It’s Tax Day 2016, so let the grumbling and gnashing of teeth begin.
Fed by pandering politicians and shameless talk-radio commentators, many American taxpayers wrongly believe that they are paying 40, 50, even 60 percent of their income to the government. Not even close.
Presidential candidates add gasoline to the smoldering discontent by proposing outrageously unrealistic plans to slash taxes. Estimates show Donald Trump’s tax proposal could add a staggering $12 trillion to the national debt over 10 years. Ted Cruz served up a flat tax idea that offers fiscal irresponsibility to the tune of about $4 trillion.
The reality is that current federal taxes do not represent a burden for average Americans. The “effective” tax rate – the true tax rate, after all exemptions, deductions and credits – for most middle class families is below 10 percent. And many are closer to the 5 percent range.
(Anyone can quickly calculate their effective rate by dividing the amount on Line 56 of their 1040 form by Line 37 – then just move the decimal point two places to the right.)
If more Americans realized what they actually pay to Uncle Sam, the endless refrain for tax cuts, which long ago became a cottage industry among special interest groups, would fade away.
Obviously, the federal income tax is not the only government levy paid by Americans. But the Tax Foundation, a longtime conservative group, has calculated that all the federal, state and local taxes and fees paid by the average worker equates to about 30 percent of their annual income.
Frankly, that number usually astounds people, especially when they realize that their tax obligation pays for everything from police and fire protection to schools and roads to the Defense Department and Medicare/Social Security.
As for the federal income tax, most Americans would be amazed at how much they get for how little they pay. That single-digit effective tax rate levied on most of us finances basic programs across a vast country in all 50 states.
Vital services for $1 a year
The dozens of federal services and agencies that cost between $1 a week and $1 a year include: the Border Patrol, FBI, EPA, mass transit, chemical and hazardous waste safety, Centers for Disease Control, special education, federal prosecutors, anti-terrorism efforts, housing for the elderly and handicapped, and the National Forest Service.
Those numbers were calculated by the centrist think tank Third Way in 2012. Given the minimal inflation rates of recent years, they’re certainly still valid.
At the same time, the siren song that says Americans are taxed to death continues unabated.
The push for more and bigger tax cuts that began in the George W. Bush administration now reveals that, under current conditions, reducing taxes does not generate a major impact on the U.S. economy. Several studies have shown that those big Bush tax cuts accomplished little, other than a dramatic increase in federal budget deficits.
Traditional macroeconomic thinking would conclude that the largest tax cuts in history — combined with two wars and inconceivably low interest rates – would result in an overheated economy marked by a spike in inflation and wage rates. That never happened. The Bush years were marked by a stable, uneventful economic atmosphere until the housing crisis hit.
At the state level, the failure of tax cuts as an economic engine is far more pronounced. Several states have slashed taxes without enjoying the expected gains in jobs and growth, but the poster child for this new reality is Kansas.
‘Model’ tax cut a disaster
Kansas Gov. Sam Brownback’s tax plan is cited far and wide as the ultimate example that cutting taxes, just for the sake of providing tax cuts, can be disastrous. Brownback promised a “model” for the rest of the nation. Instead, the Sunflower State is wilting, suffering through huge budget deficits that have led to big reductions in K-12 school funding. As for economic growth, Kansas’ production of new jobs remains below the national average and far below what the governor predicted.
In Michigan, Gov. Rick Snyder’s massive tax shift in 2011, awarding the business community with a $1.6 billion reduction in taxes, also failed to deliver. Since the cut, not one major corporation has set up shop in Michigan by claiming that the Snyder system of taxation wooed them to the Great Lakes State.
Much of Michigan’s economic rebound is due to the resurgence of the U.S. auto industry and the generation of many low-skill, low-wage jobs, including a lot of part-time work.
Obviously, no one likes to pay taxes. The IRS is such a dirty word that it has become a despised three-letter acronym – no need to spell it out, taxpayers know the enemy when they see it.
But what if those tax collectors have become the bogeymen? Not to suggest that the federal bureaucracy is a well-oiled machine, but what if average Americans understood that a significant tax cut for them means a savings of maybe $10 a week? And what if they received that barely perceptible bonus at the expense of law enforcement, highways and bridges, national security or public health?
If taxpayers saw the big picture and realized the tradeoffs are not very appealing, admittedly that might hurt the economy in a slight manner. After all, the tax-cut hucksters selling their phony elixirs would all be out of a job.
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