Friday, November 30, 2012

The Biggest Lie In America Today

grover norquist
Grover Norquist, Source: Business Insider, November 2012
Grover Norquist, a conservative lobbyist and founder of Americans for Tax Reform, has made a career by trumpeting the biggest lie in American politics.  The problem is most people don't know it's a lie.  By continuing to push the idea that Americans are overtaxed, Mr. Norquist has added to a growing misconception about taxation in the US.  The New York Times Reports that in 1944 when the US was engaged in World War II, in spite of historically high income tax rates, including a 94% tax rate on the highest earners, roughly 90% of all Americans believed their tax rates were fair.  Yet today, as the US remains entrenched in an eleven year war in Afghanistan and with historically low income tax rates including roughly half the country having no income tax liability at all, a shrinking number of Americans still believe their rates are fair.  In fact, it was the perceived threat of higher taxes that eventually gave birth to the conservative Tea Party movement, a group whose very name is an acronym for Taxed Enough Already.

Grover Norquist's assertion that Americans are overtaxed, an assertion that a growing number of Americans believe, has been the central focus of his work in politics; and make no mistake about it, he makes a very convincing case.  Mr. Norquist can rattle off a series of statistics to support his positions, and while his figures are often taken out of context, his influence should not be dismissed.  After all, he did get 95% of all Congressional Republicans to sign an anti-tax pledge.  Mr. Norquist's position is not a difficult one to defend.  Honestly, who wouldn't want to pay less in taxes and it's an easy argument to fit on a bumper sticker?  But with talks around the fiscal cliff heating up and with every government program with the possible exception of Social Security potentially on the chopping block, a simple question must be asked.  Are Americans really overtaxed?  Getting to the root of this issue is not easy, but it is necessary.

Taxation is a complex issue, so for the purpose of objectivity we will briefly examine three major areas of taxation: individual income tax rates, corporate income tax rates, and tax revenue as a percentage of gross domestic product (GDP).  Leaving politics aside, let's take a look at the numbers and see how they compare both historically and in relation to our peers in the Organization for Economic Cooperation and Development (OECD).  First, let's consider the single biggest provider of federal revenue, the individual income tax.  Income tax rates today are at historically low levels.  Across all income brackets, tax rates are as low as they've been since 1930 and are only a third of what they were in the 1940's and 50's.[1] 

Comparatively speaking, the US has some of the lowest income tax rates of any major economic player in the world.  Ranking only 23rd, America does not come close to breaking into the top 10 nations in terms of income tax rates.  In fact, the income tax rate in the US on the highest earners is a full 15% lower than the rate in Ireland, which has only the 10th highest income tax rates in the world.[2]  Turning to corporate taxes, while the US corporate tax rate at 35% on the highest business incomes seems a bit high, in reality the average US corporate income tax is still below the median effective rate among OECD nations. Finally, in terms of all forms of tax revenue as a percentage of GDP, the US ranks only 31st among OECD nations at 25.1% of GDP, which is a lower percentage share than it had in 1945, 1965, 1985, and 2005.[3]

If you've traveled abroad much, particularly to developing nations, you may come to realize just how much the US government provides for its people and how effective and efficient our nation's government is when compared to the rest of the world.  Certainly there is a lot of wasteful spending and we should always seek to achieve an even more effective and efficient government, but the idea that US citizens are overtaxed is simply not supported by the evidence, neither historically nor relative to other nations.

The premise upon which Grove Norquist has built his entire career is false and in my opinion the biggest lie in American politics today.  Popular as it may be, it is this sort of foolishness that has made it impossible for politicians to address the issue of taxation in any real or meaningful way, and it has played a major role in creating the huge debt and deficits our nation now faces.  There are real debates to be had about what government should and should not invest in, but we would do well to recognize that Americans are not overtaxed.  In fact, as unpopular as it is to say, we're simply not taxed enough.  And if you're not an American and happen to be reading this post and are wondering why it didn't discuss any form of a national consumption tax, commonly known as VAT, it's because the US doesn't have one.  That's right, America is among only a handful of nations that has no national VAT.  On that note I'll ask again.  Are Americans really overtaxed?  Not likely.

UPCOMING POST: Will Republican Extremists Do To Christie What They Did To Crist?
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References
  1. The Tax Foundation (2011). U.S. Federal Individual Income Tax Rates History, 1913-2011. Retrieved 30 November 2012: http://taxfoundation.org/article/us-federal-individual-income-tax-rates-history-1913-2011-nominal-and-inflation-adjusted-brackets
  2. CNBC (2012). Countries With the Highest Income Tax Rates. Retrieved 30 November 2012: http://www.cnbc.com/id/47290212/Countries_With_the_Highest_Income_Tax_Rates?slide=1
  3. White House (2012). Budget FY 2011, Historical Tables. Retrieved 30 November 2012: http://www.whitehouse.gov/sites/default/files/omb/budget/fy2011/assets/hist01z2.xls 

2 comments:

  1. What are your thoughts on a flat tax rate?

    Increasing the tax burden on one half of the population while maintaining full exemption for the other half is not any more sustainable than the status quo. Do you take into account the fact that, of that non-taxed half, the majority are taking money FROM the government in some form or other? Do you propose to cut these payments to the non-paying half, or would you support them continuing to draw whatever they are now? What about reducing pay-outs to these non-contributors at a rate equal to the tax increase you suggest for those currently propping up the government with their earnings? If one has to pay a little more, how about the other taking a little less? If tax rates are increased, it will do nothing but provide the means to increase the headcount of folks on the take. Perhaps it is not quite that simple, but I hear the "fair share" mantra quite a bit here lately. The graduated tax system we are under now, and the fact that so many pay nothing in at all just seems a pretty long way from fair to me.
    Bring every one under a flat tax, if there is no tax liability then reduce payouts according to the individuals "fair share" of the burden.

    One dollar of every three I make goes to the federal government, ...that's just in income tax. Then there's... sales and use tax, property tax, wheel tax, gasoline tax, luxury tax, tobacco tax, payroll tax, and coming soon.... Obamacare tax (call it what you will, it is a tax). I think I'm taxed quite enough already, thank you very much.

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    Replies
    1. First of all, thank you for taking the time to comment. I very much appreciate your input. As for my opinion on the flat tax, honestly I'm not a big fan, mainly because we now have historic levels of income inequality.

      I do have a few points regarding your comments. The concept of the half the nation having no tax liability is of course not accurate, they do pay the lion's share of payroll taxes, in fact, they pay much more than the top income bracket in total % of their income. I have another post on this topic specifically you may want to review, with supporting evidence as always.

      Second, the number cited about half the nation having no income tax liability upon further examination was shown to be an anomaly due to a confluence of factors during the recession; it is no longer true. But lastly, that half the country you refer to, when examined showed a majority of them were either senior citizens, military personnel or people who are working but actually earning below the federal poverty line, so that bears consideration of course.

      But I will say that this post is not about validating current tax policy, like you I agree it is flawed, but rather my goal was to simply point out that when comparing the US to other OECD nations or even comparing the US to itself from a historical perspective, by no objective measure is the US overtaxed, in fact, we are at historic and comparative lows in terms of taxation. The evidence is clear on this matter.

      Do I believe half the country should not pay taxes, of course not, but then that is a proven falsehood as we know they pay a great deal, roughly 14% of their income in the bottom bracket in payrolls taxes, which directly pay for medicare/medicaid, social security, welfare and other programs you inferred in your FROM comment. But again, the purpose of this post was not to claim that half should and half shouldn't be taxed, if that were my position then you could rightfully take issues, but my purpose was simply to illustrate that the US is not overtaxed, and on that matter I think the evidence is apparent.

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