation and Development. The range for those nations is 16 – 46%, average 34%. The average for European Union is 40%, (Kagan, 2020). Danes happily pay 45% of their income in taxes. That increases by another 7% in the highest income group. (Wiking , 2016) So, by that standard, our taxes are fairly low.
The IMF states that a country’s taxes should be at least 15% of GDP
The IMF states that a country’s taxes should be at least 15% of GDP, to be able to invest in it’s future and for stable economic growth. (Kagan, 2020) By that standard, our taxes are just a little more than what’s needed to keep us going.
Corporate Tax Rates: They used to be high, now not so much
In 2013, Conservative senator Jeff Flake complained that the combined Federal and State statutory corporate tax rates, at 39.1%, was among the highest in the world, and even the effective tax rates, after earmarks and exclusions, were still excessively high. He stated that these high taxes inhibit growth and make US companies less competitive. (Flake, 2013) Since that time, the corporate tax rate has been reduced from 35% to 21%. (Tax Policy Center, 2020) For 379 profitable corporations, the effective tax rate, after deductions, etc., was a mere 11.3%. For their 2018 income, 91 corporations, including Amazon, Chevron, Halliburton and IBM, paid no federal taxes at all. (Gardner, 2019)
Liberal politicians such as Elizabeth Warren and Joe Biden demand that corporations pay their “fair share.”
Taxes and the Economy
We’ll discuss the economy in regard to taxes here. We’ll explore the economy itself in greater depth in its own section.
The laughable Laffer curve
Is there a point where tax rates are so high that they harm the economy, retard growth, and end up reducing the revenue that can be collected by the government? This was addressed in a concept represented by the Laffer curve. In 1974, economist Arthur Laffer drew a graph (reportedly on a napkin while talking with president Gerald Ford’s staff) claiming that raising taxes above a certain optimum resulted in diminishing returns. This concept suggests that there is an optimum tax rate, i.e., it does not say that less is always better, at least in terms of revenue to government. It was a very simplistic model—just an arched curve on a piece of paper, without any numbers. (Chappelow, 2020) Nevertheless, the concept has been applied as a rationale for Tax cuts. The tax cuts of 2001 and 2003 produced only enough increased economic activity to make up for 10% of the lost revenue. Rather than reinvesting the money domestically, companies invested it overseas, or used it to buy back stocks, or paid it out as dividends. The 2017 tax cuts are expected to increase growth by just 0.7% annually, while increasing the debt by $1 – 2 trillion. Theoretically, the strategy of lowering tax rates to increase revenue might work when taxes are very high, at least over 50%. (Amadeo, 2020)
Taxes, in general, do not inhibit economic growth
It is often stated that taking money out of tax payers’ hands and having the government spend it harms the economy. However, the long-term growth rate in per capita GDP, from 1889 to 1989, was essentially unchanged, despite a large increase in taxation. It was highly variable in the short term with periods of recession and depression alternating with periods of expansion, but even this volatility decreased after taxation increased. Ultimately, changes in income taxes haven’t affected the long-term per capita growth rate, which, although fluctuating, hasn’t changed much since 1880. (Gale, 2014)
When we look at the results of tax cuts in the past, there is no compelling evidence to say that tax cuts themselves generated growth. During the periods of tax cuts, there was also considerable government spending, as well as monetary policies that increased the availability of money. These have been credited for the growth seen during those periods. (Gale, 2014)
Growth appears to depend on how the money is used. Tax dollars that are used for education and deficit reduction help the economy grow over the long term. (Huang, 2014) One study demonstrated that raising taxes on high-income households would not harm the economy, provided that the proceeds were directed towards debt reduction. (Huang, 2012)
Some economists claim that targeted tax cuts “distort” the economy, causing investors to put money in ventures just for the tax benefit, diverting it from where the market would otherwise direct it, and thereby diminishing the economy’s efficiency and productivity. (Gale, 2014)
Our federal debt, relative to GDP, is so high that it retards economic growth
Is our federal debt too high? As of the time of this writing, the US debt of $26.5 Trillion, compared to GDP of $19.4 trillion, is at 136% of GDP. A study by the World Bank found that if the debt-to-GDP ratio exceeds 77% for an extended period, it slows economic growth. Every percentage point of debt above this level costs the country 1.7% in economic growth. (Amadeo, 2020). Our debt to GDP ratio climbed steeply from 62% in 2007 to 84% by the end of 2009, and has been at or over 100% since 2012. (Macrotrends, 2020)
We need to pay more taxes, pay down our federal debt, and invest more in education
So, our overall tax rate, relative to our debt and GDP, is not very high compared to other developed nations. Even before the COVID-19 crisis, our tax rate has been inadequate to reduce our increased debt incurred during the 2008 recession, which will ultimately retard economic growth.
We, as a country, have shared values. A majority of us want the government to ensure that there is healthcare for our citizens (even the majority of Republicans want to continue Medicare and Medicaid) (Kiley, 2018), and we want our populace to be educated (Mahnken, 2017), which ultimately makes us better and more productive citizens.
We tend to agree on the general value of most items in the federal budget. We may rightly complain that the money is spent inefficiently, but that is expected in so large and cumbersome an organization as government. We should work together to try to make it work better.
While we may disagree on the prioritization and how much is spent on these items, we are fortunate to live in a democracy, in which we can debate and compromise to bring about optimal spending.
We seriously need to pay down our debt so that it doesn’t weigh down our economy.
Sad to say, we probably ought to be paying more taxes.
Is our tax structure fair?
The top 20% of American taxpayers paid 68% of the tax revenue collected in 2019.
What about who pays those taxes? Is the distribution of the tax burden fair? The top 20% of American taxpayers (with an income over 163,600) paid 68% of the tax revenue collected in 2019. The top 1% paid an effective rate of 30%, amounting to over ¼ of the taxes collected in 2019. (Peter G. Peterson Foundation, 2020)
What do we mean by “fair?” Does fair mean that everybody should pay exactly the same amount? What would be the result of that? The data for 2017 states that $1.6 trillion of income taxes was collected from 143 million taxpayers. That makes $11,189 per taxpayer. (York, 2020) Considering that the average income for the lowest quintile that year was $13,258, that wouldn’t leave much. And that’s not even including payroll taxes that cover Social Security, Medicare, and Unemployment insurance. Even for the 2nd quintile, making an average of $35,401, income and payroll taxes would leave hardly enough for rent. (Tax Policy Center, 2020).
So rather than paying the same exact amount, how about paying the same percent?
In 2018 the average income tax was 14.2%. Adding in Social Security and Medicare produced a total 29.6%. (Bird, 2019) With that, our 2017 lowest quintile taxpayer would be left with $9334, or just $778/month for all expenses. Meanwhile, our highest quintile, earning an average of $221,846, would be left with $164,166. So a flat percentage would leave some taxpayers in comfort and luxury, while many others would barely subsist. Some people say that that isn’t fair either.
The progressive tax system taxes some people much more, but they still have much more left over
The Congressional Research Service (Congress’s think tank) seriously contemplates these issues, as well as the contribution of state taxes, and even taxpayers’ lifetime tax burden over the course of their lives, trying to come up with something “fair.” (Congressional Research Service, 2010) What we have come up with is a “progressive” tax policy, where the poorest Americans pay little or no income tax, and the tax rate gets progressively higher as one’s income increases. (Thus the clever use of the term “progressive.”)
In 2019, a person’s 1st $9,700 (or $19,400 if married filing jointly) were taxed at a rate of 10%.
If the lucky person made more than that, the next $29,775 ($59550 if married) were taxed at 12%.
If you had income in excess of $510,300 ($612,350 if married) those dollars were taxed at 37%. (El-Sibaie, 2018)
The definition of “income” is complicated and way beyond my simple understanding. There are a plethora of deductions so that some of the income somehow doesn’t really come in.
It is worthwhile to note that, in 1918, in order to pay for WWI, the top marginal rate was 77%. In 1945, the top rate was 94%, to pay for WWII. The top rate remained at 91% until 1963. (Fontinelle, 2020) Americans used to be willing to have most or nearly all of the top fraction of the wealthy’s earnings taken to pay the country’s debts.
Personality Types
Conservatives tend to want to decrease the government’s regulation of business. In addition to the pain of having to give away money for someone else’s benefit, they also want to “starve the beast,” i.e., deny the government the resources by which it creates and enforces regulations. (Nelson, 2019)
Liberals tend to be more egalitarian. They favor taxing the rich in order to level the playing field for the poor. (Sawhill, 2017)
The essential difference in personalities between Conservatives and Liberals is examined in detail in the post, “Why are we split into essentially two parties?”
We have federal spending that most of us—in principal—agree on. Most of it is for national defense, health care and social security. Whether we pay too much or too little is a matter of opinion. From the middle, we seek to understand the values and assumptions made by Conservatives and Liberals.
And we have to pay for it. The money has to come from somebody. “Fair” is in the eye of the beholder. We cannot have everybody pay the same amount, so we strive to distribute the burden of taxation so that those who have more money pay more money.
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