Sunday, June 27, 2010

Are Americans Over-Taxed?

When Vice-President Joe Biden was asked recently by a manager of an ice cream store about lowering our taxes, Biden seemed a bit annoyed.  The manager's question seems another example of the widespread misimpression that Americans are over-taxed.  The reality, of course, is that Americans enjoy overall tax rates that are quite low in comparison to most other similar nations.

These figures are all the more remarkable considering that the United States supports by far the largest military in the world, and has overseas commitments far greater than other nations. What people should be asking the vice-president is, how do we do it? How do we manage all the United States does and still pay much less in taxes than other comparable countries?

(Urban Institute and Brookings Institute figures)



    "It may come as a surprise that US companies pay the highest taxes in the world. Yes, you read that right. American businesses, large and small and across all industries pay from 35% to 41.6% of their income in combined state and federal taxes. The 41.6% maximum rate is scheduled to rise to 46.2% in 2010 when President Obama's promised tax increases are implemented. Compare that to socialist France where companies pay only 34.4% in taxes, to China where the rate is 25%, or Russia which levies a mere 24%. Corporations in Ireland, Europe's fastest growing economy for the
    last 18 years, pay just 12.5% in taxes.

    Because of its dual taxation system, US businesses and individuals are required to pay both state and federal taxes on their income. When combined both these taxes range from a minimum of 35% in states like Nevada, South Dakota, and Wyoming that do not tax business income, to a maximum of 41.6% in Iowa, the state with the highest corporate tax rate of 12%.

    Corporate Tax Rates, US vs. Other Free-Market Democracies

    Last year the Tax Foundation, a nonpartisan educational organization with a solid reputation for independence and credibility, released a report that compared the tax rates of US corporations (across all 50 states) with 29 other countries that accept the principles of representative democracy and free-market economy (referred to as OCED countries, 30 total). Their study reveals the surprising finding that US companies are already at a significant competitive disadvantage in the world economy.

    When compared to other OECD countries:

    • 24 US states have a corporate tax rate higher than top-ranked Japan.
    • 32 states have a corporate tax rate higher than third-ranked Germany.
    • 46 states have a corporate tax rate higher than fourth-ranked Canada.
    • All 50 states have a corporate tax rate higher than fifth-ranked France."

  2. My point -- many of my friends on the left (I am a centrist) seem to think corporations don't pay enough. That may be true. We need to close loop holes so taxes paid align with law and catch cheats. Same with individuals.

    I like the idea of a modest VAT. I like the idea of closing tax loopholes and catching cheats. I like the idea of raising Medicare eligibility to 70 years old. Same with social security. Given extended life spans that would be in line with proper perspective when laws were enacted.

    I have no concrete idea of what to do about it but end of life care -- it is killing us. From personal experience I can tell you Medicare is denying claims my mother is submitting for alarming, money saving excuses -- so maybe we are getting those empathy panels or death panels (call them whatever you like) in time to save some money if not lives. It's a very tough issue and one I am embroiled in now.

    I'd like to see leadership pare down defense spending. I'd like to see public defined pension plans drastically reduced (not military, not police and not firefighters). It's not right and the reasons for having them as a recruitment tool are a thing of the past. Public sector jobs pay well -- employees should be saving more and not using my taxes to do it.

  3. Thanks again for your comments KP. It might surprise you to know that we are in agreement on most of your points. You are right that corporate taxes in the US are much higher than most countries, but those are not the taxes that upset most people. And most corporations are able to structure their affairs so that they pay little or nothing in taxes. I think the chart is supposed to include the total tax burden so higher corporate taxes are balanced out by lower income and sales taxes. Strangely these are the taxes that people seem to think are so burdensome.

    The VAT is probably where we are heading, but there will be a huge fight about it. Once enacted, though it would go a long way toward reducing the deficit. I also agree that more reform of Medicare is necessary. And I think we need a much higher gasoline tax, to help reduce the demand for oil. All of that would make our system more like Europe, but that would not be much of a selling point for the tea party crowd.

  4. It looks like KP beat me to it on the subject taxes. I'll add this:

    There are three ways to increase aggregate demand:

    1)Prime the pump–transfer wealth from the private economy to the public and then redistribute.

    2) Have the central bank print more colored green paper.

    3) Cut taxes.

    The Obama administration has been busy doing a lot of numbers one and two and at best gave us a short-lived number three. Jan. 1, 2011 will be very interesting when taxes bump up again. For liberals, higher taxes mean more prosperity and a strong economy. We'll see where that takes us.

  5. If recent history is a guide, maybe there is some support for the idea that higher taxes could lead to more prosperity and a strong economy. Clinton raised taxes, and we had a long-lasting economic boom. Bush lowered taxes, and we had the most severe crash since the Great Depression.

    But I am not saying we should raise taxes immediately. We need to run a big deficit to help the economy out of recession. But I think we need to get over our fear of raising taxes, when it becomes necessary to reduce that deficit. Of course if we were to raise marginal income tax rates back to the 90% levels we had 60 years ago, there might be some reduction of economic activity. But I don't think you can make the case that changing marginal income tax rates from say, 35% to 39%, would harm the economy. Looking at what Clinton and Bush did, you could almost say the opposite. And there are other kinds of consumption taxes that also would probably not have a severe negative effect on the economy.

  6. The threat of looming tax hikes is hamstringing the economy right now. Small businesses are very sensitive to marginal tax hikes (or the threat of) particularly since many of them are incorporated as LLC's and c-charter types.

    President Clinton cut the capital gains tax rate cut to 20% from 28% in 1997--this resulted in a budget surplus. With the Kennedy tax cuts of the 1960s, when the highest tax rate fell from to 70% from 91%, the story was the same. Bush lowered taxes and was rewarded with record tax revenue (his major problem was on the spending side of the ledger).

    A permanent cut in the highest tax rates will increase lots of other tax receipts. It will lower government spending as a consequence of a stronger economy with less unemployment and less welfare. It will have a material, positive impact on state and local governments. And these effects will only grow with time. You can't tax yourself into prosperity. I thought that lesson was learned in the late 1970's.

  7. I do agree with VH that uncertainty is hindering growth. If we are going to increase tax (whether VAT or gas or any other) then (my view) we must also cut spending. I understand my responsibility to pay (perhaps more) tax, but to keep me understanding I expect my tax money to be well spent and that means cuts in spending. This government reminds me of an alcoholic. You can deal with alcoholics in two ways: (1) ignore them and let them destroy themselves (2) have an intervention. We are about to have an electoral intervention. Look at Poland (elects conservative Pres) and other Euro governmants. They have already had intervention. Cheers!

  8. VH you are using facts very selectively. I don't think it was Clinton's reduction in the capital gains tax that caused the budget surplus. It was a significant increase in income tax rates. And when Bush cut taxes, the rich (especially) paid less taxes. There is no question that contributed to the deficit. It is absurd to suggest that if you cut taxes, you are always going to increase revenues and help the economy. Maybe if you cut them from 100% to 90% that would be true, but obviously if you cut taxes to 0% you are not going to have any revenue. And I don't think you can show any correlation between the countries with the lowest taxes and the countries with the strongest economies. If anything, there is a reverse correlation.

  9. As far as the Bush tax cuts are concerned, the CBO statistics don’t align with your assessment: The 2001 tax cuts by President George W. Bush caused the share of taxes paid by the top 10% to increase to 72.8% in 2005 from 67.8% in 2001. The “rich,” which includes small to mid-sized companies, paid more share of taxes, not less.

    Even though liberal economists may not like the Laffer Curve, they have never been able to debunk it. Somewhere along the curve is a trough where taxes are low enough to incentivize investment and work while reaping strong tax revenue. It’s true that in 1993, President Clinton ushered through Congress a large package of tax increases. (The economy was recovering from a small recession and oil prices were at record lows.) The economy recovered as expected with average growth but it certainly didn’t boom like it did after his capital gains tax cuts in 1997 which spurred massive investment in internet companies. The difference between the economy before the tax cut and after were like night and day.

    I find it ironic that liberals understand that if you tack a huge tax on cigarettes, people will be incentived to cut back or quit. If you tack a huge tax on gasoline, people will drive less. If you tack a huge tax on soda or fast food it will decrease demand for them. Simply, the more you tax something, the less of it you will get. If you increase capital gains taxes and taxes on investment capital are you going to get MORE investment in the economy? Are you going to get more job creation by taxing businesses more? Are you therefore going to get more tax revenue? I don't think so.

    BTW, some of the countries that many liberals deem as great models of progressive ideology have VERY low flat rate tax systems for capital income. And every Nordic nation has a lower corporate tax rate than the United States. These are some of the reasons for their strong economies. Hong Kong, Singapore, and South Korea all have low taxes too. There are many examples of strong, stable economies with low tax rates and plenty of middling ones with high rates.

  10. "It might surprise you to know that we are in agreement on most of your points."

    Not surprised at all Joe! I read because I enjoy your input, and I add mine to supplement yours. I am moving left and as I do I find that many on the left have the same issues of gevernment as those on the right. Once we dump ideology and see clearly most of us are center. It's the dumping that is so challenging! Keep On Truckin' ...

  11. In the immortal words of Deng Xiao Ping, it does not matter if the cat is black or white. What matters is whether it can catch mice.