For People Who Think

April 9, 2010

The “Ugly Truth”…We All Die and Almost Everyone Pays Taxes

Filed under: Uncategorized — 4peoplewhothink @ 2:54 pm

Here it comes, as it does every year – April 15th, tax day. Already, I’m hearing the complaints on my talk radio program on Albany’s WGDJ Talk 1300. One guy called the other day to complain that half the people in this country pay no federal taxes, but he has to pay them, and he’s furious about it.

Not quite true, I explained to him. Nearly 37 percent of U.S. tax revenue comes from personal income taxes. That’s about 10 percentage points more, on average, than in other industrialized countries. And it’s most assuredly true that roughly 45 percent of American households will pay no federal income tax in 2010, according to estimates by the Tax Policy Center. That’s a nonpartisan, non-political Washington think tank that focuses on tax issues.

How do these people get away with paying no federal income tax? Well, half these people are dirt poor. They bring in too little income to be liable for income taxes. The other half is composed of people who earn a bit more, but they qualify for various other tax credits — the earned income credit, the child and child-care credits, the American Opportunity and Lifetime Learning credits, which help pay for college, and the saver’s credit, which subsidizes retirement saving.

But, I explained to my caller, these people still pay the other federal taxes that make up two-thirds of the government’s revenue stream. They pay Social Security and Medicare taxes when they work. When they buy gas they pay the same state and federal taxes the rest of us pay. If they smoke or have a drink now and again they pay excise taxes. On the local and state level, they pay sales taxes when they buy stuff. If they own real property they pay property taxes. According to the Tax Policy Center, more than 75 percent of us will pay at least some form of federal tax in 2010. And the remaining people – those who pay no federal taxes? For the most part, they’re low income old people or grindingly poor people with kids. Even people with annual incomes under 10 grand pay some federal tax, generally in the form of payroll taxes on wages.

And if you’re one of those people who believes that rich people pay no taxes, then take a whiff of this cup of coffee: While it’s true that a very few rich people do avoid federal income tax through the help of shrewd lawyers and accountants, the Tax Policy Center’s research shows that 99.7 percent of people with annual incomes above $1 million will pay federal taxes this year. On average, on April 15th they’ll give the federal government 27 percent of what they bring in. The tax bill for the American taxpayer? About 18 percent.

Well, yeah, the caller said to me, but Americans are overtaxed. Taxes deprive us of our liberty and freedom. Taxes kill the economy. They kill initiative. Nobody pays taxes like Americans pay taxes. Okay, I said; that’s a point of view. Here are a few facts, though:

The Tax Policy Center tells us that in 2007, the last year for which final figures are available, federal, state and local taxes totaled about $3.8 trillion. That’s about 27 percent of the U.S. gross domestic product. That breaks down this way: Every American paid just under $13,000 in taxes. About two-thirds of that went to the federal government. As onerous as that sounds, though, it’s a lower percentage of income than the citizens of any other rich country pay.

According to the Tax Policy Center, taxes in 30 of the world’s richest countries average 36 percent of GDP. Only Mexico, Turkey, South Korea and Japan have tax rates lower than ours. And taxes in many European countries exceeded 40 percent of GDP because these nations offer vastly more extensive government services than the United States does. Moreover, they do that without maintaining a big defense establishment, as we do. They crowd in, shoulder to shoulder, under our military umbrella, and we Americans pay for their protection from the world’s really bad guys.

It is true that we Americans do pay far more in individual income taxes than residents of other wealthy nations. But we pay much less in sales taxes. About 17 percent of U.S. tax receipts come from taxes on goods and services. That’s about half the 32 percent average for rich countries. The reality is that the American tax load is considerably lower than what’s paid by people in other wealthy countries.

As for high taxes killing the economy? The 27 nations in the European Union are home to about 500 million people who produce 25 per cent of the world’s total economy. We, with a population of about 310 million, produce another 25 per cent. Per capita, we do a bit better than they do, and our economic growth has been a bit higher, but we’re also younger than they are, and our population has grown more quickly.

I had another caller who was horribly worried about the growing federal deficit and the growing national debt. These are worthy concerns, by the way. The Tea Party people are really on to something here. But this caller, as have other callers to my program, predicted that this country will cease to exist within five years if we don’t fix this right now. “We won’t have a country any more,” he predicted.

I explained that there’s a difference between legitimate concern about the country’s debt and utter hysteria over it. The Congressional Budget Office says that without spending cuts, higher taxes or some combination of the two that national debt will, in 10 years, hit 90 per cent of our GDP. That’s a scary number, but the Japanese have a national debt of 140 per cent of that country’s GDP, and the Japanese still have a country. Not only that, they also have the world’s second-largest national economy, although that economy is wheezing along under the staggering burden of that debt.

The liberals like to think that we can fix the debt problem by taxing rich people more heavily. The conservatives like to think that we can just cut spending. They’re both living in Fantasyland.

First, here’s why the liberals are wrong: A study conducted by the Tax Policy Center found that Washington would have to raise taxes by almost 40 percent to reduce — not eliminate, just reduce — the deficit to 3 percent of our GDP. That’s the 2015 goal the Obama administration set in its 2011 budget. That tax boost would mean the lowest income tax rate would jump from 10 to nearly 14 percent, and the top rate from 35 to 48 percent. If we raised taxes only on families with couples making more than $250,000 a year and on individuals making more than $200,000, then the top two income tax rates would have to more than double. The top rate would have to hit almost 77 percent to get the deficit down to 3 percent of GDP. Are the citizens of this country about to stand for that? Not a chance. And, if by some miracle increases like that could get through Congress, they still wouldn’t come close to eliminating the deficit.

As far as just cutting spending? At the moment, federal tax receipts are sufficient only to cover the costs of Social Security and Medicare, the costs of which will begin to rise dramatically next year as 10,000 baby boomers a day begin to hit the system for the next 18 years. The federal government borrows to cover everything else. Trying to fix the debt problem just by cutting spending would mean no federal food inspection, no defense department — no anything but Social Security and Medicare. Since the U.S. Constitution requires the government to provide for the national defense just cutting spending wouldn’t even be constitutional.

Bottom line: Taxes and death are equally unavoidable. Everybody resents paying taxes, but too few people really understand either what’s going on around them or why it’s going on in the first place. The solution: Turn off the daily pep rallies for one political faction or the other that you find on most of talk radio, on Fox and on MSNBC. Instead, treat yourself to a helping of the best available version of the truth.

Which, these days, is all too often the ugly truth.

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