Average U.S. tax burden at 40-year low

I finished up my tax return this weekend.  I did it myself, using Turbo Tax,  and ran it by our new accountant (because I left BusinessWeek in 2009 and started a new business, the return is more complicated than in previous years).

Now that’s done, I can take a look at the bigger tax picture. Just for fun,  I calculated total taxes paid by Americans as a share of national income.  Total taxes includes federal, state, and local income taxes, corporate income taxes, property taxes, sales taxes, social security and medicare taxes, and every other kind of tax (except for the estate tax). 

The top red line tracks total taxes as a share of national income–in effect, the average tax burden for the whole economy. In the fourth quarter of 2009, the average tax burden for the whole economy was 27.5%–the lowest since 1966. That shows the combined effects of the Great Recession and the tax cuts. If we leave out social insurance taxes, the trend is even stronger–the average tax burden, omitting social insurance taxes, is the lowest in the post-war era.

These calculations are similar to the ones done by the Tax Foundation in its calculation of Tax Freedom Day, the day where Americans have “earned enough money to pay this year’s tax obligations at the federal, state and local levels”. Take a look at the Tax Foundation’s chart.    

In fact, Tax Freedom Day is earlier now than it’s been in the past forty years, suggesting that the burden of taxes is lower.  

The question, then, is why is there so much opposition to tax increases.  Part of it is the distributional question–the average tax burden and Tax Freedom Day both measure the average over the whole economy, rather than for any individual.

But more important, I think, is the pervasive weakness in the private economy, which makes the burden of taxes feel heavier. I’m going to write more about this.

Comments

  1. “The question, then, is why is there so much opposition to tax increases.”

    Several reasons.

    First, you haven’t included other ways government takes citizen’s money, e.g. fees & surcharges. These affect the lower middle/upper lower class the most.

    Second, real wages and income have been dropping and continue to drop.

    Third, level of government service in general has fallen off (we get less for our money).

    Fourth, it is almost a certainty that the numbers obtained from the Bureau of Economic Analysis, CBO and Joint Committee on Taxation are suspect. Much of what has been coming out of the government is massaged or manipulated and can no longer be taken at face value.

    Two examples: The employment numbers (failing to include ‘discouraged workers’, using the birth death model to massage, revising downwards after the fact, etc. This is gamed for obvious reasons). Also the CPI, which did not include housing, otherwise it would have revealed the massive inflation in housing (gamed so inflation indexed government payouts, e.g. social security, would not increase).

    This has forced people to use alternate methods of examining the economy, such as state sales tax receipts – they are a hard number and can’t be ‘gamed’ (and they are dismal).

    Fifth (related to third), but most recent: Responsiveness of government has disappeared. The financial bailout was opposed by a majority of Americans, and so was the auto industry bailout, but both were passed regardless. The health care reform bill was also opposed, but again passed (at least initially).

    Most people rightly do not want to pay workers who don’t do their jobs, and those in government are supposed to be working for the people… But are clearly not.

    • Mike Mandel says:

      Agree with you on the falling real wages. Also agree on the suspect economic numbers. They are not being intentionally manipulated, but globalization has rendered GDP and productivity growth problematic. More coming on that.

  2. Mike, congrats on your completing taxes, but as an off topic notice, it seems your http://www.southmountaineconomics.com site will redirect to “innovationandgrowth.wordpress.com.” (notice the trailing dot). This mostly works and is probably a minor thing, but it can cause some subtle issues as users’ browsers are not getting the correct site address.

  3. Mike Mandel says:

    Fixed. Thanks.

  4. Nice graphs but you draw the wrong conclusion from them. You are simply dividing total tax revenue by total income, so while that accurately reflects the overall tax burden, the drops clearly do not reflect changes in tax law. If you look at where the percentages dropped over time, they always dropped during recessions, the early 80s, after the dot.com bust, and today. There was no law passed instituting tax cuts in ’80, ’00, or ’06 yet that’s when tax revenue started plunging as a percentage of income. If anything, Reagan and Bush instituted tax cuts after the last two recessions that then brought tax revenues back up, a little thing called the Laffer curve, that Obama is ignoring at his peril. Trumpeting a purely recession-caused drop in tax revenue is perverse, Mike, particularly when the Tax Foundation graph you linked shows the burden rising once you include the gigantic budget deficits that Obama is running up, that you conspicuously avoid mentioning or including in your first graph.

    • But the tax laws have changed — and dramatically.

      A significant part of the “stimulus” package was “spent” as tax breaks.

      – Mickey

  5. Perhaps I’m being obtuse, but while I can see how taxes would go down as income goes down, it does not necessarily follow that taxes as a percentage of income would go down dramatically in a recession…. unless the tax structure is more progressive than I was led to believe?

  6. Bingo, you answered your own question, CompEng. Also, companies and invidividuals use recessions to mark a whole bunch of losses on their income statements, even on loss-making entities that have been sitting there for years, since the stock market won’t punish them as much if everybody else is doing worse. The only reason the percentage of tax revenues wouldn’t go down is if we had a straight flat tax, which we are very far from having.

  7. The Fifth Horseman says:

    The one thing the American people want more than a tax cut is……

    Tax Simplification.

    No matter what the number is, figuring it out should not take so long.

    People say that no one should pay more than 30% of their income in taxes. I say that no one should be spending more than 30 minutes to figure out their tax.

    7.6 billions hours a year go in tax compliance, amounting to 3.8 million full-time workers. 20% of all tax collection just goes in processing and enforcement.

    Tax Simplification alone would probably get the recovery back to pre-recession employment levels in short order.

  8. The Fifth Horseman says:

    Aside from the #1 priority, which is Tax Simplification…

    The problem is not the amount. The problem is the ‘progressivity’.

    50% pay no income tax. Yet the Top 1% pay 40% of all taxes.

    This may be ideal for politicians. But it is bad for the economy.

    A flat tax may be too radical, but no one should pay less than 10% of their income, or more than 30% of their income, in taxes. The entire scale should be from 10% to 30%.

  9. The Fifth Horseman says:

    The third biggest problem is the Capital Gains tax.

    India and China both have Short-Term/Long-Term Capital Gains tax rates at 10%/0% respectively.

    Obviously, America should not be a higher rate (a capital exodus ensues). But America is 35%/15%. Obama, after both his 2011 increase and 2013 Obamacare surcharge, will make the Capital Gains tax rates 44.3%/24.7%. This is whoppingly high. Furthermore, people in states like CA and NY pay state tax. In CA, the maximum short-term rate is thus a whopping 54% by 2013.

    This officially makes the US a socialist country. This is in contrast to free-market India and China. The world truly is upside down.

    It is safe to say that you can predict the future of a society by its Capital Gains tax rate. America’s future is thus much darker than that of India and China.

    • Not that there’s 0 truth in what you’re saying, but come on. Do you sneer at places with a cover charge, too? Surely, they must go out of business quickly.

      • At this point in history the only truly free markets are in failed states.

      • The Fifth Horseman says:

        Why are you justifying a capital gains tax 30-50 points higher than India and China?

        Competitiveness matters, particularly for capital (which is very mobile).

    • mythicalprogrammer says:

      “This officially makes the US a socialist country. This is in contrast to free-market India and China. The world truly is upside down”

      http://www.heritage.org/index/

      China and India is not the top ten. China is 200 and something dude. Your definition is so narrow minded.

      You can say Hong Kong is #1 but Hong Kong economy model is base on England and not China.

  10. Kartik, those 3.8 million tax workers are stimulus workers, don’t you know? ;) I don’t think you can say the US is more socialist just based on a single tax rate, you have to look at total taxes as a percentage of GDP and I’m not sure the US is as far off from India/China if you do that. Also, those govts have a lot of regulations that make them much worse than the US in many regards. Americans, as opposed to the US state, will be the richest in the world for decades to come, but the rest of the world is catching up.

    CompEng, you’re really going to cover a small cover charge to taxes? Kartik didn’t argue for 0 taxes, which is what no cover charge would be. I’d actually prefer a cover charge: let me pay a set fee for basic stuff that I use and meter everyone for how much they use above that, fairly easy to do with modern IT. :)

    Dave, CompEng and I went over the tax figures in the last thread. Kartik is mostly right, certainly at the federal level, but state and local taxes have been growing at an alarming pace. Failed states are only free market in the trivial sense that there is no formally recognized govt, such warlord-ruled regions have as much in common with an actual free market as China does with communism. Besides, communist states are as poor as those failed states you mention and the more socialist OECD states are lagging far behind the more free market US, so the opposite appears to be worse.

  11. The Fifth Horseman says:

    Ajay,

    Please don’t use my first name anymore. I want to go into more, not less, anonymyty.

    Now, on the subject, I think the high capital gains tax rate is very, very harmful to America. Particularly when India and China both have 0% LT Cap gains taxes.

  12. If fair share was calculated by person what would be the tax burden of each us citizen?

    What would be the tax burden be of each U.S. resident?

    How much does each person spend in a year?

Trackbacks

  1. [...] making $0 through investment, and spending every penny on cigarrettes and living in Manhatten… The average is 28% including all forms of taxation. But, regardless, you're missing my argument completely. My argument is that you should pay less [...]

  2. [...] UPDATE. Two more charts showing the same thing: [...]

  3. [...] case of the fallacy of composition — that what’s good for one is necessarily good for all. Michael Mandel made this same observation last year. It is even more pronounced if you take out Social Insurance taxes. No one likes paying taxes. [...]

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