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Federal Taxes At Lowest Rate Since 1950

Bruce Bartlett, former adviser to President Reagan, runs some numbers on taxes in the United States and finds a result that is counter-intuitive given the state of debate:

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.

The postwar annual average is about 18.5 percent of G.D.P. Revenues averaged 18.2 percent of G.D.P. during Ronald Reagan‘s administration; the lowest percentage during that administration was 17.3 percent of G.D.P. in 1984.

In short, by the broadest measure of the tax rate, the current level is unusually low and has been for some time. Revenues were 14.9 percent of G.D.P. in both 2009 and 2010.

So what, then, of the Republican arguments that the way to stimulate the economy and create jobs is to further lower tax rates? Bartlett isn’t convinced because, he says, the argument completely ignores the fact that the statutory tax rate has very little to do with what actually gets paid in taxes:

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.

Of course, there is one alternative. Reforming the tax code to make it simplier would have the benefit of both making compliance less complicated, and likely less expensive, and increasing revenue thanks to the elimination of exclusions, deductions, and tax dodges that serve no economic benefit (and which may not even say taxpayers any money once you take the costs of compliance and preparation into account). Of course, any talk of reform that might increase revenue is verboten in the GOP. Which means we’ll just sit here doing nothing, again.

 

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About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May, 2010 and also writes at Below The Beltway. Follow Doug on Twitter | Facebook

Comments

  1. Ben says:

    thanks to the elimination of exclusions, deductions, and tax dodges that serve no economic benefit (and which may not even say taxpayers any money once you take the costs of compliance and preparation into account)

    I tend to think the parenthetical is BS, Doug. For most taxpayers, the cost of compliance and preparation is not big. I own my own home, have a child, and a tiny bit of stock. Doing my taxes cost me under 100 dollars this year. I made a hell of a lot more than that just on the mortgage deduction. Now, whether you think the mortgage deduction is wrong is an entirely different argument. I’m not arguing that. But let’s be honest here, removing all the deductions will slam the middle class. Hard.

    Like or Dislike: Thumb up 4 Thumb down 0

  2. hey norm says:

    the ideology of the so-called republicans is just dumb-founding. i don’t know how else to say this – it simply makes no sense at all.
    here’s a pretty good run-down of how they have radically re-engineered the economy and, in the process, the middle-class.
    http://robertreich.org/

    Like or Dislike: Thumb up 3 Thumb down 3

  3. Jay says:

    Hilarious that you’re pinning the blame on the GOP.

    “Raising revenue” in Washington DC speak = “raising taxes.” Of course, Democrats think the debt and deficit will magically disappear if just raise taxes on the “money counters” that make over $250K a year. Such thinking of course is a joke.

    It would be very easy to simply take rates down to 2 levels like we did in 1986 and eliminate a whole host of credits and deductions and at the same time increase revenue. But in doing that, the Democrats would scream like banshees at the idea of “the rich” paying lower rates even if they were physically paying more money to the treasury. In fact, Paul Ryan’s plan does just that and guess how the left has reacted?

    The notion this is at the feet of the GOP is a joke, especially when we have the President using ludicrous language such as, “Spending reductions in the tax code.”

    Like or Dislike: Thumb up 4 Thumb down 7

  4. ej says:

    Doug,

    there are multiple angles to this right now. At the moment, effective tax rates are historically low. But this is because of temporary measures and because of the recession, with the latter being the largest component. When you have a progressive tax system, tax revenues fluctuate by a greater amout than GDP because when peoples’ incomes fall they fall into lower brackets and and experience an automatic rate cut. The inverse is true when the economy is strong, ie the late 90s. The late 90s revenue shot through the roof because of so many capital gains receipes and people moving into higher brakets. Economists often call this an “automatic stabelizer” with respect to macro fiscal policy.

    But the other angle, which is what is important when taking about long run fiscal balances (which is what we are doing when we talk about tax levels), is that taxes are not particuarly low. At full employment, as the current law stands, close to 20 percent of GDP would go to the fed”s – higher than the historical norm of about 18.5%. This can be seen here:

    http://www.finfacts.ie/artman/uploads/3/US_budget_revenues-outlays_august252009.jpg

    So yes, at this moment taxes are low. But current tax law and therefore current long term revenues are not low at all.

    Like or Dislike: Thumb up 4 Thumb down 2

  5. John Peabody says:

    Any headline that says “1950 tax rates” is horribly mis-leading, for a massive amount of deductions (applicable then) are not present now. However, this requires the reader to read a paragraph or two to gain knowledge. Most people don’t get past the headline. But at least we can avoid these super-targets, can’t we?

    Like or Dislike: Thumb up 1 Thumb down 0

  6. ej says:

    id also add the graph now is even higher, because the healthcare bill increased both taxes and spending – and this chart was before that.

    Like or Dislike: Thumb up 0 Thumb down 1

  7. Neil Hudelson says:

    ramd,

    Thanks for the link man. The first 192 times one of your people posted the same link with essentially the same message, I ignored it. That 193rd time though…that really changed my mind.

    Maybe if your message was more provacative? I mean it has words like “revolution” and “fight” and usually a “wake up!” or two. But maybe you could also work in the words “sheeple” “undergrounds” and “resistance?” I think it would make it more effective.

    [Refers to a spam comment that has since been deleted, along with a dozen or so similar comments promoting the same URL. -ed.]

    Like or Dislike: Thumb up 0 Thumb down 0

  8. hey norm says:

    for 30 years we have been hearing that tax cuts will pay for themselves. slash taxes – deregulate. IT HAS NEVER WORKED. IT’S A FAILED ECONOMIC THEORY what’s so friggin’ hard to understand about that? reagan had to raise taxes. bush ’41 had to raise taxes. clinton raised taxes in ’93 before republicans took out their contract on america. ryan’s tea party manifesto cuts taxes and runs up debt until he throws grandma to the private sector curb and then the debt contiues for decades after.

    Like or Dislike: Thumb up 4 Thumb down 4

  9. michael reynolds says:

    Hey Norm:

    It’s a religious faith with them. They are indifferent to facts.

    Like or Dislike: Thumb up 4 Thumb down 3

  10. The Q says:

    Jay,

    I like your avatar which shows you in a pensive thinking mode…the caption should read: lets see 2 + 2 =….gotta think hard on this one, after all I am a repub, oh frickit, can I use my fingers? oh wait…it equals 2!!!!

    Only a brain dead dipshitte could come up with a patently stupid comment like yours:

    “Raising revenue” in Washington DC speak = “raising taxes.” Of course, Democrats think the debt and deficit will magically disappear if just raise taxes on the “money counters” that make over $250K a year. Such thinking of course is a joke.

    Of course, under Clinton’s ominbus budget reconciliation act of 1993 the dems did PRECISELY what you said is a “joke” with the outcome a surplus going into Bush’s term.

    What drivel you and your moronic cohort continually opine mindlessly into the ether, regardless of the utter idiocy of the content.

    Like or Dislike: Thumb up 4 Thumb down 1

  11. The Q says:

    Jay,

    One last thing…the whole Reagan era “tax cuts” pay for themselves or the current equivalent of “cutting taxes on the rich generates jobs” is the mantra of conservatives everywhere.

    SOOOO. if this is the case, why is it that with the Bush Tax cuts in place the last decade, we had the worst recession since the great depression?

    Correct me if I am wrong, but aren’t these theories your side espouses designed to unleash the private sector’s ability to generate jobs since they know better how to spend their money than the inefficient gubmint?

    Jay blaming the recession on Jimmy Carter and the community Reinvestment Act of 1977 in
    5…4…3….2…

    Like or Dislike: Thumb up 3 Thumb down 2

  12. Tsar Nicholas says:

    Reform the tax code to make it simpler?? A smashing idea.

    OK, let’s eliminate it entirely.

    Repeal the 16th Amendment and then repeal the IRC. Then enact a national sales tax to fund the federal gov’t. Then cap that sales tax rate.

    Let’s stop the idiotic practice of taxing savings, R&D and investment and instead tax consumption. Obviously we’d exempt basic foodstuffs. We could also exempt certain medical necessities too.

    The more you spend on discretionary items the more you pay in taxes. Want to pay less taxes? Well, forego that new wardrobe, Liberace, and put that money into CD’s, bonds, stocks and real estate. Let’s become a true investor nation.

    It’s a deal, right? No? No??? Hmm. Why not? That by far would be the simplest way for all of us to pay taxes. Plenty of states have operated for decades with no state income tax and have provided all the necessary and expected services to their denizens.

    If that plan is too “radical” for you then here’s another way to make the tax code real simple: scrap it and replace it with a true flat tax. Everybody pays the same rate, say 20%. That rate gets capped. No increases ever. No deductions, though. No exemptions. No credits. No AMT. No FICA. You earn $50,000 per year then you pay $10,000 per year in federal taxes. You earn $500,000 per year then you pay $100,000 per year in federal taxes. You earn $10,000 per year then you pay $2,000 in federal taxes. Simplicity, defined. The “rich” pay a lot more in dollars than the “poor.” Most importantly, however, everyone pays their fair share. We all pull the wagon a bit instead of having many if not most of us acting like human anchors. Deal??

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  13. Dean says:

    Unfortunately, these types of studies only look at Federal tax rates. If you included all taxes in the study, my guess is that the numbers would look much different. Property taxes, state taxes, gas taxes, etc. have risen significantly in the past 3-5 years.

    We the taxpayer are not like government entities that can go and create money or funding sources. As taxpayers, we only have one bucket of money to take from to pay all the taxes we are burdened with.

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  14. wr says:

    I can’t believe it took so long for some one to come up with the “but that doesn’t count because there are other taxes, too” line.

    Of course that’s never important when some right winger is complaining about all those poor people who don’t pay any taxes at all because they don’t pay Federal income taxes.

    But tell the truth about how low the income tax rate is today and the whining begins!

    Like or Dislike: Thumb up 1 Thumb down 1

  15. anjin-san says:

    Want to pay less taxes? Well, forego that new wardrobe

    Not sure I want to the GOP nanny state telling me I should dress like someone at a NASCAR event. I like to look sharp.

    Like or Dislike: Thumb up 0 Thumb down 0

  16. Dean says:

    According to Bruce Bartlett, the rate has been between 14.8% and 14.9% for 2009-2011. Two things to keep in mind about the data. First, we were impacted by the most significant economic crisis in at least the past 40 years and probably going back to the depression. Second, while I realize GDP does not include government spending, the government did pump more than $1 trillion into the economy through various bailouts, loan packages, etc.–most of which ended up in the books of US companies. If you were to take the government stimulus out of the GDP, how would that impact Bartlett’s figures?

    In effect, did the government stimulus make it look as though the Federal income tax rate as a percent of GDP was actually lower than it would have been without the stimulus? If that is the case, Bartlett’s argument is flawed.

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  17. Drew says:

    I see the “we are taxed at historical lows” meme is making the rounds again. For those interested in real understanding and perspective, driven by relevant measurement statistics and fact I’d look here http://www.taxfoundation.org/taxfreedomday/ and here.

    The Tax Foundation has often been criticized as “partisan” on policy prescriptions. But the data here comes straight from BEA and OMB tables.
    A few points for those too lazy to read:

    1. The tax to GDP ratio is not “the broadest measure,” it’s a bogus measure. If GDP increases because of debt financing and the ratio falls it doesn’t mean taxes are low, it means GDP has been goosed by an unsustainable credit card binge, reducing the ratio. This issue is addressed in the first link above.

    2. I prefer personal income in the tax burden denominator, but the attached links use national income. Fine, it still lays waste to the notion that the tax burden is at an historical low. Some perspective, and a story of a steadily increasing federal, state and local tax burden:

    a. When introduced, significant income taxation was labeled the “cost of a civilized society.” That’s when the total federal, state and local tax burden – measured in days of income or percent of income – was roughly 30 days and 10%, respectively.
    b. That burden basically doubled after the first great wave of government spending: the New Deal – to 60 days or 20%. Apparently the cost of a civil society doubled.
    c. The tax burden continued to expand, and I would note that the Kennedy tax cuts took us back to 99 days and 27%. But after the Great Society, the numbers increased to 112 days and 31% when Reagan became president. Apparently the cost of a civil society had increased another 50%.
    d. Despite the faith based notion that the Reagan and Bush tax cuts are the root of all evil, the same statistics after implementation of each is about 108 days and 29/30%. (Boy, that Kennedy guy sure was a cruel, tool of the rich guy, what with his 99 and 27%.)
    e. Just prior to the 2008 crash the similar numbers had reached 120 days and 33%. (Driven by bracket creep, property taxes and SS cap increases.)
    f. In 2011 the numbers supposedly fell to 102 days and the high 20’s percentage. But this is the canard. The government has continued to spend like crazy, and if taxes were increased accordingly the days would be 152, and the percentage something like 40%. (Apparently the cost of a civilized society is now 40?) But instead we borrow, tilting the tax to GDP statistic. But in no way are taxes “at historical lows,” and to attempt to “fix” the deficit problem the tax burden would have to increase so much as to be an economic disaster. Seen how retail spending and the economy is reacting to the higher gas prices??

    The real fact of the matter is that the tax burden has been increasing for 90 years, with spurts during every episode of surging government spending. We have a spending problem, not a low tax problem. These “analyses” making the rounds are clearly just thinly veiled attempts to justify yet another round of increases in the tax burden. It’s just data, people. Deal with it.

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  18. Joel says:

    The GOP needs to admit that some moderate tax increases will be necessary, and the Democrats need to admit that real spending cuts are necessary and stop using rhetoric like “starving grandma.” Both sides need to start acting like adults – absolute ideological purity is great for firing people up, but not for practical politics. Not even Reagan was a complete hardliner on taxes.

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