Published: April 14, 2011
Updated: April 15, 2011 7:54 a.m.

Despite rhetoric, data show U.S. taxes at historic low

By MARTIN WISCKOL
THE ORANGE COUNTY REGISTER
mwisckol@ocregister.com

While Republican lawmakers appear unified against tax hikes and many Tea Party activists want existing rates rolled back, statistics consistently show that federal taxes are at a historic low.

For the past two years, a family of four with the median income has paid less in federal income taxes than any time since at least 1955, according to the Tax Policy Center. All federal, state and local taxes combined are a lower percentage of per capita income than any time since the 1960s, according to the Tax Foundation. The highest income tax bracket is its lowest since 1992. At 35 percent, it's well below the 50-percent mark of much of the 1980s and the 70-percent bracket of the 1970s.

Tax rates are at a historic low, although that's not the perception of many Tea Party activists. This sign was among those at an April 14, 2009 Tea Party Rally in Santa Ana.

Jebb Harris, The Orange County Register.

Even the combined California state and local taxes, while tied for fourth highest in the nation, aren't particularly high for the state. In 2009 – the most recent year for which data is available – they accounted for 10.6 percent of Californians' per capita income, just slightly above the 25-year average of 10.3 percent. (Click here for tax graphics.)

"There's this impression that there's a colossal tax burden and that's not really the case," said Raphael Sonenshein, a political science professor at Cal State Fullerton. "But if you're really angry at the government, you're going to think taxes are too high."

The recession contributes to lower taxes because many incomes have stagnated or fallen, and fewer retail sales mean less sales tax. But low tax brackets and a series of special deductions are primary factors in the reduced tax burden.

Meanwhile, government spending continues to grow, leading to record budget deficits and a $14 trillion national debt. Some tax hawks advocate holding the line on taxes and balancing the budget by cutting programs. But many economists think higher taxes are inevitable because of the limited trims possible for major expenses like Medicare, Medicaid and Social Security. Those three entitlements account for 40 percent of federal spending.

Economist Esmael Abidi says spending cuts are needed and sides with those who say tax cuts stimulate the economy during a slump. Even so, he sees higher taxes as an eventual part of the recipe.

"Spending is out of control," said Esmael Abidi, director of Chapman University's Anderson Center for Economic Research. "But you cannot deal with all of the deficit by cutting programs and services."

When they began rolling taxes back before the recession, federal lawmakers – like many Americans – seemed to think the good times would never end.

"The economy was doing well and taxes were reduced, but what we thought was a baseline turned out to be the best years," said Kail Padgitt, the Tax Foundation economist who authors the group's annual report on taxes as a percentage of per capita income.

Then came efforts to stimulate the sagging economy, both through increased government spending and through tax breaks. The combination of the Middle East wars, higher domestic spending, the recession, and lower tax revenues spurred the deficit to new heights.

While Abidi is among economists who believe personal income tax cuts stimulate the economy, others take the contrary position that tax cuts don't guarantee the extra money will go into the economy. They argue that many taxpayers sock away the extra money rather than spend it, while government expenditures on things like roads, bridges and schools help job creation and are a more effective approach to putting more money in circulation.

"Some put tax cuts at the bottom of the list of things that stimulate the economy," said Roberton Williams, an economist at the Tax Policy Center.

Federal income tax cuts intended to stimulate the economy were launched under George W. Bush – including the Recovery Rebate Credit of 2008 – and continued under Barack Obama with the Making Work Pay Credit approved by Congress in February 2009 and the current 2-percent payroll tax reduction signed into law in December.

Those lower taxes have helped give the United States government the lowest revenues as a percentage of Gross Domestic Product of seven industrialized countries surveyed in 2010 by the Congressional Research Services. (The other countries were Japan, Canada, the United Kingdom, Germany, Italy and France). The U.S. also had the lowest spending as a percentage of the GDP.

But with the biggest gap between revenues (31.6 percent of GDP) and expenditures (42.2 percent of GDP), the U.S. also posted the largest deficit as a percentage of GDP, 10.5 percent.

The U.S. could close the annual deficit immediately by simply raising taxes – and still come in at a lower tax rate than Germany, Italy and France. But that's not an argument that goes over well with Tea Party activists, who've created the "backronym" of Taxed Enough Already for their name.

"I don't think we want to model ourselves after a near-socialist Europe," said longtime GOP consultant Sal Russo, co-founder of the Tea Party Express. "The tax burden is way too high."

One area where the U.S. tops European countries is with its high corporate tax rate. And that's Russo's real concern when it comes to taxes.

"It's not a question of individuals being taxed too much," Russo said. "It's where the taxes fall. It de-incentivizes business."

The average Tea Party activist doesn't necessarily share Russo's nuanced understanding of the tax structure. For instance, Mission Viejo's Connie Lee, a retiree who turns out for Tea Party demonstrations, was surprised by statistics showing personal rates were relatively low.

"I'm stunned to hear that," she said.

The Tax Foundation's Richard Morrison said Lee has plenty of company when it comes to misperceptions about taxes.

"The average level of fiscal policy savvy on the part of the American public is not very high," he said.

Russo acknowledged the phenomenon among Tea Party followers.

"Do you tend to get irrational comments from people sometimes, people who don't have their facts right?" Russo said. "Sure. But there's a problem and that's what those in the Tea Party are responding to. We're digging ourselves into a hole that's going to be very difficult to dig out of. It's immoral for us to spend money like a drunken sailor."

Republican Rep. Paul Ryan's budget proposal has been praised by Republican leaders as well as the Tax Foundation. Ryan wants to sweeping cuts to Medicare and Medicaid and a reduction of taxes on corporations and the wealthiest Americans from 35 percent to 25 percent. The plan would also cut spending on education, food stamps and low-income housing.

Obama criticized many parts of this plan Wednesday, saying he wants to raise taxes on the wealthiest Americans. Many experts agree that Ryan's plan won't solve the problem.

"There is no obvious end in site for running these trillion dollar deficits, even with Ryan's proposal, which has been called draconian," said the Tax Policy Center's Williams, who noted similarities between Ryan's plan and Tea Party philosophy. "The Tea Party view that we cut spending, cut spending, cut spending and reduce taxes a little bit – that's a minority view of how we're going to reduce the deficit. I happen to believe we're going to see both spending cuts and increased taxes."

Cal State Fullerton's Sonenshein says that the spending side of the equation has been the focus of debate, while the government's lagging revenue stream is an equally important component. And he thinks he knows why lawmakers haven't worked harder to inform the public that taxes are at a historic low.

"What rational person in the political arena," he said, "is going to argue that taxes aren't very high?"

Contact the writer: 714-796-6753 or mwisckol@ocregister.com

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