Friday, August 24, 2012

The Reality of Taxes in America

Andrea Louise Campbell has a great article taking a comparative look at taxes in the United States.

The bottom line is that "the reality of U.S. fiscal policy: compared with its counterparts among the advanced nations, the United States' tax system collects little revenue, poorly redistributes that money across the population, and is mind-bogglingly complex."

An example of this complexity is that "to get another sense of the difference between the United States and other developed countries, consider the subsidization of the cost of raising children. Many advanced-country governments calculate and send allowances to families with children. In the United States, however, households with children must navigate and administer a complex system of tax breaks themselves, such the Child Tax Credit and the Earned Income Tax Credit. And if they file their returns incorrectly, the IRS may fine them."

Furthermore, for the tax system as a whole "the share of taxes paid by each income group essentially resembles the share of income that it receives, which would not be the case in a more progressive system. According to the Institute on Taxation and Economic Policy, a fiscal think tank, in 2011, the lowest fifth of earners received 3.4 percent of total income and paid 2.1 percent of total taxes, the middle fifth received 11.4 percent of income and paid 10.3 percent of taxes, and the top one percent received 21 percent of income and paid 21.6 percent of taxes. "

What do we get for it? "In Europe, regressive taxes are matched with highly redistributive states. In the United States, mildly progressive taxes are matched with a not very redistributive state. As a result, the United States experiences greater inequality than most other advanced nations, with the tax-and-transfer system doing little to alleviate it."

And what does the research say about the consequences? Generally, that the US fiscal state is inefficiently small. "Slemrod and Bakija found little correlation across the OECD countries between taxes as a percentage of the economy and the size of the economy itself, as measured by per capita GDP. Nor, according to their research, is there a high correlation between taxes as a percentage of GDP and the annual rate of economic growth." "There is little evidence that tax rates affect the participation of either middle- or high-income individuals in the work force. And despite higher taxes, higher earners ultimately did not spend much less during the 1990s, since the total income of the top one percent during that decade rose..." "past experience suggests that a tax hike today would not severely damage the economy, and productivity might even rise with the security and investments that government spending can provide."

We face some real decisions over the next few years in this country, and it would be best if we understood the consequences of these decisions. Unfortunately, it seems to me that mythology dominates the tax discussion at the expense of research and reality. I encourage you to read the whole article, it is sobering considering the state of US political debate.

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