Believe it or not, U.S. taxes are at historic lows
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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 federal tax rate is total 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 Office estimated that federal taxes would consume just 14.8 percent of GDP 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 GDP. Revenues averaged 18.2 percent of GDP during Ronald Reagan's administration; the lowest percentage during his administration was 17.3 percent of GDP 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 GDP in both 2009 and 2010.
Yet if one listens to Republicans, one would think that taxes have never been higher, that an excessive tax burden is the most important constraint holding back economic growth and that a big tax cut is exactly what the economy needs to get growing again.
House Republicans recently released a plan to reduce unemployment. Its principal provision would reduce the top statutory income tax rate on businesses and individuals to 25 percent from 35 percent. No evidence was offered for the Republican argument that cutting taxes for the well-to-do and big corporations would reduce unemployment; it was simply asserted as self-evident.
One would not know from the Republican document that corporate taxes are expected to raise just 1.3 percent of GDP in revenue this year, about a third of what it was in the 1950s.
The GOP says global competitiveness requires the United States to reduce its corporate tax rate. But the United States actually has the lowest corporate tax burden of any of the advanced member nations of the Organization for Economic Cooperation and Development.
If taxes are low historically and in comparison with our global competitors, how are Republicans able to maintain that taxes are excessively high?
They do so by ignoring the effective tax rate and concentrating solely on the statutory tax rate, which is often manipulated to make it appear that rates are much higher than they really are.
By contrast, one almost never hears that total revenues are at their lowest level in two or three generations as a share of GDP or that corporate tax revenues as a share of GDP are the lowest among all major countries. One hears only that the statutory corporate tax rate in the United States is high compared with other countries, which is true but not necessarily relevant.
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.
First Published June 5, 2011 12:00 am