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Posted by on May 31, 2011 in Economy, Politics, Society | 26 comments

Economist Bruce Bartlett on Taxes: Are They High or Low?

It depends on how you define the tax rate:

Historically, the term “tax rate” has meant the average or effective tax rate — that is, taxes as a share of income. The broadest measure of the tax rate is total federal revenues divided by the gross domestic product.

By this measure, federal taxes are at their lowest level in more than 60 years. The Congressional Budget Officeestimated that federal taxes would consume just 14.8 percent of G.D.P. this year. The last year in which revenues were lower was 1950, according to the Office of Management and Budget.
[…]
Yet if one listens to Republicans, one would think that taxes have never been higher, that an excessive tax burden is the most important constraint holding back economic growth and that a big tax cut is exactly what the economy needs to get growing again.
[…]
The G.O.P. says global competitiveness requires the United States to reduce its corporate tax rate. But the United States actually has the lowest corporate tax burden of any of the member nations of the Organization for Economic Cooperation and Development.

So, how do Republicans get away with claiming that historically low tax rates are the opposite?

… They do so by ignoring the effective tax rate and concentrating solely on the statutory tax rate, which is often manipulated to make it appear that rates are much higher than they really are.
[
For example, Stephen Moore of The Wall Street Journal recently asserted that Democrats were trying to raise the top income tax rate to 62 percent from 35 percent. But most of the difference between these two rates is the payroll tax and state taxes that are already in existence. The rest consists largely of assuming tax increases that no one has formally proposed and that would be politically impossible to enact at the present time.
[…]
Nevertheless, one routinely hears variations of the Moore argument from conservative commentators. By contrast, one almost never hears that total revenues are at their lowest level in two or three generations as a share of G.D.P. or that corporate tax revenues as a share of G.D.P. are the lowest among all major countries. One hears only that the statutory corporate tax rate in the United States is high compared with other countries, which is true but not necessarily relevant.

The economic importance of statutory tax rates is blown far out of proportion by Republicans looking for ways to make taxes look high when they are quite low. And they almost never note that the statutory tax rate applies only to the last dollar earned or that the effective tax rate is substantially lower even for the richest taxpayers and largest corporations because of tax exclusions, deductions, credits and the 15 percent top rate on dividends and capital gains.

The many adjustments to income permitted by the tax code, plus alternative tax rates on the largest sources of income of the wealthy, explain why the average federal income tax rate on the 400 richest people in America was 18.11 percent in 2008, according to the Internal Revenue Service, down from 26.38 percent when these data were first calculated in 1992. Among the top 400, 7.5 percent had an average tax rate of less than 10 percent, 25 percent paid between 10 and 15 percent, and 28 percent paid between 15 and 20 percent.

The truth of the matter is that federal taxes in the United States are very low. There is no reason to believe that reducing them further will do anything to raise growth or reduce unemployment.

Meanwhile, back at the jobs and foreclosure crisis (emphasis is mine):

U.S. single-family home prices dropped in March, dipping below their 2009 low, as the housing market remained bogged down by inventory and weak demand, a closely watched survey said Tuesday.

But don’t forget: The economic priority is to cut spending. Remember: Home prices dipping below historic levels, foreclosures increasing, and jobs disappearing does not constitute an emergency. The deficit does. Because… well, because it’s crushing us. Because we are burdening our grandchildren with mountains of debt. As opposed to crushing our families and burdening our children with more foreclosures and a weakening housing market added to a grim employment outlook. How could anyone make a rational case that the burden to our current economy and to our currently living children with the immediate consequences of millions of Americans with no job, no prospect of a job, no home, and no income is a more immediate threat to the health of an economy than raising the national debt ceiling would be? Beats me. I guess you have to be a loony liberal to understand that one.

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  • Actually, since we’re talking about income taxes, the best way to measure would be as a percent of income (federal+state+local).

    Just saying.

  • SteveinCH

    I’d have to say I was shocked to see this post from Mr. Bartlett, a once reputable analyst. He’s right of course that taxes should be measured relative to the economy and he’s also right that the current number is very low by historical standards; however (you knew there was a however didn’t you) he purposefully omits an important part of the discussion.

    Here’s the CBO long-range projection of tax receipts from last year. The numbers are going to be slightly off in the near term but only slightly…more important is the medium term forecast under the alternative fiscal scenario (the one that assumes only tax rates on the rich increase and the AMT patch continues).

    http://www.cbo.gov/ftpdocs/115xx/doc11579/06-30-LTBO.pdf (page 54)

    To quote the CBO

    “Revenues as a share of GDP would increase from 15 percent of GDP in 2010 to just over 19 percent in 2020 and would remain constant at about 19 percent of GDP
    thereafter.”

    And that is a result of doing less than nothing, that is, extending the tax cuts below 250K and continuing to patch the AMT. Thus, the conclusion we should draw is that current tax receipts are lower than future tax receipts WITHOUT any change in tax policy. Bruce Bartlett knows this and that makes his column much more disingenuous than if he were simply ignorant.

  • DLS

    One of Bartlett’s books, I’ve read — it includes on its cover a picture Don Q. would love. [chuckle]

    http://www.amazon.com/New-American-Economy-Failure-Reaganomics/dp/0230615872

  • Dr. J

    Mr. Bartlett is right on his main point. As the charts I linked a couple days ago show, federal taxes have been more or less flat since the ’50s. State and local taxes have risen quite a bit since then, but if you look right now, taxes are about where they were in the ’70s.

    So we should get busy raising taxes? Not necessarily. Government revenue has been quite volatile since 2000, and although taxes are relatively low now, they were at an all-time high just five years ago. As Steve says, they’re going to come back up on their own.

  • slamfu

    Republicans follow very simple principles on certain things and don’t bother to check with reality. Whatever taxes are currently they are too high. If we have a %5 flat tax, they’d be yelling for a cut to 3% or 4% even if we were turning into a 3rd world nation as a result. Whatever we spend on defense isn’t enough. We could be spending $900 billion on defense, when China the #2 military spends an estimated $90-$100 billion, and they’d attack anyone who wanted a cut as soft on defense. The GOP stance on any given issue is what it is regardless of facts that a normal person would assess to determine what course to take.

  • KATHY KATTENBURG

    So we should get busy raising taxes? Not necessarily. Government revenue has been quite volatile since 2000, and although taxes are relatively low now, they were at an all-time high just five years ago. As Steve says, they’re going to come back up on their own.

    They’re going to come back up on their own? How is that? I think that’s really good news, because it means we can apply that principle to spending cuts, too. No need to cut spending — spending is going to come down on its own.

    Kathy

  • KATHY KATTENBURG

    Republicans follow very simple principles on certain things and don’t bother to check with reality.

    Man oh man, slamfu, you can say that again. I am fascinated on a regular basis by some of the things that Republicans say. It’s amazing.

    Kathy

  • SteveinCH

    Kathy,

    As a percent of GDP, Bartlett’s preferred measure, taxes do come up on their own. That was the point of the CBO report I linked. From today’s level, they come up for 2 reasons. First, as the economy recovers, receipts recover more quickly, particularly corporate tax receipts and investment tax receipts. Second, over time, incomes rise ahead of inflation. Since tax brackets are indexed to inflation, tax receipts go up faster than inflation. And, if real wage growth grows faster than real GDP as has happened in the past, tax receipts increase faster than GDP.

    As for spending, we need to break it into two,parts…mandatory and discretionary. Mandatory spending grows by formula. Historically ss spending has grown per beneficiary roughly in line with inflation. Medicare and Medicaid have grown much faster than GDP. Discretionary spending grows as fast a government wants it to. Over a fairly long period of time, total discretionary spending has grown less fast than GDP. This has to be the case because of the growth of mandatory spending.

    Oddly, or perhaps not, you and slamfu make fun of the concept without understanding the dynamics or even reading the CBO report. I am not arguing for taxes to come down, but I really don’t like pundits who play fast and loose with facts that they know to make their point.

  • Dr. J

    They’re going to come back up on their own? How is that? I think that’s really good news, because it means we can apply that principle to spending cuts, too. No need to cut spending — spending is going to come down on its own.

    Kathy, the charts I linked give a sense of *why* taxes are down lately, and it backs up what Steve says. They were headed steadily up until sharp drop-offs in 2001 and 2008 that affected personal income tax, payroll tax, and business tax all at once. In other words, the economy soured and pulled down tax revenues more than it pulled down GDP. As it recovered from the 2001 downturn, taxes came right back up to where they had been. As it recovers from the current downturn, they will do the same again.

    Sure, we can apply the same technique to analyzing spending. Here are comparable charts showing spending breakdown as a % of GDP. Unfortunately they don’t show the same recession-driven pattern. Spending rose steadily starting from 1950, fell a bit during the 90s and has risen fairly steadily since. There’s little to suggest that economic recoveries lower spending.

    And there’s plenty to suggest that non-cyclical factors are going to push spending much higher. CBO projections into the future suggest that spending growth will be all about health care.

  • KATHY KATTENBURG

    As a percent of GDP, Bartlett’s preferred measure, taxes do come up on their own.

    Barlett made a distinction between the statutory tax rate and the effective tax rate. He said that looking only at the statutory tax rate gives a deceptive picture of how much tax is actually being paid, because it isn’t being measured against deductions, tax code loopholes, etc.

    I understood Bartlett on that point because he expressed it clearly in a manner that indicated an intent to make himself understood to people who were not economists or statisticians. What you have said, above (not just the little snip here, everything), I don’t understand at all. I can’t even say I disagree with it. I don’t understand your intended meaning. Your writing, to me, on this subject, is just utterly opaque.

    Kathy

  • SteveinCH

    Let me try it this way Kathy.

    1. Bartlett is right that effective tax rates are at a historical low, under 15% of GDP.

    2. He is also right that effective tax rates are far more important than statutory tax rates, something that should be remembered on the left when comparing current taxes to historical levels.

    3. Where is his wrong is focusing on the current effective tax rate exclusively.

    4. Absent any change in statutory tax rates, effective tax rates will increase. The reasons for this are somewhat technical although I’m happy to explain more. Indeed, absent any change in statutory tax rates, effective tax receipts would return to about 18.5% of GDP. If one allows tax rates on “the rich” to increase as they are scheduled in 2013, the effective tax take would become about 19.0% of GDP.

    5. Bartlett is aware that number 4 is true and therefore focusing his argument on point 1 is disingenuous. See point 3.

    If that doesn’t help, let me know. It’s a somewhat arcane topic to begin with.

  • Dr. J

    If I might try, Steve, I think it’s very simple. Even if statutory tax rates are constant, effective tax rates will go up and down. Because the tax is a percentage of (for example) income or profits or payroll expense, and those things go up and down.

    Bartlett is right that effective tax rates are low at this moment relative to the past few decades. But that’s not because the statutory rates are particularly low, it’s because unemployment is high, and therefore incomes and payrolls are down, and therefore the taxes on those things are providing less money than they did a few years ago. They will come back up as the economy picks up, and the effective tax rate will rise as well.

    There’s another reason effective rates will rise, too: AMT. Back in 1969, to prevent 155 high-income households from avoiding income tax through loopholes and deductions, Congress passed the alternative minimum tax. It can be thought of as an additional tax on top of the normal income tax, so it always increases taxes for the people it applies to. And because the AMT threshold isn’t indexed to inflation, it now applies to millions of households, and more every year.

  • SteveinCH

    Good points Dr. J.

    One more reason is the fact that wage growth and corporate profit growth frequently exceed GDP growth. When this happens, taxes as a percentage of GDP increase assuming constant statutory tax rates

  • KATHY KATTENBURG

    Bartlett is right that effective tax rates are low at this moment relative to the past few decades. But that’s not because the statutory rates are particularly low, it’s because unemployment is high, and therefore incomes and payrolls are down, and therefore the taxes on those things are providing less money than they did a few years ago.

    Here’s the thing, though: you (and Steve, too, if this point of yours was what he was trying to say, too) are countering a claim that Bartlett did not make — at least as I read him.

    I did not see Bartlett claiming that the effective tax rate is too low because the statutory tax rate is too low. I saw him saying that the effective tax rate is the more accurate measure of what individuals are actually paying in taxes than is the statutory tax. He’s saying looking at the statutory tax alone gives a misleading impression that the tax rate people actually pay IS TOO HIGH, not too low.

    Also, your assertion that the effective tax rate is down “because unemployment is high, and therefore incomes and payrolls are down, and therefore the taxes on those things are providing less money than they did a few years ago,” ignores what Bartlett gave as the explanation for why the effective tax rate is lower than the statutory tax rate: not because of unemployment and payrolls, etc., but because of the many ways in which high income earners can reduce their taxable income. Here is what he wrote:

    The economic importance of statutory tax rates is blown far out of proportion by Republicans looking for ways to make taxes look high when they are quite low. And they almost never note that the statutory tax rate applies only to the last dollar earned or that the effective tax rate is substantially lower even for the richest taxpayers and largest corporations because of tax exclusions, deductions, credits and the 15 percent top rate on dividends and capital gains.

    The many adjustments to income permitted by the tax code, plus alternative tax rates on the largest sources of income of the wealthy, explain why the average federal income tax rate on the 400 richest people in America was 18.11 percent in 2008, according to the Internal Revenue Service, down from 26.38 percent when these data were first calculated in 1992. …

    So what that has to do with unemployment and payrolls is a mystery to me, nor can I understand how effective tax rates will go up all by themselves when (and if) the job market improves, when the job market is not the explanation for why the effective tax rate is low to start with.

    The only way the effective tax rate would go up, following Bartlett’s argument, is if these “adjustments” that the wealthy make to their income, the deductions, the loopholes, etc., were ended or reduced. And that is not going to happen w/o human action.

    Kathy

  • SteveinCH

    Let me try it this way Kathy.

    When Bartlett says the effective tax rate is low, he means two things. First, it’s low relative to the statutory tax rate because of deductions and exemptions. This statement, as you reference above, is always true. He also means that it is low relative to what it has been historically. This is also true at the current moment in time. But, as the CBO report shows, it is not projected to be true in the future regardless of any changes in the statutory tax rate or exemptions or loopholes or anything else about the statutory tax system.

    This leads you to the perfectly logical question you have asked two times which is why would the effective tax rate go up if the statutory tax rate (and associated rules like deductions) is unchanged.

    I’m going to offer a few simplified examples and then give you some evidence that starts to explain why.

    There are really two effects here. The effect of coming out of a recession and what happens in general in the economy. Let’s start with coming out of the recession, however slowly.

    As we come out of a recession, more workers are hired meaning that total wages increase…corporate profits also go up which means that stock prices and capital gains go up. Each of these things tends to go up faster than GDP when an economy comes out of a recession. As a result, taxes based on these things also go up faster than GDP. Thus, the effective tax rate, measured against GDP tends to go up.

    Take a simplified example. Skip this part if you like, I just want to demonstrate how the numbers work. Let’s say that currently taxes are 15% of GDP. If wages, and corporate profits (and associated capital gains) go up by 8% and the GDP goes up by 2% (not too far off of where we are), one year from now, taxes would be 15.9% of GDP. That’s (15*1.08)/(100*1.02).

    So because when the economy grows, wages and business income tends to grow faster, an economy coming out of recession tends to lead to increasing effective tax rates even in a world where statutory tax rates and deductions are unchanged.

    Now the same thing is true but to a lesser degree even when the economy is not coming out of a recession. To take a simple example, here is the long-term forecast for corporate profit growth
    http://www.consensuseconomics.com/forecast_surveys/corporate_profit_forecasts.htm

    In each year starting in 2010, you’ll see that corporate profits are growing faster than the economy. As a consequence, all other things staying the same, corporate profits (and therefore corporate taxes) will tend to grow faster than the economy. This makes the effective corporate tax rate (measured against GDP) higher even though there was no change in the tax code.

    I don’t know if that’s helping or hurting. Now that I’ve written this though, I remember a post on this topic that was quite good. Let me see if I can find it. I think the explanation there is better than the one I just offered.

  • SteveinCH

    Kathy,

    Here’s the article I was looking for from Derek Thompson, a very good blogger on The Atlantic website. I don’t often agree with him but I think he is very good on economic issues. He is one of the better bloggers on the fiscal situation even if he approaches it from a (in my view) slightly left of center perspective.

    You’ll see in this post, he’s talking about a different but related issue, namely why is it that the Federal government never raises more than about 20 percent of GDP in taxes. His conclusion (correct in my view) is that the government keeps cutting taxes.

    In other words, taxes as a percentage of GDP increase over time unless the government either cuts tax rates or adds new deductions and exemptions. He provides a nice time series graph that helps make the point.

    You can also see the impact of coming out of a recession on tax receipts (for example in the 75 to 79 timeframe). In any event, perhaps the picture is easier to follow than the complex explanation I offered above.

    http://www.theatlantic.com/business/archive/2011/04/raising-tax-revenue-isnt-impossible-its-easy/237671/

  • SteveinCH

    So to end the digression. Bruce Bartlett knows that effective tax rates (measured against GDP) will rise from current levels unless government cuts taxes again. That means he shouldn’t just refer to today’s effective rate in his argument.

    By the way, I do not believe that effective tax rates should be cut from the current projection. I would favor constant effective tax rates but in a tax code with lower rates and fewer (no) deductions because I think that is a better tax code.

    So, in short, I agree with Bruce that we should not cause effective tax rates to decline but that’s not because effective rates are historically low today as that is a temporary phenomenon.

    OK, I’ll shut up now ; )

    Have a good night

  • Dr. J

    I saw him saying that the effective tax rate is the more accurate measure of what individuals are actually paying in taxes than is the statutory tax. He’s saying looking at the statutory tax alone gives a misleading impression that the tax rate people actually pay IS TOO HIGH, not too low.

    Yes, I agree that the effective tax rate is a more accurate measure of what individuals are paying. And if you take statutory tax rate to mean the top marginal rate, by definition the effective rate is lower–not just for high income households, but for everyone.

    So I agree with Bartlett on all that. But he also claims “The truth of the matter is that federal taxes in the United States are very low.” That’s strictly true but misleading, because it’s temporary.

  • KATHY KATTENBURG

    As we come out of a recession, more workers are hired meaning that total wages increase…corporate profits also go up which means that stock prices and capital gains go up. Each of these things tends to go up faster than GDP when an economy comes out of a recession. As a result, taxes based on these things also go up faster than GDP. Thus, the effective tax rate, measured against GDP tends to go up.

    I don’t buy this. Corporate profits are already sky high. Corporations have been stockpiling profits; they’re at record highs. Plus, corporations don’t make more profits by hiring more people and/or increasing wages; they make more profits by laying off workers and moving their jobs to China.

    The connection you’re making between hiring/wages and increased profits just does not make sense to me, and it also contradicts things you’ve said at other times.

    In other words, taxes as a percentage of GDP increase over time unless the government either cuts tax rates or adds new deductions and exemptions. He provides a nice time series graph that helps make the point.

    If my reading is correct, Steve, Thompson is not saying that the tax rate never increases above 20%; he’s saying that the *revenue* raised from taxes has never gone above 20% because Congress keeps cutting taxes. If we want more revenue, we have to raise taxes. That’s the conclusion I take from his article. I don’t see where the conclusion you take from the article is justified by what Thompson says.

    Kathy

  • KATHY KATTENBURG

    That’s strictly true but misleading, because it’s temporary.

    And that assertion is precisely what you have not, as yet, supported with evidence. You said that increased employment and payrolls will raise the effective tax rate, but that’s not what Bartlett said, and you have not provided any evidence to demonstrate its truth.

    Kathy

  • Dr. J

    No, Bartlett didn’t explicitly claim that the low effective taxes here to stay. Nor did he claim that his article was *not* misleading. But they aren’t, and it is. And I presented as evidence a whole bunch of graphs showing the effective tax rate’s relationship to cyclical economic factors.

  • SteveinCH

    Kathy

    The definition of effective tax rate is total taxes divided by GDP as Bartlett is using it. Derek’s point is revenue goes up as a percent of GDP unless we cut taxes. If we leave taxes alone, revenue goes up. That is what the graph shows

    As to the rest, I didn’t mean to say that profits were connected to hiring but that both go up in recoveries faster than real GDP.

    I provided you the profit forecast. I can get the personal income forecast if it helps.

    In any event, I refer you back to the CBO forecast. It gives revenue forecasts as a percent of GDP without changes in tax rates

  • JSpencer

    Agree with slamfu. No matter the rates, republicans will complain and brandish their taxaphobia as though it’s Excalibur. In truth the mantra is like a broken 78 rpm record at this point. As the man said, taxes are the price we pay for civilization. The man is right.

  • SteveinCH

    I pay taxes JS. How about you?

  • As the man said, taxes are the price we pay for civilization. The man is right.

    We also have an obligation to hold those who get those taxes accountable, in whatever way is available. Maybe you don’t mind being forced to pay for killings, torture, market manipulations and ripoff schemes, but I do. This “price of civilization” stuff sounds like “sit down and shut up” to me.

  • DLS

    J. Spencer wrote:

    As the man said, taxes are the price we pay for civilization. The man is right.

    Yep, the smiling, pleasant-talking BSer. Define “civilization”; that’s where these liberals fail time after time.

    Is midnight basketball, or the Bridge to Nowhere, or any other stupid gimmick and waste of money undertaken by the federal government (which should be the last government to undertake anything) truly “civilization”? No, obviously.

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