The Congressional Budget Office just released a very thorough update of their high quality household income series, adding data through 2009. There’s so much in here it will be weeks before I can work my way through all of its nooks and crannies, but so far, two things jumped out at me.
First, man, I gotta say: when it comes to federal taxation, there is just no case in the data to be made in any way, shape or form that we Americans are overtaxed. Not middle income, not high income—not the overall average. Not relative to other countries (figure 4 here), and not relative to our historical rates back to 1979.
The top line in the first figure below shows the decline in the overall average federal tax rate for all households. The rate is relatively constant at around 22% from 1979 to the big tax cuts of the GW Bush years (the ones we’re still arguing about!), when they start to slide; the decline at the end of the series is both cyclical and policy driven, as pretax income declines in the Great Recession and Recovery Act tax cuts lowered tax liabilities.
By the end of the series, the average US household was paying 17.4% of their income in federal taxes, compared to 22% in 1979. The main culprit is the income tax; all the others in the figure stay relatively constant.
The bottom slide shows a long downward trend in the effective rate paid by the top 1% starting in the mid-1990s, and particularly large cyclical effects at the end of the series for middle and low-income households. At their peak average income in 2007 ($1.9 million), had the top 1% paid taxes at their mid-90s effective rate (35%) instead of their 2007 rate (28%), their tax liability would have been $134,000 higher.
We clearly are facing hard times, and there’s a lot of powerful data in here for future posts on how households across the board, including the top 1%, got whacked by the downturn (notably, however, the top 1% started climbing back in 2010–other groups have yet to do so).
But I just don’t see how, based on these facts, anyone can make a case that we’re overtaxed, and to be clear, this includes all federal taxes, including business taxes. I also think there’s a strong, reality-based case in here for new revenues in any deal to stabilize the debt situation, starting at the top of the income scale, as I argued earlier today. But like I said, that’s based on the facts. Based on Buddha-knows-what, people will continue to say whatever the h-e-double-hockey-sticks they want.
Second…actually, no time for that right now…more to come.
How does figure 5 change when local and state taxes are included (I would presumed one would use the median)?
Lots of people have asked about this…For the most part, state and local taxes and more regressive than Fed taxes, so you’d see higher rates at the bottom and middle, for sure. The question is, would they change the trend? I’m not sure, because there’s not a ton of work on this–it’s quite demanding to collect all the information about state/local tax structures…CTJ does the best work on it: http://ctj.org/ctjreports/2012/04/who_pays_taxes_in_america.php
I doubt that state/local taxes have trended up enough to offset the negative trend in effective federal rates I document in the post.
Your right that state and local taxes offset the progressiveness of federal taxes, but isn’t it fair that each bracket of taxpayers have a similar share of both taxes and income? It is confusing to hear policymakers to talk about how taxes are fair or unfair when no one knows what they consider fair.
Also one more thing, how does the average tax rate differ if the 1%is disaggregated to .01% and .001%? Just curious.
I disagree with your conclusion that Americans are not overtaxed. You omit state income, local (realestate and personal property), sales taxes, and others. I did a little calc on my total 2010 tax levy. I made $219,000, and paid 48% of that in taxes. I think that percentage is right up there at the top of the list of “other countries.” Oh, and that doesn’t include gasoline, meals and lodging, telecommunications, etc… Count me out at 50%
Do any European tax figures include federal taxes for health care?
First, the middle three quintiles makes up a huge percentage of the population. The second and third quintiles may pay less in taxes, but they’ve been whacked in basic cost of living, particularly housing. And since many in those qunintiles rent (particularly in those states with jobs), they don’t get the housing subsidy that homeowners get.
Add in state and local taxes, sales taxes, payroll taxes, and property taxes and the story changes.
Here in NJ at the margin the top rate would be 35% federal, 8.25% state, ~5% payroll, 6% sales taxes, and ungodly property taxes. Not overtaxed???
Rates will go up for Obamacare let alone the potential expiration of tax cuts. Not overtaxed???
Under Clinton, on average, the top 5% of earners (AGI) had 31% of income and paid 52% of income taxes. The bottom 50% had 14% of income and paid 4.36% of income taxes/
Under Bush, top 5% saw income share rise to 34% but income tax share rose to 57.2%. For the bottom 50% income share fell to 13.25% and the share of income taxes fell to 3.24%.
So for bottom 50% share of income was 425% of share of taxes. For top 5%, share of income % was 60% of share of taxes paid.
Tax code actually got more progressive under Bush!! Shhh, dirty secret.
As you comb through these stats, remember that comparisons of taxation rates between countries is misleading. In the USA we pay low taxes, but we also get very little back for our taxes, while in other first world countries they get health care, child care, paid leave, and decent retirement programs, all of which in America are paid to the private sector (if at all). If my median annual middle class income is $50,000 and my actual Federal tax rate is about %20, that’s $10,000 in taxes. Add in the additional $12,000 the average American family spends on health insurance each year that citizens of other first world countries do not have to spend, and you are looking at more like 44%. Child care adds a few more thousand dollars to the total. State and local taxes, sales taxes, gasoline taxes, and an wide assortment of other government fees and charges push the figure to way over 50%. Americans are dissatisfied for a good reason.
Yes–someone else asked about this too…the VATs in Europe/Scandinavia, eg, collect much more revenue and use it to provide many more public goods, including health care!
-“First, man, I gotta say: when it comes to federal taxation, there is just no case in the data to be made in any way, shape or form that we Americans are overtaxed. Not middle income, not high income—not the overall average. Not relative to other countries (figure 4 here), and not relative to our historical rates back to 1979.”
-“Why not just let them all expire? Because a tax increase to all federal income-tax paying households is both economically worrisome — it would create too much fiscal drag right now — and too much to ask of middle- and upper-middle income families whose incomes were largely stagnant in the 2000s, fell sharply in the recession, and, unlike those at the top of the scale, still don’t have much to show for the recovery.”
I must admit, I’m having more than a bit of hard time buying into the logic of the second statement Jared. How well are these assumptions supported by data on the actual spending of these “middle- and upper-middle income families”? We already know that those with a high MPC aren’t paying much in income taxes and most of the tax dollars not collected go to those with the lowest MPC of these two groups. Are there any estimates of how much of these avoided tax payments are going to savings and paying down debt instead of spending? There are many better solutions to continuing these tax gifts to those in little need of assistance (e.g. collect the taxes & increase the EIC in the same amount to be sure the money is actually spent) relative to those that are bearing most of the consequences of this disaster (the unemployed).
This policy of negotiating some compromise on these tax cuts also severely understates the importance of “driving a stake through the heart” of these Bush tax cuts that are “sucking the blood” out of our government’s ability to provide the minimum level of services its citizens require. The Republicans have succeeded in blocking any attempt at generating new revenues and will continue to do so. At a minimum, we need to address this revenue shortfall through what is now, do to the intransigence of the Republican Party, the only available option. The actual spending impact will likely be minimal and can be addressed through other options. Its way past time to put an end to this charade!
Good points, but here’s what I think:
There are surely more stimulative uses for the $150bn–one year cost of middle class tax cuts. But they’re nowhere near to the table of what’s possible right now. Re “driving a stake…” I couldn’t agree more, but the relevant question, again, given what’s on the table, is can we finally allow the highend cuts to expire? That would be a huge accomplishment…this is no time to let the best be the enemy of the good.
-“…the relevant question, again, given what’s on the table, is can we finally allow the highend cuts to expire? That would be a huge accomplishment…”
It certainly would be a huge accomplishment; and its already achieved by doing nothing! Why do we let the Republicans unilaterally decide what’s on the table? Maybe its time to put rejection of the highly coercive Norquist pledge on the table?
I think you have greater confidence in the ability of the administration to negotiate a worthwhile compromise than is likely given the opposition. If you’re not willing to walk away, you’re already at a disadvantage that the current crop of Republicans will surely exploit. Doing nothing is an option too, often the most overlooked, even when it might be the best option.
This is all irrelevant; the average American hates other Americans so much that any taxation feels like theft.
MMT makes a very compelling case that we are currently overtaxed.
>But I just don’t see how, based on these facts, anyone can make a case that we’re overtaxed
Rent, which should include things like the license to practice medicine (since residencies per year are limited despite many applicants from within and outside the US) will be higher when inequality is high (due, again, to imperfect price discrimination) which… might lead to these things having a higher cost. Health costs have definitely gone up, since most people have insurance where everyone pays for expensive or unnecessary care. Anecdotally, housing costs in places like New York have been going up which probably affects people with low income, possibly causing them to wish taxes were lower…
If no one thought we were overtaxed, would they have any interest in news stories about $17k drip pans? Maybe that would just be seen as proof of high quality, due to the assumption that everything about the US is, and should be, better than in say Europe?
Dr. Bernstein (and OTE’ers), relevant to this post is an OpEd in today’s NYT by Hanauer and Liu, authors of “The Gardens of Democracy” (2011), about the economic metaphors we use and how those affect our thinking about taxation (and other topics).
I happen to agree with their analysis that (economics) metaphors matter, and the EMH metaphor assumes that taxes only ‘extract’ from the ‘jobs machine’ that we call ‘The Economy’.
It logically follows that taxes are assumed to always and everywhere ‘shrink the pie’ of economic activity. Ergo, this EMH metaphor sets up an intellectual straight-jacket in which tax rates always have to be ‘lowered’, as a consequence of the serious misconception that ‘rich people create jobs by investing’. (After all, due to the limitations of the EMH metaphor: if markets are always perfect, then anything — like taxes — that happens ‘outside’ markets is assumed to be economically dire and curiously damaging to markets.)
We’ve seen how this metaphor plays out, and the results are ludicrous. We’re caught up in the sticky webs of our own bad metaphors, arguing over arcane tax regs and rates; meanwhile, economic inequality and social instability escalate. We end up spending our energy arguing about whether we pay ‘more than people in Nation X’, as if we’re all racing our ‘economic engines’ in some kind of mad-dash F1 series of Grand Tax Competition; some strange Romneyrama of Tax Avoidance, in which it is assumed that whoever pays the lowest taxes is the ‘winner’. The role that taxes can play in making a more civil, sustainable economic culture is lost entirely in this paradigm of ‘Machinebrain’ EMH economic assumptions.
I also happen to agree with Hanauer and Liu’s ‘Gardenbrain’ economic metaphor, which posits that economics is a social activity, and consequently: (a) the more interactions that occur, (b) the more prosperous the economy, and therefore (c) everyone does better when everyone does better.
The Gardenbrain metaphor does not limit us to asking merely ‘do we pay more than others’? Instead, it focuses on questions like: ‘are we using tax revenue to create the kinds of longer term, sustainable ‘economic feedback loops’ that creates shared prosperity? In other words, in the Gardenbrain metaphor (at least, as I understand it) taxes are more like humus or compost: if you want good results you need good soil. Taxes are like the layer of dirt from which other good things will emerge over time, given reasonable tending and attention.
In this paradigm, concentrated wealth is a symptom that the overall system is stressed: it limits the number and quality of the economic feedback loops. It’s like saying your economic ‘soil’ is too acidic, or contains too few nutrients to sustain economic fertility (as in say, Somalia or Chad). It’s not merely a technical problem: it’s a recognition that complex adaptive systems (like economies) require a basic level of … well, ‘basic nutrients’, that go by the name ‘taxes’. The issue of how to make those tax dollars more accountable is related to getting more feedback loops in the system; the better the information circulating around, the healthier the system will become.
So I think the post falls prey to a set of assumptions about ‘how much’ (relative to Nation X) taxation is acceptable, which kind of keeps us stuck in the Machinebrain EMH metaphors that we’ve already been stuck in too long. I’m aggravated about taxes, but my frustration is more tied to a lack of accountability for where all that money goes. That’s an information issue, more related to the needs of a complex, adaptive system.
The very first sentence of the report states “The recent recession has had a substantial impact on income, the amount of taxes owed, and average tax rates.” Isn’t it entirely plausible and likely that the decrease in tax rates is due mostly to the fact that incomes dropped and people migrated to lower tax brackets thus causing a lower average rate?
In fact, the CBO effectively acknowledged such with this statement: “Average after-tax income fell notably, owing to a drop in market income caused by the recession that began in December 2007 thatand decreases in federal taxes.” Since the CBO also acknowledged t was only partially offset by increases in government transfers hat “Average tax rates depend on tax laws and economic conditions”, and since the economic climate started deteriorating in 2007 and culminated in 2009 with over 10% umemployment, then wouldn’t a snapshot look at 2009 tax rates be more heavily influenced by the accumulated effects of the economic downturn moreso than any tax policy that President Obama got passed in 2009?
Finally, the report also states:
Because average federal tax rates rise with income, the share of federal taxes paid by higher-income households exceeded their share of before-tax income, and the opposite was true for lower-income households.
In 2009, the shares of federal taxes paid by households in certain income quintiles were:
Lowest quintile: 0.3 percent
Middle quintile: 9.4 percent
Highest quintile: 67.9 percent
I would assert that contrary to your assertion, there is a group of Americans who probably are overtaxed.
1. Average after-tax income fell notably, owing to a drop in market income caused by the recession that began in December 2007 that was only partially offset by increases in government transfers and decreases in federal taxes.
2. Since the CBO also acknowledged that “Average tax rates depend on tax laws and economic conditions.”
As I stressed in my post: the decline in effective rates over the 2000s was largely policy–over the downturn, 2007-09 in these data, both the economy and policy were in play. Mostly the economy, I suspect, as you point out, but policy mattered too–expansions of CTC and EITC and Making Work Pay (2009) all lower tax liabilities for middle and lower income HHs. Where you see pure economy effects are in the top 1%, whose rate went up a bit in 2009 because they had large capital losses and their incomes are well above the top threshold so they don’t benefit from slipping into lower rates.
It seems like they can afford it. From the NYTimes:
“This group is key because the top 5 percent of income earners accounts for about one-third of spending, and the top 20 percent accounts for close to 60 percent of spending,” said Mark Zandi, chief economist of Moody’s Analytics. “That was key to why we suffered such a bad recession — their spending fell very sharply.”