Tax Myths

It's Not as Bad as You Think

Recently, when speaking to a number of businessmen, I came to realize how convinced they were that America is a high-tax country, which just happens not to be so. But, then, almost everything that everyone, liberals and conservatives alike, thinks about taxes is not so. Here are a few of the standard myths.

Myth 1: Americans Pay High Taxes Each year, the OECD (Organization for Economic Cooperation and Development), a research group sponsored by the thirty leading industrial countries, publishes an analysis of comparative tax burdens—taxes actually paid as a percent of the Gross Domestic Product. They include all taxes—sales, income, property, whatever, imposed by all levels of government. And they count actual tax revenues—in other words, they measure what governments do, not what they say.

The most recent data are for 2007. And guess what? The United States, as usual, ranked twenty-seventh out of the thirty, trailed only by Korea, Turkey, and Mexico. The total American tax burden is about 28 percent of GDP; the OECD median is about 36 percent; and the highest, in Denmark, is 48 percent.

Myth 2: Changing Tax Rates Changes Taxes The Congressional Budget Office has computed changes in “effective federal tax rates” for different income brackets over the twenty-five years through 2004, a period that included several major changes in the income-tax code. The table below charts the change in just federal income taxes actually paid by the wealthiest, the top 1 percent of earners, over that period. Very large changes in the federal income tax code clearly made very little difference in the income taxes actually paid.

Myth 3: Taxes Drive Economic Activity Occasionally, a widely publicized change in tax rates can shift economic activity. When the Reagan administration increased taxes in 1986—yes, Ronald Reagan did approve a tax increase—they removed a long-standing tax shelter for new commercial construction. Developers rushed to push projects forward to beat the deadline. We saw the same effect from the recently expired buyers’ tax credit for new home purchases. In both cases, a widely publicized tax change shifted future activity into the present—but in both cases the temporary uptick was roughly matched by a corresponding downturn. Shifting activity from period to period, that is, doesn’t much affect total activity over the longer term.

But it’s much harder, indeed probably impossible, to show that specific tax legislation genuinely slowed the economy down or made it grow faster. Economists of different political persuasions shout at each other about such things, but there is no way to prove a result one way or the other. Economic models are built on quicksands of hypotheses and simplifications, and are then applied to data that themselves are blobs of estimates and guesses. Over the long term, U.S. growth rates have been fairly steady and consistent. Trying to relate little wiggles in the overall trend line to specific tax-policy choices is really Wizard-of-Oz fantasy-making.

Myth 4: America Does Not Have a Progressive Tax Structure If Myth 1 is pushed by conservatives, this one is the favorite of liberals. In truth, if you count everything, it’s pretty progressive, and the general progressivity has persisted through major changes in the tax codes (see table above). For its “tax effectiveness” analysis the CBO adds in the impact of all federal taxes—income tax, payroll tax, corporate taxes, and others. The CBO also makes two important but very reasonable allocation assumptions. Working people get credit for all payroll taxes, including the employer’s share, because they clearly come out of the wage budget. In the same way, shareholders, who are disproportionately rich, get credit for all corporate taxes, because it’s ultimately coming out of their pockets.

A fair conclusion would be that Americans are not heavily taxed, that the current tax code is reasonably progressive, but certainly not confiscatory. And that if Americans need to raise taxes to reduce growing federal deficits, increases across the board would be the obvious place to start. In other words, what is all the shouting about?


Related: An Expensive Loyalty and The Cost of Democracy, by the Editors
Measuring Inequality, by Charles R. Morris

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Denmark with the 48% tax rate also has the highest 'happiness' position of all the first world countries. I Guess  the 'mad as hell and won't take it anymore' Tea Partiers have not yet landed there. Lucky Danes..

We should envy all the countries who have an enlightened attitude about paying a fair share of taxes and providing for those in need. People in Australia, Canada, most of Scandanavia, even former iron curtain countries honor a social contract. We are not exempt and will be judged by Matthew 25.

Amen, I love your article so much I'm sharing it on my blog.  I am sick and tired of people thinking they don't have to pay for thier fair share.  We have one of the lowest tax rates in the world and wealthier people believe they are being punished.  What ever happened to the old saying, "To much is given, much is expected."

http://historywasneverlikethat.blogspot.com/

I agree with the author and wish that the President and Congress had the courage to raise taxes on all of us.  As a senior citizen with approximately $18,000 pension income, low interest rates and social security, I paid  less than $800 for 2010.  I can afford to pay more taxes, and am sure those at the top with all their tax loopholes, can afford more.

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About the Author

Charles R. Morris, a Commonweal columnist, is the author of The Two Trillion Dollar Meltdown (Public Affairs), among other books, and is a fellow at the Century Foundation.