Despite a sense of being overburdened, US citizens pay historically low taxes, which are insufficient to pay for public services, writes DAVID LEONHARDT
WHEN PEOPLE heard that Mitt Romney’s federal income tax rate was about 15 per cent, the immediate reaction of many was to assume that their own tax rate was higher. The top marginal rate is 35 per cent after all, and the marginal rate on a couple with $70,000 (€54,1710) in taxable income is 25 per cent.
But the truth is that most households probably pay a lower rate than Romney. It is impossible to know for sure, given that he has yet to release his tax return.
What is clear, though, is that a large majority of US households – about two out of three – pays less than 15 per cent of income to the federal government, through either income taxes or payroll taxes.
This disconnect between what we pay and what we think we pay is one of the US’s biggest economic problems.
Many Americans see themselves as struggling under the weight of a heavy tax burden (partly for the understandable reason that wage growth has been so weak). Yet taxes in the US are quite low today, compared with past years or those in other countries. Most important, taxes are not sufficient to pay for the programmes many people want.
What does this combination create? An enormous long-term budget deficit.
Together, all federal taxes equalled 14.4 per cent of the nation’s economic output last year, the lowest level since 1950. Add state and local taxes, and the share nearly doubles, to about 27 per cent, according to the Tax Policy Center in Washington – still lower than at almost any other point in the past 40 years.
As the economy recovers and incomes rise, tax payments will increase somewhat. But they will not keep pace with projected spending. Total taxes at current rates would still make up a smaller share of the economy than in virtually any other rich country – not just European nations but also Australia, Canada, Israel and New Zealand.
Obviously, tax increases are not the only way to solve the deficit. Spending cuts can, too. But so far, at least, many voters seem to prefer small, symbolic cuts, like those to foreign aid. Substantial cuts tend to be politically unpopular.
Since the late 1970s total federal tax rates have fallen for every income group. The payroll tax has risen, but declines in income tax have more than made up for those increases. Nearly half the population now pays no federal income tax.
Taxes have fallen most for the very affluent. Romney and his father – George W Romney, the former automobile executive, Michigan governor and presidential candidate – do a nice job of illustrating the change.
The elder Romney, who died in 1995, paid an average federal tax rate of 37 per cent in the 12 years for which he released his tax returns, according to an analysis in Tax Notes magazine. Mitt Romney’s tax rate has been far lower, thanks mostly to the decline in taxes on stocks and other investments. The top marginal tax rate on ordinary income has also fallen sharply.
Besides the drop in tax rates, affluent households have benefited disproportionately from tax breaks and cuts. The mortgage interest deduction, widely considered a middle class benefit, actually saves a typical middle-income household only about $200 a year. The average family in the top 1 per cent saves more than $5,000.
Such breaks are probably one reason so many people feel as if their own taxes are such a burden. They have a sense, and not incorrectly, that others are benefiting from tax breaks unavailable to them.
The group for which tax rates have fallen the least is the upper middle class: households earning between about $75,000 and $300,000 a year. Their tax rates have declined over the past few decades, but only by a couple of percentage points.
Of course, many of the people who talk publicly about taxes – economists, policy experts, journalists – happen to fall into this group, which may be yet another reason the public debate does not always match reality. – ( New York Timesservice)