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Tax-heavy and making plenty cash

By Dylan Matthews

The Tax Policy Center's Roberton Williams and Rosanne Altshuler have a great piece in The Washington Post debunking myths about tax policy. This, in particular, is a crucial point:

2. Americans are overtaxed.

In 2007, federal, state and local taxes claimed about $3.8 trillion, or 27 percent of U.S. gross domestic product. That's nearly $13,000 for every American. Two-thirds of tax revenues went to the federal government.

It may sound like a lot, but other developed countries collect even more. In 2006, taxes in 30 of the world's richest countries averaged 36 percent of GDP; only Mexico, Turkey, South Korea and Japan had tax rates lower than ours. And taxes in many European countries exceeded 40 percent of GDP because these nations offer more extensive government services than the United States does.

Americans do pay far more in individual income taxes than residents of other wealthy nations. Nearly 37 percent of U.S. tax revenue came from personal income taxes in 2006, about 10 percentage points more, on average, than in other industrialized countries. But we pay much less in sales taxes; 17 percent of 2006 U.S. tax receipts were from taxes on goods and services, or about half the 32 percent average for rich countries.

This obviously isn't a point supporters of a more expansive welfare state like to stress, but the U.S. can afford to raise taxes considerably – 10 percent of GDP or more – if it decides that providing useful services to its citizens is worth it. Objections raised to health-care reform – or universal preschool, or paid family leave, etc. – based on fears that it cannot be paid for tend to ignore this option, but it's the obvious solution down the road. Assuming CBO projections hold, this won't be necessary for the current health-care reform package, but even should it become necessary, the U.S. wouldn't face fiscal catastrophe; it would just inch closer toward being a normal developed country. If the increases are centered around consumption, where Williams and Altshuler note the U.S. is lagging, the negative effect on growth could be limited. Even studies that warn about the contractionary effects of tax increases, such as this one (PDF) from Christina and David Romer, focus on how increases blunt growth by deterring savings and investment, which new consumption taxes would actually encourage.

-- Dylan Matthews is a student at Harvard and a researcher at The Washington Post.

By Washington Post editor  |  April 5, 2010; 10:30 AM ET
Categories:  Taxes  
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Comments

It's an interesting argument, but taxes as a percentage of GDP aren't the only things to look at. Obviously, you look at the value of services provided, a good start.

But then there's the unemployment rate in those countries. Then there's the average salary. Per capita productivity. And so on. High taxes don't just take money out of the tax payers pocket and return it in the form of services he or she may or may not want. They also impact unemployment rates, rates of housing ownership, average salaries, and so on.

When you buy that cute little puppy, it doesn't just cost you the price of the cute little puppy. There's the vet. There's everything it chews up. There's all the poop and pee you end up cleaning out off the floor. There's obedience training. But there's a reason the pet shop doesn't emphasize the shoes you're going to lose or the carpet you're going to have to replace.

There's more to high taxes than being obligated to pay for more government services, whether you want them or not.

Posted by: Kevin_Willis | April 5, 2010 11:08 AM | Report abuse

"There's more to high taxes than being obligated to pay for more government services, whether you want them or not."

Spoken like someone who didn't bother to read to the end of the post. Maybe you were distracted by a cute little puppy?

Posted by: slag | April 5, 2010 11:22 AM | Report abuse

Dylan,

the problem with the US is that every state has different tax burdens so while some may be low mine in NJ is very high. About a total tax rate of about 45% when you factor in property taxes etc.


Also I'm thinking more and more about how the federal government is going to be able to subsidize small employers healthcare to between 35 and 50% for the next several years and still not destroy the tax base? Am I missing something in that part of the healthcare legislation?

Employers are already calling me to hold off on the "destruction" of their plans due to rising premiums because they're about to not pay for it, it'll be on the government's dime.

Again its not reducing costs, its shifting costs.


And if you were paying 45% of your income to taxes you wouldn't be so willing to shell over another 10%.

Posted by: visionbrkr | April 5, 2010 11:24 AM | Report abuse

Mankiw makes a great point:

"high tax rates tend to depress GDP. Looking at taxes as a percentage of GDP may mislead us into thinking we can increase tax revenue more than we actually can."

Posted by: marteen | April 5, 2010 11:32 AM | Report abuse

visionbrkr is correct.

Klein fails to mention that such a small percentage of the populace pay the bulk of the income taxes. The libs never seem to understand that Washington produces nothing. Rather it exists by siphoning off those who do produce profits. Hey, what's another 10% when almost 60% of the country pay no sales tax at all.

If left unchecked, liberal democrats would destroy all incentive in this country. Then who will be left to pay for all their grand schemes?

Posted by: superman32 | April 5, 2010 11:36 AM | Report abuse

Well, one hopes that when students like Dylan Matthews gets out into the real world and realizes how higher taxes actually impact us working slobs, he may change his philosophy.

And keep in mind, young Mr. Matthews, that the U.S. has large international obligations.
Although the world is slowly changing for the better, there are still powerful, dangerous actors on the world stage and they are not intimidated by anyone except the U.S. (albeit a bit less so under our current administration)

Posted by: spamsux1 | April 5, 2010 11:37 AM | Report abuse

And yet, though unemployment may be higher in the countries discussed in this post which have higher tax burdens, they haven't managed to stamp out "all incentive".

We're talking about a few percentages here or there in tax rates, not the end of the world, freedom, or anything else. Like any other policy, raising taxes needs to be evaluated based on its pros and cons, not insane hyperbole about the end of liberty.

And certain ways to change the tax system might end up producing more revenues on the federal government while changing the incentives for the better. (I'm thinking about the progressive consumption tax discussed below).

Posted by: MosBen | April 5, 2010 12:05 PM | Report abuse

Easy to say, MosBen, when you're talking about taking and spending someone else's money.

Posted by: superman32 | April 5, 2010 12:20 PM | Report abuse

superman32 wrote: "Klein fails to mention that such a small percentage of the populace pay the bulk of the income taxes."

And superman32 fails to mention (like most conservatives) that the vast majority of people pay taxes, even if they're not paying Federal income taxes. Did you read the 5 myths article? "But even citizens who pay no income tax still pay other kinds of taxes. They pay Social Security and Medicare taxes when they work, sales taxes when they buy things and property taxes on their homes. Drivers pay gasoline taxes, and smokers and drinkers pay excise taxes on tobacco and alcohol. According to our research, more than 75 percent of us will pay at least some form of federal tax in 2010. Those who pay no federal taxes are mostly the low-income elderly or very poor families with children. Even about half of those with annual incomes under $10,000 pay some federal tax, most often payroll taxes on wages."

I wonder why conservatives never mention that?

Posted by: steveh46 | April 5, 2010 12:24 PM | Report abuse

superman32,

not everyone is after your money. (this assumes you have money which no one on here could know or not). Its that paranoia that goes too far right that gives conservatives a bad name.

And people need to lay off Dylan's status as a "student". We all were there once but most of us (myself included) weren't bright enough to go to Harvard. I'm sure he gets it all spamsux1.

Posted by: visionbrkr | April 5, 2010 12:25 PM | Report abuse

superman32, that's a trite and empty answer, just as it would be if I said, "It's easy to talk about unfair taxes when it's not your child receiving a sub-standard education." I could list any number of other social ills.

We're not talking about tyranny. We're talking about policy. The expense is either worth it because it serves a useful purpose with a bearable cost or doesn't. One side is not going to eliminate the incentive for people to work and the other isn't going to starve all under-privilaged children. There are real costs to the policy decisions that are made in Washington, but few are as apocalypic as all that, and grownups can tell the difference between the end of freedom and an adjustment of a few points in the marginal tax rate.

Posted by: MosBen | April 5, 2010 12:27 PM | Report abuse

So, why do we have to "catch" up with others countries in taxes? Some new rule from Obama! We should be reducing the size of the government, reducing entitlement programs, and incentivizing business to create jobs. We all know that the CBO's projections on Obamacare are low; and that the problem of deficits will get worse in the future. It's time for for the inexperienced to step aside and put some reality back into society!

2010 WITHOUT DOUBT, VOTE THEM OUT!

visit: http://eclecticramblings.wordpress.com

Posted by: my4653 | April 5, 2010 12:35 PM | Report abuse

"Well, one hopes that when students like Dylan Matthews gets out into the real world and realizes how higher taxes actually impact us working slobs, he may change his philosophy."

It's a pity that life is so hard for you. And if Matthews changed "his philosophy" based merely on his singular personal experience, it wouldn't be much of a philosophy, now would it?

Posted by: slag | April 5, 2010 12:39 PM | Report abuse

Have you actually read the Romer and Romer study ? I haven't, but I know that David Romer called it "hyper Keynesian." OK a hint -- Keynes was not worried about excessive consumption.

The point of the Romer and Romer study is as close to the opposite of your claim as is possible. They conclude that tax cuts unaccmpanied by spending cuts cause increase demand and, in the short term, increased output. This happens according to R and R because they cause increased consumption, that is, reduced saving.

Note this view has been expressed as policy on the advice of C Romer -- Since she became chairwoman of the CEA there has been a huge gigantic tax cut (and various smaller ones). Taxes weren't cut in spite of the fact that the tax cut was expected to reduce saving rates. That was the point of the tax cut component of the stimulus bill.

Don't mix up short term and long term. Don't mix up effects given historical monetary policy and effects given optimal monetary policy. Learn some basic Macroeconomics. Or how about reviewing economics 101.

Posted by: rjw88 | April 5, 2010 12:50 PM | Report abuse

sorry I mean Ec 10 not economics 101. Or is it actually called Social Analysis 10 now ?

Posted by: rjw88 | April 5, 2010 1:00 PM | Report abuse

@slag: "Spoken like someone who didn't bother to read to the end of the post. Maybe you were distracted by a cute little puppy?"

I read the end of the post. Did not read the PDF it linked to, however. And, while I like puppies, there's nothing like LOL catz if you want to distract me.

Posted by: Kevin_Willis | April 5, 2010 1:16 PM | Report abuse


Mentioning Europe's tax burden is a poor way to demonstrate Americans are not overtaxed.

Posted by: RandomWalk1 | April 5, 2010 1:41 PM | Report abuse

RandomWalk1, I don't mean this sarcastically, but why? Granted, the situation may be more complex than tax rate as a percent of GDP, as Kevin points out, but in a world where the slightest talk of increasing tax rates or of introducing a new type of tax is met with cries of "Tyranny!" and "Oppression!", why isn't it reasonable to say that Europeans pay higher tax rates and don't live in some kind of police state?

Posted by: MosBen | April 5, 2010 2:17 PM | Report abuse

Financial transaction tax structured to capture day trading and hyperfast computer arbitrage trading.

Derivatives tax structured to capture speculators who don't own or have a significant interest in the underlying commodities they are trading.

I would raise the income tax top rate back to around 50% after the first 2 million or so and have it go up 5% for every 2 million earned up to about 90%.

Where is the wealth tax? the only wealth taxed in the US is real estate. Other forms of assets should get some form of taxation, since real estate is the major or only asset most non rich people have outside retirement accounts.

Posted by: srw3 | April 5, 2010 2:17 PM | Report abuse

The begininning of the justification for raising taxes.

Step One - Show our tax rate as % of GDP
Step Two - Show Europe's tax rate as a % of GDP
Step Three - Blame Bush for cutting taxes
Step Four - Have special interest groups write a bill
Step Five - Pass the bill as fast as possible while saying we are one step closer "to every other industrialized country"

Posted by: Holla26 | April 5, 2010 2:25 PM | Report abuse

srw3,

I'm sorry but your income tax suggestion (IMO) would destroy innovation and businesses as we know them especially in the small to medium sized markets. I'm reasonable so i'm fine with taxing unearned income but your income tax suggestion would hurt more than help.

Can we also talk about some entitlement reform too when we speak of these changes?

Posted by: visionbrkr | April 5, 2010 2:32 PM | Report abuse

visionbrkr, I've always been skeptical of the "high tax rates kill innovation" argument, but what do you think about a heavily progressive consumption tax?

If we only tax what people spend, not what they invest in "innovation" or in savings, could we agree to a 100% tax on spending above a couple million per year?

Posted by: MosBen | April 5, 2010 3:05 PM | Report abuse

Easy to say for a guy who pays NO TAXES!

Posted by: obrier2 | April 5, 2010 3:18 PM | Report abuse

mosben,

i know several small to medium size employers that make in the range of $2-5 million per year in salary. If you tax them at 60-70-80% of their income they will absolutely change what they do to avoid that. This means not hiring new employees in their companies or doing whatever legal means are at their disposal to evade the taxes.

I'd be fine with a consumption tax as long as it doesn't increase my overall tax burden. If its just layering then I'm not for that. Remember I'm already in the range of 40-45% when you factor in property, sales, etc.

Maybe I'm a bad example for your theory.

Posted by: visionbrkr | April 5, 2010 3:23 PM | Report abuse

It is a little awkward that this post is being made by someone who, presumably, has never paid taxes in his life.

And while I am in the moaning mode, it'd be nice of Dylan would actually engage in the comments section. I mean, it's the least he can do after being given the great privilege of temporarily blogging for the Washington Post.

Posted by: gocowboys | April 5, 2010 3:38 PM | Report abuse

I think we should keep in mind that taxation at the federal level does not pay for anything. Neither does debt issuance for that matter. The federal government only ever borrows back what it has already spent. Taxation decreases liquidity in the private sector, its purpose is to drive the value of money and keep down inflation expectations. Debt issuance is really about allowing the Federal Reserve to maintain its target interest rate (there's a corporate welfare component to it as well, you can find a good article about this here:

http://bilbo.economicoutlook.net/blog/?p=8225

). Consumption and income taxes should be raised if the economy is overheating and there is a fear of inflation. Here in the U.S. we are so far from that point right now I can't imagine why anyone would even consider raising these kinds of taxes. Financial transactions taxes, excise taxes, and other similar kinds of taxes designed to alter behavior should be evaluated based on whether or not the behavior in question is desirable, not on the amount of revenue that can be raised (this only applies to federal taxes, not state and local taxes). The Federal government is the monopoly issuer of U.S. dollars. The idea of a sovereign government saving in the currency it issues under monopoly conditions is patently foolish.

Posted by: nklein1553 | April 5, 2010 3:47 PM | Report abuse

Dylan,

I think a few other people have alluded to this, but those European nations with high taxes tend to have significantly fewer hours worked than the U.S. While France is almost as productive as the United States, French GDP per capita is about 1/3 lower because their hours worked are about 1/3 lower. When taxes were similar in both countries, working hours were also similar. Raising federal taxes, particularly on people in already high tax states (e.g. visionbrkr) so that the overall take is at European levels, a lot of revenue will be lost due to reduced economic activity over the long haul. I'm not saying we're past the peak of the Laffer curve yet - I'm just saying that raising the proportion of GDP taxed is going to slow down the trend rate of GDP growth, and so we won't collect as much in taxes as we expect.

Also, consumption taxes won't necessarily increase saving and investment. If you substitute existing income taxes with consumption taxes, savings and investment should increase. If the taxes are additive, you reduce my after tax income, and potentially my savings as well.

So if I make $50,000/yr, save $10,000/yr and pay $10,000 in taxes currently, and a VAT takes away another $2,000/yr, I might end up reducing my saving to $9,000/yr and my consumption from $30,000 to $29,000. While the VAT incents against current consumption, my current consumption is fairly path dependent. I pay rent, pay my car bill, pay for gas, pay for groceries, pay for going out on the town. In my case I'll cut some of my savings out to maintain my lifestyle - I'm not going to cut my spending by the full $2,000+, mostly because that $2,000 is, on the margin, spent on entertainment which I highly value. Sure, I might not go out to restaurants quite as much, but I'm not going to cook every meal at home either. In addition, I might also conclude that taxes are only going to continue moving higher in the future, so I might as well spend my money while its mine before VAT goes up and before Congress circa 2040 puts a 25% 'excess savings tax' on my Roth IRA to fund Social Security for people who failed to save.

So while a VAT might be better in terms of keeping my savings rate high relative to a new income tax, compared to the status quo I will probably save less if there is a VAT.

Posted by: justin84 | April 5, 2010 6:47 PM | Report abuse

@vb:I'm sorry but your income tax suggestion (IMO) would destroy innovation and businesses as we know them especially in the small to medium sized markets.

So, what you are saying is that people need the extra 10% (from 40-50%) marginal rate on the income past 2 million dollars in order to innovate? I just don't see that.

since the tax goes up 5% at 2 million dollar increments, the 90% rate would only affect incomes of over 10 million. I know that this will never happen but would like to see higher marginal rates on obscene incomes of wall streeters, instead of some kind of regulation on bonuses per say.

Most of the people making this kind of money are getting most of it from passive income (dividends, interest, stock appreciation, etc.) anyway.

Is it just the income tax that you disagree with or the transaction tax and derivatives tax as well? I don't see day trading or hyperfast computer trading as adding much to economic growth, just making traders obscene amounts of money.

Posted by: srw3 | April 5, 2010 7:09 PM | Report abuse

MosBen,

A 100% tax rate on extra spending is probably too high.

The return to evading the tax on the margin is extremely high. There's an huge incentive to avoid reporting income if on the progressive consumption tax will take 100% of it away. For that matter, it will probably put a damper on serial entrepreneurs. Once you have, say, $10 million in the bank, you might as well keep your spending at a modest $200,000/yr and avoid the luxury tax as much as possible. Or, for that matter, retire in a place with much better tax laws (or move there to continue your entreprenuerial adventures).

In addition, there is a lot of economic activity geared to supporting the consumption patterns of the wealthy. If consumption by the wealthy falls, you're going to put a lot of businesses and people out of work. Now, the economy will eventually readjust and new businesses will be created and these workers will eventually become employed again, but that's a lot of pain to face just because we as society are jealous of people with big yachts and mansions. Also, you'd probably destroy the financial sector (and by destroy, I mean send a lot of the financiers currently here to Hong Kong and Singapore - high rollers that currently pay lots of taxes and buy lots of stuff here).

At any rate, I think there are some serious unintended consequences to distoring the market by that much.

Posted by: justin84 | April 5, 2010 7:10 PM | Report abuse

I don't want to see a VAT until we have a financial transactions tax and a derivatives tax in place. VAT taxes are nregressive in nature unless there is a very high floor before the tax kicks in.

Posted by: srw3 | April 5, 2010 7:11 PM | Report abuse

@vb:i know several small to medium size employers that make in the range of $2-5 million per year in salary. If you tax them at 60-70-80% of their income they will absolutely change what they do to avoid that.

Under my plan which you dissed, $2 million would have no change in tax rates. 4-5 million would get 45% tax rates. What I am proposing seems downright reasonable, given it doesn't get close the rates you quote as killing innovation.

Posted by: srw3 | April 5, 2010 7:22 PM | Report abuse

@J84:So if I make $50,000/yr, save $10,000/yr

Unless you are independently wealthy without your salary, saving 20% of your 50k pretax income is almost impossible in almost any part of the country. You would have to own your home outright, live rent free with someone, own your car outright and have no credit card debt, and no dependents, to consistently save that % of your 50k income.

Posted by: srw3 | April 5, 2010 7:30 PM | Report abuse

srw3,

maybe "killing innovation" was a bit strong. Severely hamper better?

Ya i'd be fine with a minimal tax on passive income and derivatives and financial transactions. I'd prefer that to what i've seen on some liberal websites.

A VAT to have any shot would need to come AFTER a fixing of the tax code. You can't just lop it on top of what we have now and NOT expect a revolt.

plus you can't talk tax without talking entitlement reform at the same time. It has to be done TOGETHER.

justin,

as i paid my taxes today (ugh) I'm so glad I could be your guinea pig.

If i was selfish I'd say go ahead and tax lower taxed states now but I doubt they could afford it relative to their incomes in those states.


and i love your thoughts on the taxing of the wealthy. The butler's unions would probably be totally against it!!

Posted by: visionbrkr | April 5, 2010 8:29 PM | Report abuse

"just inch closer toward being a normal developed country"

I'm sure the "normal developed country" Mr. Matthews talks about is a European country which is the liberal nirvana. Yes we can raise our tax rates to confiscatory levels like they do in Europe then we too can enjoy slow economic growth, high unemployment and an out of control welfare state.

It's also interesting to hear all the lefties lately advocating for a VAT tax, just like Europe, to close the massive Obama deficit. Of course they love the VAT tax because its invisible to the tax payer and can be raised at will by the government without the taxpayer being able to see the increase directly. Unlike a traditional sales tax where you can look at the cash register receipt when you buy something to tell how much it costs.

Here's a radical idea. How about the government cut back on it's spending to close the Obama deficit?

Posted by: RobT1 | April 6, 2010 5:40 PM | Report abuse

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