Taxes and Incomes

The chart above was produced by long-time commenter Andy who blogs occasionally at his own blog, Organizing Entropy. It’s part of an ongoing discussion that’s been going on in comments that I thought worth promoting to the front page. The discussion is about the frequently encountered claim that taxes are lower than ever before (or lower than they’ve been since 1995 or 1983).

As I see it Andy’s chart supports everybody’s perceptions.

  1. It is true that taxes as a percent of income has fallen from its highs.
  2. It is also true that taxes are not at an all-time (or even post-war) low.

I note that all of the valleys in taxes as a percent of personal income are associated with recessions and the last two peaks are associated with bubbles. That’s an artifact of the reliance on the income of those in the highest decile. And there’s your rising income inequality, too. Earners in the top percentiles get more from assets and inflated assets prices are what make bubbles.

Perhaps I’m misinterpreting them but as I see it Dr. Krugman and those who agree with him argue that all that are necessary to resolve our fiscal dilemma are to a) raise taxes on the top earners and sometimes b) reduce defense spending. I think that a) is based on a cherry-picking of the evidence and is unlikely to yield as much revenue as they think it will. I think that b) is correct but needs to be combined with a revised strategic and grand strategic plan.

Among Republicans in Congress there appears to be a group (a dominant group) that believes that if we lower tax rates additional revenue will be realized. I think that is, as P. G. Wodehouse might have said, far from hinged.

My view:

  1. We need to reduce defense spending (see above for caveats).
  2. We need healthcare reform.
  3. Social Security needs a few tweaks, e.g. raising the retirement age or some version of means testing (it already has some means testing cf. the sliding scale of payments), but no major corrections.
  4. A properly constructed revision to the personal income tax could yield additional revenues
  5. Foreseeable minor revisions to the personal income tax are unlikely to be properly constructed.
  6. More attention should be focused on the deduction side than on the rate side, e.g. caps on mortgage interest deduction.

We would probably get more real mileage by reducing marginal income tax rates, eliminating FICA, and imposing a VAT but I don’t see any real prospect for those measures (and all of them would need to be implemented together for such a plan to work).

I also think that revenue increases are politically necessary, that the Simpson-Bowles commission got it about right, and that the president’s failure to get behind the recommendations of the commission that he appointed is one of the saddest aspects of the entire fiscal fiasco.

8 comments… add one

  • What was interesting to me is how the rate steps up with increases in FICA. Take FICA out of the picture and the taxes flatten out considerably. This USA Today article from earlier this year (and controversial at the time) uses these figures that don’t account for FICA and, when looking only at income taxes, the data support their claim. Of course, effective rates are so low right now because the economy sucks and there are many people who are making a lot less money or no money at all.

    I’m pretty much with Dave regarding the way forward and would add that we need a much simpler tax code as well. There is no good reason that average people should have to hire someone or buy a piece of software to do their taxes.

    So yeah, it all depends on what you are talking about and it’s very important to compare apples to apples.

  • Drew

    Well, well, well. I don’t think I’ve ever seen this graph………..(snicker)

    I guess you follow skirmishes in your comments section, Dave. Let me provide color, at least as I see it.

    1. This all started for me with a Doug Mataconis essay, citing some professor, that taxes are at an all time low, relative to the early 1950’s. The relevant stat: taxes to GDP.

    2. This seemed intuitively impossible, and upon about 2 minutes reflection I realized the falsity of the statistic because the denominator – GDP – had been artificially inflated because of financing. By definition taxes to GDP would decline.

    3. However, it still left an open issue: what is the relative tax burden today? And then I stumbled upon this graph. Everyone will probably choose their own hills and valleys, but any way you slice it, taxes are 60% – 80% higher than in the early 50’s by this measure. Decidedly NOT at all time lows.

    4. A friend, and owner of his own blogsite, and I collaborated to dig data on taxes to other measures. Personal income. National income etc (Because I wonder if household or per capita income has technical problems). The conclusions do not change. The most charitable measure we could come up with is that taxes are about 40% higher. NOT an all time low.

    5. To the recent debate. Andy: taxes at all time low. Me: NOT. Andy produced his data, starting at 1979. I suspect he did not know that I had mined data on this subject. I called him out for selectively choosing a start point. He hid under a rock: “the available govt statistics made me do it.” Bull.

    6. I tend to look at our government finances – spending and taxing – on about a 50 year time frame. Since the Great Society. Certain things are undeniable: social spending is a juggernaut, without any sense of constraint, and total government spending has only appeared to remain in some sort of bounds because defense spending has been steadily reduced. That is a fleeting asset. Total taxation has steadily increased – quadrupling since pre war, and almost doubling since post war. (As for the graph – take out the dot com bubble, and the current recession – its about 20%) I think Dave is being charitable in saying “both sides are right.” I don’t consider an almost doubling of taxation to be insignificant. Which brings me to…

    7. I think it is pretty clear that we stopped increasing the total tax burden circa 1980 because a) the adverse economics became understood and/or b) the politics of it stopped working. So borrow, borrow, borrow. Despite Doug M chiding me that sovereigns can borrow forever, Mr. S and Mr. P beg to differ. As certain European nations and now even the good old US of A demonstrate…… every entity has a terminal “debt capacity.”

    8. Lastly, everyone wants the easy road out. Tax the rich. Fact of the matter is that by any measure, and including regeressive payroll etc taxes, we are at the most progressive taxation point in the last 50 years. Slaughtering the golden goose might get a President, and some Senators and a few Congressmen through the next election cycle, but it will come at great cost to The Average Joe. (13% unemployment anyone?) Many of you consider yourselves friends of the needy. Look in the mirror and ask if you really just want your guy to win, or you really care about The Average Joe.

  • Drew,

    I hid under a rock, eh? While under that rock and I went and found the data for the tiny little chart you posted, spent the time to recreate it and discover what it actually measured, added to the chart and made another one that looked only at income taxes. Yeah, that’s me, “hiding” behind by 1979 CBO data, being dishonest!

    So, if I ever said that taxes were “at an all time low” and I will assume I did since I’m not going to go back and check, then I was mistaken. So let me amend that to say that taxes are at an all time low since the mid-1970’s. Happy now?

  • Mike

    Dave
    I read your blog almost every day and wanted to thank you for having one of the best written and most thoughtful blogs out there. I would be curious to see how the graph would look broken out by tax brackets. I would imagine my tax bracket is flat to low, Bill Gates is low, and someone like Drew is at an all time high. I would prefer to eliminate the corp tax, have a progressive flat tax with a large standard deduction, treat all income as earned income but income average capital gains.

    Mike

  • PD Shaw

    I’m not sure where the data is coming from, but it looks like national figures for tax revenues and personal income were used?

    I think Andy was looking for effective tax rates across time, which might be a different analysis. Here is someone who tried to do it using one technique: http://www.freeby50.com/2009/04/history-of-effective-tax-rate-for.html

    I’m not sure I’m entirely confident of the methodology since it assumes “income” means the samething across time and I think this becomes increasingly problematic as we cross over major revisions in the tax code (1954 & 1986). Also, prior to the introduction of the payroll withholding in 1943, I’m not sure if the income tax was truly effective.

    Still, I think the linked graph is substantially similar to my eye on the big issues.

  • Mike,

    Indeed what I’ve specifically been trying to research is effective tax rates by quintile. So far all I have found is the CBO data which goes back to 1979 along with some Piketty/Saez data that is not congruent with the CBO. I’ve yet to find a consistent analysis and methodology that examines that from the mid-20th century to today.

    PD Shaw,

    The source data for the chart is here. I took “personal income” (line 1) and calculated the percentage of taxes (lines 24 & 25). The definitions for what’s included in each of those is found in the BEA glossary here.

  • PD Shaw

    Thanks Andy,

    I guess part of the point I was trying to make is that this type of gross national data could reveal no difference between these two very different types of systems:

    a total of 10% of the people pay 90% of their income;
    a total of 90% of the people pay 10% of their income.

    I think there is some different utility to attempting to determine what is common or average, not that national aggregate figures are not useful also.

    I’m still skeptical about income figures before social security, before payroll withholding, and before non-agricultural employment became dominant. I can’t prove my skepticism, but how could someone prove what my grandfathers made in agriculture in the 30s and 40s?

  • steve

    “7. I think it is pretty clear that we stopped increasing the total tax burden circa 1980 because a) the adverse economics became understood and/or b) the politics of it stopped working.”

    It was because starve the beast, which is absolutely brilliant electoral politics, became the norm on the right. Prior to 1980, the GOP advocated for balancing budgets.

    ” As certain European nations ”

    Which would be? A poorly run country (Greece has been in default half of the last 150 years) can default at any level of taxation. Ireland, lowest corporate rates in Europe IIRC, is at least as bad off as Greece.

    Steve

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