Are We Really Overtaxed?

One of the common refrains we hear from Republican politicians and conservative commentators is that Americans are being overtaxed. Our taxes are among the highest in the world, if you believe the rhetoric. This line of argument is being used to promote terminating the inheritance tax, eliminating the payroll tax, adopting a single-rate tax system, and reducing income, capital gains, and business tax rates.

Another refrain is that the federal debt is at crisis levels and must be reduced. Since we are already overtaxed, the only way to deal with this is to shrink government spending. As I mentioned last week, if you want to reduce government spending, you are going to have to deal with Social Security, Medicare, and the military. The rest of the budget is pocket change, relatively speaking. But since Republicans want to increase military spending, their primary target for saving money is what they call “entitlements,” which include Social Security, Medicare, food stamps, CHIP, unemployment compensation, and veterans programs.

Some Republicans are so up in arms about the “debt crisis” that they want to pass a balanced budget amendment. How they plan on balancing the budget while cutting taxes is a mystery. Maybe we can use Paul Ryan’s magic asterisks. To put this in perspective, in 2015 the deficit was $439 billion, the smallest it has been since 2007. Still, cutting $439 billion in government spending would be quite a hatchet job and would certainly plunge the economy into another major recession. So that pipe dream ain’t gonna come true. At any rate, no Republican politician is going to seriously try to cut Social Security or Medicare, not with the Baby Boomers retiring in droves and most of them without any retirement savings to speak of.

In spite of the facts, though, every one of the 31,000 or so GOP presidential candidates vowed to cut taxes, especially on the wealthy. Estimates for the carnage ranged from $9.5 trillion over its first 10 years for Trump’s plan (and another $15 trillion in its second decade) on down to about $6.8 trillion for Rubio. Of course the estimates vary widely, depending on various assumptions. But all the plans had two things in common: the debt would balloon by trillions and the wealthy would make off like bandits.

So, if we do want to reduce the national debt (and that wouldn’t be a terrible idea), we need to look at increasing taxes. Well, what’s the truth about our tax burden as Americans? I’ll copy a chart here from the Citizens for Tax Justice website.

 

Oh my! Can this be accurate? Of the countries belonging to the OECD (Organization for Economic Cooperation and Development), only Chile and Mexico tax less than the United States? Well, yes. We’re overtaxed? Gee, try to sell that whopper in Denmark. By the way, the numbers behind this chart include all federal, state, and local taxes.

So, let’s look at the U.S. over the 32 years stretching from 1979 to 2010. The following chart compares U.S. tax receipts with the average of our OECD friends.

 

A couple of trends are notable. First, our OECD partners’ taxes have increased slowly over time, but by less than 2 percent in 32 years. Second, U.S. tax revenues peaked during the end of the Clinton presidency (remember, when we ran a budget surplus). Second, the Bush tax cuts had an immediate and predictable effect. Tax revenues dropped from a high of 29.5 percent just before Bush took office to a low of 26.3 percent in 2008. We can throw out 2009 as an anomaly because the Great Recession skewed the numbers. Supply-side dogma insists that cutting taxes will increase growth, and Republican politicians are still trying to sell that snake oil after three decades of proof that it just. does. not. happen. Consequently, when you take steady spending (which is basically what we have had over the years, despite Republican the-sky-is-falling rhetoric), stir in reduced tax revenue, add a major recession, and fold in two pinches of unfunded wars, you have the perfect recipe for, well, ballooning debt.

So, where are we now? The latest comparative numbers for OECD countries were for 2010. In 2015, though, the federal government collected $3.25 trillion in taxes. State and local taxes collected were $1.33 trillion. Total tax revenue, then, was $4.58 trillion. GDP for 2015 was about $17.9 trillion. This means tax revenue was 25.5 percent of GDP. Still 4 percent below our 2000 revenues . . . and about 22 percent below Denmark.

Anyway, next time you hear a politician or a talk radio personality complaining about how horribly high our taxes are, remember the numbers and say, “Nice try. Do your homework.”