Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served
on the staffs of Representatives Jack Kemp and Ron Paul.
A couple of weeks ago, I discussed the low level of federal taxes as a share of the gross domestic product in the United States, both historically and in comparison with other developed economies. I noted that total federal revenue — income, corporate and payroll taxes combined –– has been below 15 percent of gross domestic product for three years in a row, its lowest level since 1950 and well below the postwar average of about 18.5 percent of G.D.P.
Judging by their comments, a great many readers were incredulous. For years, Republicans have told them over and over again that taxes in the United States are exceptionally high and the primary obstacle to growth, and that a huge tax cut would do more to raise growth than any other policy.
For example, former Gov. Tim Pawlenty of Minnesota, a candidate for the Republican presidential nomination, has proposed reducing the top statutory income tax rate on individuals to 25 percent and abolishing the taxation of interest, dividends and capital gains. The Tax Policy Center estimates that this plan would reduce federal revenues by $8 trillion over the next decade.
Governor Pawlenty contends that unprecedented growth will result — to such an extent that there will actually be no revenue loss at all.
I am not picking on Governor Pawlenty; all of the candidates for the Republican presidential nomination support similar policies, and not one has criticized him for making outlandish claims. Rather, I want to emphasize how widespread the view is, at least among Republicans, that Americans are overtaxed.
A common criticism of my earlier point about federal taxes as a share of G.D.P. is that I ignored marginal tax rates — the tax on each additional dollar earned — and the payroll tax, which is the largest tax that most people pay. Of course, I did not ignore the payroll tax; it is part of total federal revenues. But the point about marginal rates is worth exploring further, since economists agree that this is often the most important tax rate for economic decision-making.
The Tax Policy Center annually calculates average and marginal tax rates for four-person families with the same relative income. It starts with the median income, which is the exact middle of the income distribution, with half of all families above and half below. It then calculates tax rates for those with half the median income, a common definition for the working poor, and twice the median income, which would represent the reasonably well-to-do.
The table below shows the average and marginal tax rates for each of these families since 1955, including both federal income taxes and the employee share of payroll taxes.
sources: Treasury Department, Tax Policy Center
As one can see, average tax rates on the working poor have never been lower; in fact, they pay neither income taxes nor the employee’s share of the payroll tax, because the earned income tax credit offsets both and even gives them a small refund on top.
However, the tax credit is phased out at a rate of 21.06 percent for families with two children after their earned income reaches $16,690. The loss of a refundable credit is exactly the same, economically, as paying more taxes, and this is what imposes such high marginal rates on the working poor.
A typical middle-class family, on the other hand, is paying less in federal taxes than it has since 1967. Its marginal rate is also down substantially since it peaked in 1982 at 31.7 percent. The well-to-do family, too, has seen its average and marginal tax rates decline substantially.
Of course, these data do not prove that taxes are not too high. That is a subjective judgment related to issues of fairness and the value that people assign to the government benefits they receive in return. Many in the Tea Party talk as if the value of government is zero; consequently, they would probably complain about any tax level above zero.
Nevertheless, it is clear that federal taxes have not been rising and are, at least in historical terms, lower for most taxpayers than they have been since the 1960s. Those who assert that taxes are rising or are at confiscatory levels simply do not know what they are talking about.
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