Despite perceptions, the case is strong that taxes in America are distributed with remarkable evenness across income groups.
Families with up to $20,000 in cash income pay 26% of their economic income in federal, state and local taxes. Families earning between $75,000 and $200,000 pay 26% too. Those with cash incomes above $200,000 pay a modestly larger share of their income in taxes: 30%.
So, including the federal income tax and all other taxes beyond it as a package, the tax code overall is remarkably flat. There's no need for a new tax if its purpose is to include the middle class more.
Tax reform for simplification and to raise tax visibility (so taxpayers can make informed choices), continues to be important.
Federal income tax receipts are by far the most progressive piece of federal revenues, and also highly visible.
So it is easy to assume that the rich bear a very heavy burden of the cost of government relative to the rest of the population. And they do in absolute terms, but less so as a percentage of their earnings.
First, MyGovSpending.com looks at the picture from a holistic viewpoint. So we combine federal, state and local revenues. Federal income taxes amount to just 25% of government revenues, so its impact on the progressivity of the entire tax code is diluted.
The next big tax is payroll tax at 20% of government revs. These are actually regressive, and undo much of the progressivity of the federal income tax.
Sales taxes are 9% of government revenues, and are notably regressive. The rich pay a smaller portion of their income in these taxes because the rich save more and consume less, relative to their incomes.
Then there are corporate income taxes, other levies on businesses, and property taxes, too. These foot to another 21% of the government's cream.
Economists can quibble about who actually pays these. Economists we rely upon argue that 70% of the bulk of these taxes are paid by workers and 30% by stockholders. If one accepts that, these taxes have a regressive bent to them, too.
Then 10% government revenues are often thought of as "non-tax" revenues. These are proceeds from government-owned businesses, like the post office and lotteries. It also includes fines and fees of various kinds.
MyGovSpending.com forwards the argument that these revenue streams are owned by citizens as equal "shareholders" in government. To the extent these revenue streams are controlled by legislatures instead of retail level citizens, they qualify as taxes.
The rich DO bear federal income taxes disproportionately. By design.
Holistically however, American taxes are spread remarkably evenly across income groups. By accident.
____________________
Note, although this analysis indicates the tax code is much flatter than commonly assumed, that should not be taken to imply that the poor are unfairly fleeced. The next logical step, and one beyond the scope of this post, is to analyze who receives government spending.
See this excellent paper by Andrew Chamberlain and Gerald Prante of the Tax Foundation entitled Who Pays Taxes and Who Receives Government Spending for a look at that topic.
It is available at http://www.taxfoundation.org/publications/show/2282.html.
Tuesday, April 27, 2010
Wednesday, April 21, 2010
Quick take on a new paper from the Committee For A Responsible Federal Budget (CRFB) - A PREVENTABLE CRISIS: EXPLORING FISCAL CRISIS SCENARIOS FOR THE UNITED STATES
Sober-mindedness is a deeply embedded characteristic of the Committee for a Responsible Federal Budget (CRFB). There is an impressive array of former senior policy makers, deep thinkers, and assorted movers-and-shakers from both parties on its board.
The Committee released an uncharacteristically provocative short new paper entitled A Preventable Crisis: Exploring Fiscal Crisis Scenarios for the United States.
In the absent of extraordinary political compromise, preferably delivered as fast as one can buy a Whopper with Cheese, a financial crisis of unprecedented magnitude appears to be riding down upon us.
CRFB (pronounced "kurfba") notes that the jitters have begun. Financial markets are getting queasy about lending money to the US government.
So what's next? CRFB muses that we could muddle along as we have, with Washington lacking the political courage to address the problem. In fact, politicians can even make the problem worse by expanding entitlements, leading to a Catastrophic Budget Failure. Lenders cut off credit to the government, it cannot pay its bills, and public spending is sharply curtailed, pronto. Imagine the unemployment rate then!
Another path to the same end passes through inflation first. This path is widely anticipated among both professional and armchair economists. The Federal Reserve bows to political pressures to pump up inflation and print money to buy government debt and - presto - high interest rates detonate a cut-off of government borrowing and a fresh recession with no rescue in sight.
Or, the US could continue to borrow until the debt reaches such heights, and the interest costs become so burdensome, that Washington simply decides the pain of paying the interest is less than the pain of trashing the United States' credit score. It simply walks away from the obligations - an outright default.
CRFB concludes "...while most economists consider the worst case (default) to be unthinkable for the United States, we unfortunately live in an era where the unthinkable has become thinkable."
Carrying this line of thought to the next step beyond the paper's scope quickly leads one to ponder the impact on families and individuals.
How does widespread and lengthy unemployment affect families? How do curtailed defense budgets affect global stability, most immediately in the Middle East? How do tumbling public budgets affect retirees and children in school?
What calamity are we courting? What can individuals do to avert it? (One thought, let your federal elected representatives know what you think either by calling, emailing or via MyGovSpending.com.)
If the ship doesn't turn, what can ordinary people do to minimize the damage to their families?
How much damage will be done to you, your family, your country, your world?
What will emerge?
The Committee released an uncharacteristically provocative short new paper entitled A Preventable Crisis: Exploring Fiscal Crisis Scenarios for the United States.
In the absent of extraordinary political compromise, preferably delivered as fast as one can buy a Whopper with Cheese, a financial crisis of unprecedented magnitude appears to be riding down upon us.
CRFB (pronounced "kurfba") notes that the jitters have begun. Financial markets are getting queasy about lending money to the US government.
So what's next? CRFB muses that we could muddle along as we have, with Washington lacking the political courage to address the problem. In fact, politicians can even make the problem worse by expanding entitlements, leading to a Catastrophic Budget Failure. Lenders cut off credit to the government, it cannot pay its bills, and public spending is sharply curtailed, pronto. Imagine the unemployment rate then!
Another path to the same end passes through inflation first. This path is widely anticipated among both professional and armchair economists. The Federal Reserve bows to political pressures to pump up inflation and print money to buy government debt and - presto - high interest rates detonate a cut-off of government borrowing and a fresh recession with no rescue in sight.
Or, the US could continue to borrow until the debt reaches such heights, and the interest costs become so burdensome, that Washington simply decides the pain of paying the interest is less than the pain of trashing the United States' credit score. It simply walks away from the obligations - an outright default.
CRFB concludes "...while most economists consider the worst case (default) to be unthinkable for the United States, we unfortunately live in an era where the unthinkable has become thinkable."
Carrying this line of thought to the next step beyond the paper's scope quickly leads one to ponder the impact on families and individuals.
How does widespread and lengthy unemployment affect families? How do curtailed defense budgets affect global stability, most immediately in the Middle East? How do tumbling public budgets affect retirees and children in school?
What calamity are we courting? What can individuals do to avert it? (One thought, let your federal elected representatives know what you think either by calling, emailing or via MyGovSpending.com.)
If the ship doesn't turn, what can ordinary people do to minimize the damage to their families?
How much damage will be done to you, your family, your country, your world?
What will emerge?
Thursday, April 1, 2010
HARD THOUGHTS ABOUT HARD DEBT
A million dollars is a lot of government-incurred debt for a family generating $75,000 of income a year(1). Interest on that pallet-load of cash is $50,000 a year at a 5% annual interest rate. After paying taxes and rent, there is not much left for sushi.
Luckily, only about $85,000(2) of that $1,000,000 is already spent. Voters have at least a snowball's chance in Hades of stopping the remaining $915,000 of borrowing that government has penciled-in to the family calendar.
That $85,000 is hard debt. These loans are contractual obligations that have to be paid. Just like a mortgage or car loan. There really are very few options, other than pay it or default. (Default includes inflation - a topic for another time.)
"Debt Held by the Public" is the name given in the official records. MyGovSpending.com adds state and local debt to the federal government's total(3).
That $85,000 is growing fast. A typical Ms or Mr Middle America is still borrowing heavily. Not always voluntarily, but via Uncle Sam and a motley collection of state and local governments.
If the borrowing binge were to stop today, interest on that $85,000 at 5% would run up taxes by $4,250 a year on a typical family.
Unfortunately, there's hardly a cowgirl alive who expects the binge to stop today. In fact, we are adding principal to the debt at the rate of $11,000 per year. The Obama Administration's 10-year forecast does not anticipate any reduction in taxpayer debt burden(5).
Please don't take that as a partisan shot. Obama is indeed accumulating responsibility for the debt. But in my mind, the whole "Washington, Inc." ecosystem of special interests, bureaucrats, and politicians is to blame for hoodwinking its citizens for generations.
And ultimately it's our fault -- the voters' fault -- for trusting Washington...for being snookered so easily.
Fool me once, shame on you.
Fool me twice, shame on me.
For those of us who have voted more than once, the second half of that simple aphorism applies.
How large a burden is this hard debt on our typical hard-working, law-abiding, tax-paying Mr and Ms Middle America? When the binge ends - and it will end - our typical family will be on the hook for another $6,000 to $10,000 in taxes each year, or quite possibly more(6).
What will American families cut from their lives? Retirement savings? College? Vacations? Charity? Housing? Cars? Food? Entertainment? School supplies? Clothing?
The answer is YES -- to all.
For a long, long time.
It's a hard debt to repay and getting harder every day.
____________________________________
Postnotes:
(1) Refer to post on this blog of 25 Feb 2010 entitled "Average US Family Owes $1 Million in Government Obligations. No Kidding." for details.
(2) To calculate an individual family's Hard Debt we add federal "Debt Held by the Public" (from Congressional Budget Office available at http://www.cbo.gov/ftpdocs/100xx/doc10014/03-20-PresidentBudget.pdf) to state and local debt excluding bonds issued for private purposes (from the Census Bureau, available at http://www.census.gov/govs/estimate/0600ussl_1.html.
CBO uses both historical data and projections is generates. It quotes federal debt held by the public on a fiscal year basis, so MyGovSpending.com adjusts the data to a calendar year basis. Census Bureau data lags, so we project current levels of debt based on growth rates of the prior five years.
We prorate the nation's total 'debt held by the public' to a particular family by applying the same ratio that the family's tax burden is to the nation's total taxes as calculated by MyGovSpending.com using work by Chamberlain Economics LLC.
(3) State and local governments often allow private concerns to borrow under a government banner for favorable tax treatment and lower after-tax interest rates for private borrowers. We exclude that debt.
(4) Federal Reserve publication H15 shows 5-year Treasury interest rates averaged 8.9% from 1975 through 1994. http://www.federalreserve.gov/releases/h15/data/Annual/H15_TCMNOM_Y5.txt
(5) Office of Management and Budget, The President's Budget, 2011, Summary Tables, page 146, Table S1, Budget Totals, the lines titled "Debt Held by the Public" as a % of GDP. Available at http://www.whitehouse.gov/omb/budget/fy2011/assets/tables.pdf.
(6) We make the optimistic assumptions that the debt binge ends in 2013 and that taxpayers pay down the federal debt held by the public from the CBO's projected 72% of GDP to a more prudent 30% of GDP over the next 20 years. State and local debt held by the public is reduced similiarly. The low estimate of tax increase of $6,000 annually assumes a 5% annual interest rate on the debt throughout the pay down period, while the high estimate of $10,000 assumes a 9% interest rate.
Luckily, only about $85,000(2) of that $1,000,000 is already spent. Voters have at least a snowball's chance in Hades of stopping the remaining $915,000 of borrowing that government has penciled-in to the family calendar.
That $85,000 is hard debt. These loans are contractual obligations that have to be paid. Just like a mortgage or car loan. There really are very few options, other than pay it or default. (Default includes inflation - a topic for another time.)
"Debt Held by the Public" is the name given in the official records. MyGovSpending.com adds state and local debt to the federal government's total(3).
That $85,000 is growing fast. A typical Ms or Mr Middle America is still borrowing heavily. Not always voluntarily, but via Uncle Sam and a motley collection of state and local governments.
If the borrowing binge were to stop today, interest on that $85,000 at 5% would run up taxes by $4,250 a year on a typical family.
Unfortunately, there's hardly a cowgirl alive who expects the binge to stop today. In fact, we are adding principal to the debt at the rate of $11,000 per year. The Obama Administration's 10-year forecast does not anticipate any reduction in taxpayer debt burden(5).
Please don't take that as a partisan shot. Obama is indeed accumulating responsibility for the debt. But in my mind, the whole "Washington, Inc." ecosystem of special interests, bureaucrats, and politicians is to blame for hoodwinking its citizens for generations.
And ultimately it's our fault -- the voters' fault -- for trusting Washington...for being snookered so easily.
Fool me once, shame on you.
Fool me twice, shame on me.
For those of us who have voted more than once, the second half of that simple aphorism applies.
How large a burden is this hard debt on our typical hard-working, law-abiding, tax-paying Mr and Ms Middle America? When the binge ends - and it will end - our typical family will be on the hook for another $6,000 to $10,000 in taxes each year, or quite possibly more(6).
What will American families cut from their lives? Retirement savings? College? Vacations? Charity? Housing? Cars? Food? Entertainment? School supplies? Clothing?
The answer is YES -- to all.
For a long, long time.
It's a hard debt to repay and getting harder every day.
____________________________________
Postnotes:
(1) Refer to post on this blog of 25 Feb 2010 entitled "Average US Family Owes $1 Million in Government Obligations. No Kidding." for details.
(2) To calculate an individual family's Hard Debt we add federal "Debt Held by the Public" (from Congressional Budget Office available at http://www.cbo.gov/ftpdocs/100xx/doc10014/03-20-PresidentBudget.pdf) to state and local debt excluding bonds issued for private purposes (from the Census Bureau, available at http://www.census.gov/govs/estimate/0600ussl_1.html.
CBO uses both historical data and projections is generates. It quotes federal debt held by the public on a fiscal year basis, so MyGovSpending.com adjusts the data to a calendar year basis. Census Bureau data lags, so we project current levels of debt based on growth rates of the prior five years.
We prorate the nation's total 'debt held by the public' to a particular family by applying the same ratio that the family's tax burden is to the nation's total taxes as calculated by MyGovSpending.com using work by Chamberlain Economics LLC.
(3) State and local governments often allow private concerns to borrow under a government banner for favorable tax treatment and lower after-tax interest rates for private borrowers. We exclude that debt.
(4) Federal Reserve publication H15 shows 5-year Treasury interest rates averaged 8.9% from 1975 through 1994. http://www.federalreserve.gov/releases/h15/data/Annual/H15_TCMNOM_Y5.txt
(5) Office of Management and Budget, The President's Budget, 2011, Summary Tables, page 146, Table S1, Budget Totals, the lines titled "Debt Held by the Public" as a % of GDP. Available at http://www.whitehouse.gov/omb/budget/fy2011/assets/tables.pdf.
(6) We make the optimistic assumptions that the debt binge ends in 2013 and that taxpayers pay down the federal debt held by the public from the CBO's projected 72% of GDP to a more prudent 30% of GDP over the next 20 years. State and local debt held by the public is reduced similiarly. The low estimate of tax increase of $6,000 annually assumes a 5% annual interest rate on the debt throughout the pay down period, while the high estimate of $10,000 assumes a 9% interest rate.
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