There are a number of ideas being parlayed by presidential candidates, policy makers, and politicians regarding how to reform the U.S. tax code. Unfortunately, none of the ideas mentioned recently are new, nor do they address the fundamental reasons to reform the code, those being: Fairness and Simplicity, which I am capitalizing here as a way of elevating these concepts above other policy goals (involving unfairness and complexity).
History can be a great teacher. But, numbers CAN lie, and everyone has an agenda, including me.
But, let’s take a look at history and see if we can put it in today’s context. First, let’s look at tax rates. Currently, the top marginal rate is half of what it was in 1975 on incomes over $375,000 – 70% vs. 35%. All of the other rates are lower as well, but not by nearly as much. So, the bulk of the benefits of the tax bracket “flattening” has gone to those in the top tax bracket (not surprised, are you?)
Now, what about tax deductions and tax credits? These are also known as “Tax Expenditures” in the world of tax policy making. They are special tax breaks designed to benefit only certain taxpayers, such as the oil and gas industry, home owners, or low income workers with families. Tax Expenditures have risen 43% in the 3 years spanning 2006 to 2009 (think: George W.), and have risen 78% over the last 30 years. What this means is that Fairness has gone out the window, replaced by taxation bent on favoring certain taxpayers and disfavoring others. One taxpayer’s tax on the same income may bear no resemblance to another taxpayer with the same income due to the existence of these special deductions and credits.
Now let’s look at where the taxes come from today vs. where they came from 60 years ago. Employment taxes as a share of the total tax burden have risen 400% in the last 6 decades, going from 10% of total revenues in 1950 to a whopping 40% of total revenues today. Conversely, corporate tax revenues as a percent of total revenues have dropped 428%, going from 30% of total revenues to 7% in 2010. Meanwhile, total individual taxes (not payroll taxes) as a percent of total tax revenues have remained fairly steady for the last 60 years, at about 42%. The rest of the tax revenues come from estate, gift, and excise taxes, and these have fluctuated over the years, but overall, contribute a much lower percentage to total revenues than they did in 1950.
It is quite striking to note that despite all the tweaking and complexity of the current tax code, individuals still bear, overall, about the same burden that they did 60 years ago. The difference is in the mix. Working people of all income levels now bear a much larger burden of the total budget than they did 60 years ago. They contribute not only payroll taxes but income taxes as well. Their total federal effective tax rate can easily exceed 45% if they are self-employed and in the middle class. Wealthy individuals who do not work and derive most of their income from capital gains and dividends enjoy a much lower tax rate. Some of them enjoy a ZERO rate. And, in 2009, the top 10% of taxpayers, those with adjusted gross income exceeding $112,000 paid an overall average tax rate of just 18%. It should be noted however, that those with AGI below the median income of $32,000 (the bottom 50%) paid an average rate of only 1.85% (remember this doesn’t include payroll taxes). It is somewhat shocking to note that the incredibly low AGI number of $32,000 represents ½ of the taxpaying population, and it supports the recent census information indicating that nearly 50% of all Americans are living at or near the poverty level. The biggest beneficiary of the tax burden shift among taxpayers has been corporations, however. Maybe now that they are “people” we should tax them as individuals. That would raise a lot of revenue.
Oddly, tax revenue as a percentage of GDP has remained fairly constant at about 18% for the last 30 years. So, while tax revenues have been stable despite all the tweaking (an estimated 4,000 changes to the code just last year), the federal deficit has been skyrocketing, and WHO PAYS is really the question to ask yourself.
We are very far away from Simplicity and Fairness. The recent proposals to lower rates and take away some deductions (charitable contributions and home mortgage interest) would further skew the Fairness meter, being another boon for the super wealthy. However, taking away deductions does move us toward Simplicity.
In my next post, I’ll take on what I would do to bring about tax reform. In the meantime, although I might be using statistics for my “damned lies,” every fact in this blog post was taken from one of three sources: the Congressional Budget Office, the Joint Committee on Taxation, and the Internal Revenue Service.