Dec 11, 2012 -
In two recent newsletters, I have written to you about what is in the “fiscal cliff” and government spending. In this issue we will look at federal taxes. Below you will find a historical look at tax rates and revenues, who the government collects taxes from, and the financial burden that our complex tax code has created on individuals and businesses.
A Historical Look at Tax Rates and Revenues
Since World War II, top tax rates have fluctuated from a high of 94 percent to a low of 28 percent. But the remarkable fact is that revenue going into the government has been pretty steady. Revenue has averaged 17.7 percent of Gross Domestic Product (GDP) since 1945 and has never been more than 20.6 percent, which was at the height of the tech boom.
Federal Spending is now 24.3 percent of GDP. If tax revenue is never going to exceed 20.6 percent regardless of tax rates, it is absolutely clear that increasing taxes will never fix our deficit; only cuts in spending can do that.
A Shrinking Tax Base
According to the nonpartisan congressional Joint Committee on Taxation, 51 percent of American households paid no income tax in 2009. Even if retired Medicare and Social Security recipients are excluded, the percentage of working-age Americans who pay no income tax has risen dramatically. According to a report released by the Tax Foundation, about 41 percent of those who filed tax returns in 2010 paid nothing or received more money in refunds from the government than they paid in taxes. That number has grown from 21 percent of tax returns filed in 1990.
The decreasing number of taxpayers is due in part to the growing amount of tax credits that filers can claim. The value of tax credits in 2010 reached $224 billion. Of course, not all credits are bad, but they reduce the number of Americans who have a stake in the U.S. tax system and they add to the complexity of our tax code – which is discussed later in this newsletter.
Who is Paying Their "Fair Share"?
All of this means that a smaller percentage of Americans are now paying a larger percentage of the country’s total tax revenues. Meanwhile, phrases like “paying a fair share” have been used by President Obama to make the case that some Americans with higher incomes are not paying enough in taxes. But as the graphics below demonstrate, the numbers show that our tax system is already very progressive.
In fact, the amount of income earned by the top 20 percent fell in the last ten years, but the portion of federal taxes they paid grew.
Note: The only percentage of federal tax liabilities that is greater than its share of income is the highest quintile.
Sources of Federal Revenue
Individual income taxes have consistently made up the largest portion of federal tax revenue since World War II. The second largest portion has been social insurance and retirement taxes, but that percentage has already begun to decline and will most likely continue to do so as 78 million baby boomers retire. It is also interesting to note that there has been an overall decline in revenue from corporate income taxes since 1945, yet the United States still has the highest corporate income tax rate in the world.
The Hidden Cost of the Tax Code
There is another economic burden that is part of our complex federal tax code, the cost of compliance. In a 2011 report by the Laffer Center, economists estimated that U.S. taxpayers pay $431.1 billion to comply with and administer our complex tax system. This economic burden is referred to as the “complexity tax”. Consider these facts from the report:
- Approximately $31.5 billion in direct outlays (e.g. paying a tax preparer or purchasing software).
- Total IRS administrative costs of $12.4 billion.
- The Taxpayer Advocacy Service of the IRS estimates that individuals and businesses also spent 6.1 billion hours in 2010 complying with the filing requirements of the U.S. income tax code, or an estimated cost of $377.9 billion as of 2008.
- Individuals = 3.16 billion hours, or $216.2 billion annually
- Businesses = 2.94 billion hours, or $161.7 billion annually
- Comprehensive audits also impose an additional taxpayer burden of at least $9.3 billion annually.
There has been no major tax simplification passed by Congress since 1986, but since that time, over 14,400 amendments have been made to the tax code.
As always, I am interested in your feedback and your suggestions on this topic or any other that matters to you. I hope you will contact me with your opinion via phone, email, letter, website, or Facebook.