Short Answer: It depends on who is paying the taxes.
Federal Taxes Are Less Than Half The Tax Picture
Let’s start with why the taxes are needed in the first place: national defense, foreign affairs, foreign and domestic intelligence, infrastructure building and maintenance, safety net, education, law and order, “safety and security”, public health, interstate commerce, disaster assistance, etc.. A healthy, well-balanced and growing industrialized society, especially one that views itself as a global power, probably should be devoting about a quarter (25%) of its gross domestic product (GDP) to the governments that maintain that society – in the form of taxes placed equitably on all its citizens.
Since most discussion of taxes in the US is focused on the US Congress and the federal government, the subject of taxes in America is often quite confused. Federal taxes now are actually not that high at all. However, the only sensible way to view taxes is as a sum of all taxes paid at all levels– local, state and national.
The US is a federation of fifty semi-independent states, but over the last half century the national government has assumed ever more responsibility for meeting the wants of all citizens, making the states ever more dependent on the federal government. However, this is usually a two-way street. States often are required to meet a portion of social welfare programs and other subsidies, and when the federal subsidies decline, states either have to decrease those programs or raise state taxes. There’s a certain balance always maintained with state and federal taxes. Reducing or eliminating government programs, and the bureaucrats living very well off of them, is the hardest thing to do in our society, so this option almost never gets accomplished. Also, many members of Congress are very adept at taking money from large populous states and sending it to less populous states in quantities disproportionate to what the smaller states would otherwise be eligible. So it’s not surprising that there is a balancing effect between state and national taxes; what happens on the federal level will often have an opposite effect on the state level – to keep programs running and overall taxes in relative balance. Still it’s usually broad trends on the federal level that set the overall direction of taxes, up or down.
Some Recent History Of Taxes
During the late-1960s, under President Lyndon Johnson’s huge “Great Society” initiative intended to end poverty in America – an intention nearly everyone supported – the states were provided large sums of federal money under a range of social programs. States were required to match all or a portion of those funds in order to receive them. Back when we still considered the results of what we were doing, and not just the intentions, not just focusing on the process, most of the programs were eventually shown to be effective only in placing large numbers of people on government employee payrolls to administer the programs – programs which essentially made large numbers of other people dependent on government. The net result was to actually increase poverty in America, while also increasing the number of bureaucrats on the people’s payroll. It was a lose-lose situation. The overall concept was flawed, and most of the programs were eventually stopped, but a few, like education subsidies, remained. And the surviving concept of states matching federal funds inextricably linked state policies to federal policies, especially in the social welfare and education arenas. Trends in federal taxes are now usually accompanied by similar trends in state and local taxes. (“Local” usually refers to large cities or metropolitan areas – a third level of taxation below the state and federal levels.)
Over the past century, the sum of all taxes in the US has ranged between 20% and 33% of gross domestic product (GDP). This overall figure did reach a peak around the year 2000 during the peacetime Clinton Administration. But despite the popular impression that taxes are now crushing them, total taxes today (2010) in the United States are rather low compared with past years or with taxes in other countries.
(Full Disclosure: Since age 15 I have always completed and filed my own tax forms. I have also paid state and federal income taxes in every year of my life, including while serving in war zones, and continue to do so. I always use the applicable basic forms and don’t bother to go hunting for arcane deductions. My income is in the mid-range for all Americans, and very considerably lower than it would be had I chosen any one of several other available career paths. For 2011, after benefiting from the mortgage interest and charity deductions, which reduced my federal tax rate to just 13.7%, as a single worker with no dependents I paid a little over 23% total taxes on all income earned. This was probably the lowest overall tax rate in my life. For 2012 I paid over 26% of my income in taxes, which was also low from a historical perspective. In 2013 it rose to around 28%. In 2014 it rose a little more – to around 30%. In 2015 it will be about 31%, so I will be increasing my charity giving. About 60% of my taxes goes to the federal government, and about 40% to the state and county governments. The reader might also consider what I’ve done for a living for quite a long time now, mostly overseas. Like most average American workers, I do contribute to worthy charities every year. The money I donate to charity allows me to reduce the taxes that would otherwise go to government. I wouldn’t mind paying more taxes if I knew that they would be spent intelligently. But I know they won’t, so I greatly appreciate having the option to channel some of my hard-earned money to charities that will use it intelligently. For example, I really hate being forced to pick up the tab for the irresponsible choices made by our legions of “special” women, especially when they have never been required to do anything. They are not “stupid and helpless”; make them pay for their own behavior, their own free choices. And it really pains me that half of my countrymen don’t pay any taxes at all. How is that even possible?)
Together, all federal taxes equaled 14.4 percent of the nation’s economic “output” in 2010, the lowest level since 1950 – 60 years earlier. But other taxes have risen.
Add state and local taxes, and the share nearly doubles, to about 27 percent — still lower than at almost any other point in the last 40 years (since 1970).
This total tax percentage rose steadily on the Greatest Generation from 20% of Gross Domestic Product (GDP) in 1950 to 29% in 1970, continued thereafter to remain steady for the Baby Boomers at 29% until 1990, took a dramatic rise during the 1990s Clinton Administration to a peak of 33% in 2000, and then took a major reversal under the Bush II Administration. The following summarizes overall tax trends during the previous six decades.
1. The twenty years between 1950 and 1970 saw several major “extra-ordinary” government expenses on the federal level, including paying off WW II and Marshall Plan bills, paying for the wars in Korea and Vietnam, building and fielding a high tech global military capable of counter-balancing the steadily growing Warsaw Pact/Soviet Union communist nuclear power, paying for the monstrous Interstate Highway System, the Race to Space and the Moon, the finally the “Great Society”. That twenty years saw the wisest expenditure of federal tax dollars in the nations history.
1950 – 20%
1960 – 25% (one-quarter of the nation’s GDP)
1970 – 29%
2. The twenty years between 1970 and 1990 saw a continuation of some previous major programs, but an end to most big-ticket items like the Marshall Plan, Space Race, Vietnam War and many “Great Society” bills. With no new major expenses (except the steady rise in citizen “entitlements”), taxes should have begun to fall back significantly, but didn’t. It’s important to realize here that the really huge number of healthy and well-educated children born to and raised by the Greatest Generation – the Baby Boomers – were now beginning to pay taxes of their own, and their huge numbers made it quite easy for them to meet “entitlement” benefits and other routine expenses of society, and most especially to very easily fund the comparatively brief retirement needs of their parents in Social Security and Medicare. However, it also is simply not in the DNA of politicians and bureaucrats to turn off money spigots; they can always very quickly find alternate ways to spend other people’s money. And they did. Essentially, the primary focus of federal taxes shifted from investments in the future of the nation (wars, foreign reconstruction, national infrastructure, education, research, etc.) to entitlements (welfare, subsidies, etc.) of current citizens. The Baby Boomers shifted the emphasis from “us” tomorrow to “me” today, and kept their taxes steady to do it.
Baby Boomer Generation:
1970 – 29%
1980 – 29%
1990 – 30%
2a. After a brief surge during the 1980s, really huge defense spending was reduced by almost half when the “Cold” War ended around 1990. Once again, great reductions in military spending offered an opportunity to reduce taxes. But instead there was a frenzy in Congress in the early 1990s to redistribute this “Peace Dividend” from the military to domestic wants (i.e., to buy votes). Almost a million military people were fired over several years, before and after the Persian Gulf War, but most defense contractors continued to build military hardware and employ civilian voters, even if the military didn’t need and couldn’t use what they were making. And even with a very dramatically reduced force and funding, the US military continued to function as “World Cop” as the Clinton Administration handed that shadow military its highest number of missions in history, all concerned with many parts of the world that posed no conceivable threat to the United States, but rather might possibly impact “friends and allies” (most of whom enjoyed the US services gratis) and vicariously inflate American citizen self-worth (and thus also buy votes). This placed on auto-pilot the continuing world influence of the President, White House staff and US diplomats, all of whom during the 1990s possessed a palpable disdain for the very military people who provided the power and expertise behind their “global social engineering” quest, all pumped up on America’s sudden single super-power status. The tax burden on Americans should have reversed dramatically around 1990, but instead continued to rise for another decade, mainly to meet ballooning domestic entitlements, buy global influence and re-engineering, and pay for the rising cost of government.
1990 – 30%
2000 – 33% (one-third of the nation’s GDP)
(Democrats had solid control of both houses of Congress 1989-1994, but in 1995 Republicans took control of both houses for the first time since the 1950s, but with a Democrat (Clinton) very popular with women in the White House. With emotion, if not logic, solidly behind him, Clinton won the money battles and continued to build the welfare state.)
3. The Republican Bush Administration in 2001, seizing the moment, then enacted a very major reduction in federal taxes – just as the US began two major wars. Right move, wrong time. But, then, in a US with half of its citizens now on the federal dole, no time is the “right” time to buck the inexorable upward trend in taxes, but the war factor just seemed to be rubbing salt into military wounds, plus actually rewarding most citizens with less taxes while a tiny few went off to risk life and limb to wage wars on their behalf. Now we actually reward citizens, reduce their share of the burden, when their soldiers go off to die. The wars forced the US military to draw very heavily on state National Guard and Reserve forces, plus a really huge explosion of civilian commercial contractors, for desperately needed personnel, but personnel who lacked the expertise, training and professionalism of Regular forces. At the same time, the nation’s deficit spending continued to rise even above 1990s levels, contributing greatly to a really huge and ever growing national debt, interest on which also added to the nation’s bills. So, in effect, the Bush II Administration reduced taxes, started two wars, and increased borrowing to pay for it all. Brilliant. (But any citizen objections to the wars was extremely muted.)
2000 – 33%
2010 – 27%
(The “Bush Tax Cuts”: The “Economic Growth and Tax Relief Reconciliation Act” of 2001 – signed 7 June 2001 (three months before 9/11) and the “Jobs and Growth Tax Relief Reconciliation Act”of 2003 – signed 28 May 2003 (two months after the invasion of Iraq) – became law even with a Congress rather evenly divided.)
Of course, the above discussion focuses on federal spending, but the tax rates shown are the sum of all three levels of government. I would argue that the time to stop the rise of taxes at all levels of government had come, that tax cuts were needed to force the nation to address its deficit spending and growing debt, but that the Bush reversal on the federal level alone was just too large and too abrupt. If you’re going to cut taxes, doing so while waging two wars, and without having a fix for Medicare and Social Security in place, is not the time to do it. The “thinking” seemed to be to reduce government revenues in order to force Congress to get along with less by adjusting spending accordingly. But this tactic overlooked another option – government borrowing to make up the difference between revenues and spending. Even worse was the fact that the Bush Administration, also in the “vote-buying” business, also pushed through a whole new huge “birthright entitlement” (Prescription Drugs) program with no way to pay for it. (A major part of all this inexplicable increased spending and tax reduction “thinking”, among both political parties, was to blunt anticipated public opposition to two new wars.) The ideal approach to reversing the tax rise would be a peacetime mechanism that simply reduces spending on every line item by 1% each year for a decade – with taxes that decline by the same amount. But such sensible adult approaches are impossible in a prevailing environment where the game is all about buying votes by “redistributing wealth” (i.e., taking it from “someone else” and giving it to “me”) and handing the huge bills to future generations of Americans.
Now the major emphasis in politics continues to search for new taxes, rather than address as responsible adults the very precarious state of the nation’s overall financial situation. Even with current wars winding down and many tens of thousands of Army and Marine soldiers once again being fired, politicians continue to argue over where to extract more money. This will be the third time in succession that politicians have used a dramatic fall in military costs to maintain wartime levels of spending while merely shifting funds to domestic wants and doing nothing to address either annual deficit spending or the overall national debt. A cynic might conclude that the nation now engages in wars as a subterfuge to keep both taxes and spending high so as to meet ever rising current domestic wants.
No one seems to notice that the American “economic engine” of the world is not recovering quickly from “The Great Recession” or in nearly as healthy a state as in past down-turns. Something fundamental has changed inside America and the way it previously offered opportunities for gainful employment, and thus taxable income, to all. The Great Recession has revealed a certain lingering, perhaps even malingering, illness in the American economy, in which only government and those industries dependent on government spending remain healthy with full employment and pay. All other industries seem teetering on the brink of a new “Rust Belt”. The most worrisome trend of all is the tens of millions of workers, mostly the men who everyone depends on to pay the bills, who have simply walked away, have just left the labor market entirely even though they have many years of productive work left in their lives, have simply concluded that life just isn’t worth all the old “expected” roles anymore. And on the horizon is another new massive “entitlement” program amounting to an incredible 1/6th of the economy – health care – that also will benefit women far more than men. Many formerly very productive men are beginning to ask, “Why bother? What’s in it for me?”
Are US Tax Rates Appropriate?
Still, total taxes at today’s rates (2012 – 27% of GDP) make up a smaller share of the US economy than in virtually any other “rich” country — not just European nations, but also Australia, Canada, Israel and New Zealand. Of course, none of these other countries are nearly as large as the US, but the argument can be made that US taxes are now at or about where they should be, especially with wars in Iraq and Afghanistan winding down. What is always overlooked when comparing the US tax system with those in other advanced societies is the fact that most of those other societies heavily supplement national income taxes with a national consumption tax – a national sales tax or a value-added tax (VAT) that taxes everyone equally on what they consume (buy). Other advanced societies ensure some level of universal equity, universal participation, through a significant consumption tax; we do not. A consumption tax is no longer possible in the US simply because it would affect every single “me” in the country and not just “someone else”. (Most Americans do pay a state sales tax, but it’s still not surprising that Europeans don’t accumulate as much stuff that quickly ends up in landfills as do Americans.) (See Footnote #1.)
Furthermore, the account and taxpayer pictures in the US are both way out of balance. We continue to run a huge deficit (spend more than we take in each year) while also having to service (make huge interest payments on) a truly staggering debt, while far too many of us (around 47%) don’t contribute anything at all to government. This stupidity just can’t work, even without a major recession. So far, catastrophe has been averted primarily though a Federal Reserve that prints trainloads of new money, continued government borrowing, and mechanisms that keep interest rates at rock-bottom levels.
Most importantly, American federal taxes are simply not sufficient to pay for the federal programs that many people want, like Medicare, Social Security, Medicaid, Prescription Drugs, defense and wars, road construction and education subsidies. The cost of federal social welfare entitlements like Medicare and Social Security have continued to rise, and will now rise exponentially, as all those Baby Boomers enter the longest retirement periods in American history, while federal tax revenues to pay for them have fallen. And now we have the granddaddy of all entitlement programs coming on line – the new Health Care program amounting to a staggering 1/6th of the economy – the costs of which everyone knows full well will very rapidly out-pace premium revenues and require just more borrowing. That new health care program will inevitably require government to make up massive shortfalls not realized by the program’s exceedingly naïve intentions. Premiums, taxes and borrowing will all rise as an inevitable direct result of this new welfare program.
Stated simply, the nation has failed to adequately address major structural problems in both Medicare and Social Security – which are on a path to bankrupt the nation, while adding even more entitlement programs (Prescription Drugs and Health Care). There’s a point where simply raising taxes to keep pace with the rising costs of these social welfare programs will strangle the nation’s ability to function. Increased taxes alone cannot solve this federal problem – a problem that feeds both the deficit and the debt. Admittedly 2010 was a recession year with high unemployment (over 20,000,000), and as the economy recovers and incomes slowly rise (hopefully), tax payments will increase. But these increases will not keep pace with projected spending in such big ticket items as Medicare, Social Security and the cost of government. There is now also the very real worry that many millions of people have been out of a job for so long that they will never return to the workforce, but instead remain dependent on government. The defining characteristic of American government is now taking money from one half and giving it to the other half in a plethora of birthright entitlements, while borrowing the really huge shortfall. Worse, the emphasis is all one “me” and “now”, with almost no realistic concern about the dismal future that faces our children.
Opposing Political Philosophies
A lot of this is wrapped up in two opposing political philosophies – left and right, liberal and conservative. Democrats are seen as liberal (left) – in favor of government social programs that assist “people in need”, while Republican are seen as conservative (right) – in favor of helping business employ workers who can “stand on their own”. Democrats, strong on socialism, prefer to redistribute wealth to assist the less advantaged (and thus improve the well being of citizens), while Republicans, strong on capitalism, prefer to enable people to create their own wealth (and, with it, the nation’s wealth). Socialism views citizens as helpless masses, while capitalism views citizens as capable of anything. Democrats are seen as “cooperative”, while Republicans are seen as “competitive”.
Democrats are heavily supported by women, Republicans are supported more by men. (I have a personal tendency to view the former as “feminine” in philosophical outlook, the latter as “masculine”, while recognizing that the times have shifted overall in favor of the “feminine” side, despite often misguided attempts to slow down or reverse the prevailing trend by the fading “masculine” side. The nation is simply in a transition period.) While women heavily concentrate their vote left of center, men still distribute their vote normally across the entire spectrum, so the leftward concentration of majority women will prevail.
My own view falls somewhere between the two views, with a stronger nod toward the conservative side than that which exists today in America. Why?
One thing is certain: You can only redistribute wealth that already exists. You can’t redistribute new wealth if none is being created. You can only move around inherited money – which is also rapidly hemorrhaging overseas – until it’s all gone. More and more people being assisted by government means less and less people paying taxes to government; the “takers” eventually overwhelm the “givers”. Socialism inexorably leads to dependence on government, which, in turn, must draw its funding from elsewhere, and capitalism can be brutal in deciding winners and losers, but at least with a profit motive creates its own funding. The problem for capitalism comes when the winners are penalized for succeeding in order to accommodate the losers who do not succeed. Once the penalties (taxes) reach a certain point, there is no longer an incentive to succeed, and everyone just takes the natural path of least resistance to dependence on government. But then the problem for socialism becomes government unable to find its funding, anywhere.
There is a happy medium somewhere between socialism and capitalism. The Greatest Generation had a pretty good fix on that medium, but the Baby Boomers lost it sometime during the 1970s (or probably just never understood it). And, ever since 1980, the super-majority of “cooperating” women voters keep demanding to fix the medium too far left of center, much to the consternation of those on the “competing” right. Our society has become far more characterized by those claiming rights, and far less by those willing to assume responsibilities.
What About Spending?
Of course, tax increases are not the only way to solve the deficit problem or pay down the debt while still funding a balanced government. Spending cuts can, too. But, at least so far, many voters seem to prefer small, symbolic cuts, like those to foreign aid (which accounts for only about 1% of the federal budget). Substantial cuts tend to be politically unpopular, usually because they are seen as “too draconian”. And no one wants to cut programs that benefit “me”. (The country also has a really enormous influx of recent immigrants, the largest in our history, who have not yet found their economic footing, and thus represent, for the time being, a net drag rather than a net stimulus on government funding. These people are absolutely critical to our future because they provide the needed babies who will become tomorrow’s taxpayers, future taxpayer babies we have become too “special” to have and raise ourselves.)
When viewed objectively, logically, there really is no function of government that cannot be reduced. But some reductions are easier than others, and all have major hurdles and consequences. Full compensation for most government employees is now so much higher than for the average taxpayer that these people no longer have much in common with the people they are supposed to be serving, so both government compensation and workforce need to be reduced – if that is even possible against the nation’s most powerful unions. In recent years government has used the tactic of awarding enormous contracts to commercial companies to do government functions – which neatly serves to hide the true size of the explosion of the federal bureaucracy; theoretically such program would be easy to cut simply by terminating the contracts. But this is naïve when the employees of those companies are very well compensated voters and when they perform functions now critical to government, too. In fact, very many of them were set up by bureaucrats who then left government for higher pay with the very companies they had set up. Health care in the US costs 50% more per person than the next highest country (Norway) but doesn’t provide nearly the results that almost all other advanced societies achieve. Women benefit from Social Security for twice as long as men but raise only half the number of taxpayers needed to pay for it while making the same contributions to the program as do men. The same is true of Medicare. Everyone wants to live longer but with no change in the retirement age and no solutions as to how to pay for a third of adult life in non-productive “retirement”. It’s absurd to think that dramatic changes can’t or shouldn’t be made to these incredibly expensive entitlement programs. Most other social welfare programs can also be cut, even if this is perceived as “heartless”, and force more people to contribute to their society by earning a taxable income.
It is possible to reduce defense spending, too – but only with a major re-thinking about the role of that military in the world (“defend the nation” or “police the world”) and only if the cuts are equitably balanced between personnel and equipment. It’s easy to fire soldiers (no union), but nearly impossible to turn off civilian companies who employ lots of voters to make hardware. Many of the professional combat-support ground soldiers fired around 1990 were the very people needed most in both Afghanistan and Iraq – only a decade later – to reduce casualties and make rapid progress against an enemy that didn’t possess a single ship, plane, tank, missile or drone, i.e., zero hardware. We had fifty times more heavy equipment and power than could possibly be employed in those wars, but not nearly enough of the right kind of professional people actually needed on the ground. Besides, to play world cop you don’t need soldiers willing to die for their country; all you need are hired mercenaries willing to risk everything for whomever pays the most money. But mercenaries don’t provide quite the same vicarious self-worth to civilian citizens that real soldiers provide, especially when they die or get permanently maimed.
And some voter preferences are just counter-intuitive; everyone wants to “spend more” on “education” (for “the children”), but we already have the most expensive education system, and the worst performing, in the industrialized world, so “more money” is not nearly as smart here as a “completely different system” – one that actually works, and works just as well for boys as it does for girls. It’s not the process, but rather the results, that count. But no one expects that to ever happen against the vested interests of our enormously powerful teachers unions and women’s lobbies. (Most K-12 education costs in the US are met primarily by state and local taxes on real estate, and further subsidized by the federal government. But, despite its astronomical costs, American K-12 “education” is essentially a national shame heavily engineered by and for our dominant women. And, worse, although home values have fallen by almost half since 2007, both government and insurance companies are still assessing their fees based on enormously inflated real estate prices – so those who pay the bills for useless schools and their employees are doing so with less and less of their own wealth.)
Nothing “succeeds” in government, including “education”, better than failure. In America, the answer to EVERYTHING is “more money!”; it’s one of those give-away “questions for morons” on every public school test from first grade onward. (They just don’t mention that the “more money” has to come from “someone else” or that the “someone else” is supposed to completely ignore the dismal results obtained with all that money over the previous forty years. It’s the same sacred altar of past cultures where ceremonies centered around the high priestess sacrificing her people’s wealth endlessly down into a bottomless pit – after setting aside her own cut, of course. It’s all about process; results are irrelevant.) So, when you get right down to it, cutting tax revenues is the only way to force reductions in spending, but there’s no guarantee that those reductions will actually be made or, if made, will be in any way rational or equitable. On the contrary. (And the Baby Boomer “solution” to such quandaries over the past forty years is simply to borrow the shortfalls.)
Are US Taxes Equitable?
Still, in a nation of 310 million, if all adults were paying an equitable share of taxes, the sum would be more than sufficient to meet all government costs. But, under the “redistribution of wealth” and “entitlements” philosophies that take care of “me” and “now”, half the adult population now pays no federal income tax at all, and many others pay only token amounts. A 2016 Gallup poll found that 57% of Americans think that their federal income taxes are too high – even though only 55% of American households pay any federal income taxes at all in 2016. (Think about the various absurdities in that statement. Now consider that half the children born in America are now born to single women exercising their “rights of choice”; these are “families”, which constitute “households”.) Even with that, all told, most other “households” now pay less than 13 percent of their income to the federal government because of tax breaks like the deductions for dependents, health insurance, mortgage interest and charity contributions. On the first $70,000 of a couple’s taxable income, the total federal income tax rate is only 13.8 percent, before deductions. (Federal taxes on stocks and other investments have declined, and marginal rates apply to only a small part of a taxpayer’s income.)
Since the late 1970s, total federal tax rates have fallen for every income group. (Payroll taxes (See Footnote #2.) for social welfare programs have risen slightly, but declines in the income tax have more than made up for those increases.) But as the federal tax burden has fallen, state and local taxes have risen to offset much of the federal loss. (Most state and local taxes are based on federal tax requirements and thus only require an adjustment to their tax tables.) So, rather than increase taxes on “me”, we again hear loud calls to “tax the rich” and “take money from the military” (but without “hurting small business” like day care centers or cutting “my” civilian defense-related job. “Just sock it to those rich guys who somehow managed against the prevailing political philosophy to succeed in America by actually competing, and fire several hundred thousand of those soldiers who come out of the shadows every so often to give “me” a desperately needed fix of vicarious self-worth.”). But don’t touch anything else.
“For a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” – Winston Churchill, commenting on the brilliant practice that has been de rigueur in America ever since politicians started using other people’s money to buy Baby Boomer “me” votes in the 1970s. It helps explain why the country now has the largest debt in the history of humanity, incredibly more than 100% of its annual gross domestic product, and one which will require great sacrifices for the next four or five generations just to pay down, much less to ever pay off – IF the country somehow manages to survive that long, which is doubtful. (The European Union, which has a combined economy larger than that of the US, wisely will not allow any member country to have a national debt that is larger than 60% of annual gross domestic product.)
There is very little that is actually “fair” about the American tax system. There is something deeply flawed about a country half of whose citizens contribute nothing to maintaining their society, who have no stake in its future, even in living up to its fundamental principles of “equality for all”, who are essentially unaccountable freeloaders dragging down the nation. Like so much else in our society, our tax system started breaking during the 1970s, and has only gotten progressively more broken since. When you compare how we run a society to every other advanced country, we look just stupid, continually shooting ourselves in the foot, continually demanding things that fundamentally work against the greater good – all in the self-involved interests of childish “me” and “now”. We have become our own greatest enemy, devouring ourselves from within. Once the baby Boomers removed “responsibilities” from “rights”, the “pursuit of happiness” completely overwhelmed “equality for all”. We became a society totally out of balance that now lists precariously at the very edge of catastrophe.
There are a few things about government that are widely misunderstood. Despite all the political rhetoric, there are definite limits to government’s ability to affect our lives in the arena. For example: (1) No matter how gargantuan the US government becomes, it cannot in any appreciable way affect the economy. It can only tweak around on the edges of an economy that is far too large and subject to far too many influences outside the country and beyond the control of our government. (2) The government cannot “create jobs”. The only jobs government adds or subtracts are those on the people’s payroll in government itself, or hired with the people’s money on government contract to produce specific products or services. Other than these comparatively minor numbers, only successful business can create jobs in a highly competitive capitalist economy.
Government, however, can affect the environment in which that business operates through policies that either place it at an advantage or disadvantage with competitors in that environment – by tweaking around on the edges. Government can do this in several ways, mainly by either imposing or withdrawing regulations on business operations or taxes on business profits. Since business is dependent on consumers purchasing its product or service, government can also affect business by adjusting the disposable wealth in the hands of those consumers – by adding or decreasing the amount of that wealth that is added to or withdrawn from the arena by government taxes on consumers. The more taxes government collects, the less money is available to keep the economy churning, and vice versa. The nation’s wealth is not determined by money moved around inside the country; it is a factor of the profits it earns on goods and services sold to others – outside the country. If all your efforts are focused on moving money out of the country – by buying cheaper foreign products, playing world cop, buying illegal drugs, importing immigrants who are excess of their home country’s ability to serve, etc., – you are simply draining the country of its inherited wealth while placing other countries at an advantage.
For much of the last century, the US capitalist economy was the largest such economy on the planet, and, except for occasional feint charges by countries such as Russia, Japan or the European Union, it faced little in the way of competition from others in the world. That is changing fast. The US is losing great amounts of its wealth on a steady basis – through products Americans purchase from outside the country (including illegal drugs) and through interest money the government pays to those other countries holding its debts. The US also picks up well over 80% of the costs of defense of our “allies”, and wars involving “allies”, instead of an equitable 45% or less, and this includes those rich Europeans. (We buy their token participation, as well as the military hardware their civilian industries produce.) Worse, soon the US will be faced with very potent competitors on many different fronts. China especially is methodically pursuing a plan similar to that written by the US a century ago to achieve global economic dominance, and other rising economies like India, Brazil and Turkey are pursuing different paths to global relevance. Global competition over the next 30 years will decide winners and losers for the subsequent century.
The US is not well positioned to meet that competition and is certain to lose not only jobs but wealth in quantities that will severely test its future viability. Aggressive competition is the name of the game. A LOT of people out there beyond our shores dearly want what we’ve enjoyed, what the Greatest Generation built, since the 1940s. There will be very little time for cooperative hand-holding in the years ahead, or we simply will not survive. Only one thing is for certain: We will not survive if well over half of us is still sitting around expecting the very few of “someone else” remaining to take the blame, pay the bills and do the hard stuff in the real world – especially if huge numbers of women keep contemplating their navels while screwing over boys in school or trying to turn them into twisted little girls. You can bet that the rest of the world won’t come anywhere near that level of privileged self-involvement. When $2200 of the cost of every new American car is solely for the platinum health care of those who built it, we have already lost that one single competition, and about 50,000 jobs, to China. (And shifting those health care costs to government still requires the consumer to pick up the tab.) We have got to find better ways to run this ship, equitably, a way that gets the maximum capabilities of all of us, business included, working together in the best possible environment. We must also become a lot more knowledgeable about the world beyond “me”.
Obviously, the only way to fix this mess is to dramatically restructure Medicare and Social Security (premiums, benefits and eligibility), put brakes on the rising cost of government, throw out the current tax system, and institute a flat tax of about 17% on consumption – for all citizens. (See Footnote #3; learning about a VAT is well worth the three minutes it takes.) All citizens should be sharing equitably in the costs of their government, but, considering the enormous power now wielded by a few self-interested lobbies representing really huge groups of whining voters, the chances of that happening are zero. So it’s likely that the nation will go belly up before anything sensible is actually undertaken. Eventually real irreparable economic catastrophe will simply force changes on us that we should have started making forty years ago. Our days as a super power, or even as a great nation, will then be over.
The nation’s contemporary infrastructure is mostly the work of the Greatest Generation – a half century ago. Their children have not improved it appreciably, much less properly maintained it, ever since. Most of it is falling apart, slipping back into Third World standards. A third of our bridges alone need replacing, our ports are far below standard, even our roads are choking for want of modern rapid transit and high-speed rail systems. We once were far out ahead of the rest of the world with our infrastructure; now it’s just a national shame, coming in well below at least 25 other countries, including China. These things will severely restrict the nation’s ability to compete on the global stage. This, in turn, will make it harder and harder just to maintain our society. We need to spend far less money on “me” and far more money on “us”, and on our children’s future.
Of course, it’s not just government. During the rise of the Greatest Generation, from 1945 to 1975, 40% of corporate profits was reinvested in the company before returning the remaining 60% to investors (stock holders). Reinvestment involves putting the money into corporate facilities, research, new hires, new ventures, expansions and increased employee compensation – all intended to foster future growth. During the rise of their Baby Boomer children, from 1975 to 2010, only 10% of profits was reinvested, and the remaining 90% went to pay investors wanting more money for “me”, now, damned the future. Economist J.W. Mason of CUNY: “Finance is no longer an instrument for getting money into productive business, but instead for getting money out of them.” A lot of those corporate shares are now held by a lot more Americans, including in IRA mutual funds, but the practice overall is just another reflection of our narcissistic instant gratification society effectively undoing the broadly shared prosperity that Americans enjoyed for much of the post-war era. Government is not making adequate investment in the future, and neither is business.
President Eisenhower ended both the British and French colonial super-powers with simple phone calls to their leaders. He pointed out that their power was now based solely on money borrowed from America, that both nations were living in a fantasy world far beyond their means, and America was now exercising its option. “Either stand down, or I’ll call in my chits.” The US didn’t call in those debts, but both countries quietly but begrudgingly left the Suez and went home to completely restructure their entire societies – based on hard economic realities. The first step was to systematically dismantel their global empires, empires they could no longer maintain alone. Our humongous $17 Trillion national debt is, in effect, a very powerful “nuclear option” weapon aired right at our heart.
There’s just not much in America that makes sense anymore. It’s all emotion, zero logic. When will the White House receive its phone call?
(See “The Most Important Import” and “Thrifty Americans”, posted separately.)
The tax figures above, but not the discussion, are based on information provided by the Tax Policy Center in Washington DC.
Footnote #1: Charity: Another factor that almost always gets overlooked in discussions about taxes in America is the really huge amounts that Americans voluntarily contribute to charities of their choice, both domestic and foreign. This per capita amount is the highest in the world. Many Americans would prefer to have some choice in where their money goes in support of worthy causes, rather than have such decisions made by a government ruled by self-interested lobbies and bureaucrats.
Footnote #2: Payroll Taxes: Payroll tax is a term often used to blur the picture about taxes. Payroll taxes are all taxes held back by an employer on income earned by an employee – in order to pay these taxes directly to local, state and federal governments. Most of these payroll taxes are income taxes destined for local, state and national general funds, and some of these withheld income taxes may be returned to the employee later when he or she files year-end tax forms (and takes advantage of various tax deductions). Other payroll taxes pay premiums on programs like Medicare, Medicaid, Social Security and unemployment insurance, which are matched by the employer and paid to the government for the specified purpose; government uses these funds to pay current beneficiaries of the various social programs. Often people will use “payroll taxes” to refer to social welfare premiums only, and “withholding” to refer to income taxes, but actually all are “payroll taxes” held back (withheld) by the employer. When someone starts talking about “payroll taxes”, always ask them to which specific payroll tax they are referring. (And premium taxes for Social Security, Medicare, etc., do not go into “my” account. There is no “my” account; those taxes are used to pay current beneficiaries. Your children, the generation behind you, if there are enough of them, and if they can afford the costs, will pay for you when you become a beneficiary.)
Footnote #3: Consumption Tax. A consumption tax charges everyone, rich and poor, the same tax rate for everything they consume (except for certain “life necessities”, such as food and medicine, certain health care). Since poor people don’t buy much, they don’t pay much consumption taxes. The more money one has, they more things they buy, and thus the more consumption taxes they pay. Since rich people have more money with which to buy stuff, they pay more consumption taxes. Those on the lower end of the economic scale have an incentive for productive employment, savings and investments, in order to make more money with which to buy things, if they want those things. This contributes to the society’s economic growth. A consumption tax is a flat tax – a fixed rate that applies to everyone. It is simple, equitable and fair.
There are two basic kinds of consumption taxes – sales tax and value-added tax.
A sales tax is a consumption tax, a fixed universal percentage of a sale price that an end consumer pays when they buy something. From the perspective of the buyer, it is a tax on the final purchase price. The sales tax is added to the purchase price to determine the full amount due in the transaction. The seller collects the tax and then passes on the tax collected to the government. It’s a one-time event that takes place when the end product is sold at the retail level to the end user. A sales tax on the end buyer allows everyone else in the chain to profit without the burden of sales taxes (although the profits may be taxed, for example, as capital gains), and there is no economic incentive to either collect taxes from buyers or to remit taxes to the government. For example, if the buyer can convince a seller that he is acquiring the product for further distribution, for further re-sale, the seller may not collect the taxes. The burden is on government to ensure taxes are being properly collected and remitted, which adds to the cost of government.
The US has no national sales tax, but 45 of the individual states do, and many cities, counties, transit authorities and special purpose districts impose additional local sales taxes. It is only when the final sales transaction takes place within a particular locality that that locality’s sales tax is applied. If a state and locality have no sales tax, then none is collected at the transaction, and none is paid to the respective governments. Except for an inheritance tax on considerable wealth, the only type of consumption tax that exists in the United States is a sales tax.
A value-added tax (VAT) is also a consumption tax, a fixed universal percentage of a sale price that a consumer pays when they buy something. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, however, it is a tax only on the “value added” to a product, material or service, by their own stage of its production or distribution. Since the seller had paid a sales (VAT) tax when he purchased the product for further re-sale, the seller now remits to the government the difference between these two amounts, and retains the rest for themselves. There is no VAT in the United States, but is wide-spread throughout Europe (where rates average about 21%). Mexico, Canada, China, India, Australia and New Zealand also have VATs.
The “value added” to a product by a business is the sale price charged to its customer, minus the price already paid for materials and other taxable inputs. A VAT is like a sales tax in that ultimately only the end consumer cannot recover any of the taxes paid. With the VAT, collections, remittances to the government, and credits for taxes already paid occur each time a business in the supply chain purchases products. Everyone involved in the evolution of a product has an economic incentive to actually collect and pay the taxes due, rather than for the end buyer to have an incentive to avoid paying a one-time tax.
For example, I own an orange grove in Florida. I own the land, care for the grove, pick the oranges, put them in cartons, transport the cartons to town and sell them to a company based in Georgia that makes orange juice. I add to my sale price the taxes that must be paid to the government by the buyer on the transaction, then subtract any taxes I already paid on things I needed to grow the oranges, and remit the remainder to the government. The juice company transports the oranges to its plant in Georgia, squeezes the oranges, processes the juice, puts the processed juice in containers, the containers into cartons and sells the cartons to a distributor. The distributor pays the taxes due on the transaction to the juice company. The juice company subtracts the taxes that it has already paid when the oranges were purchased, and remits the remainder to the government. The distributor transports the cartons to its warehouse in Ohio, sells them to a grocery chain company and transports them from the warehouse to the chain’s individual stores throughout the central US. The distributor changes the grocery chain the taxes due, subtracts what he previously paid in taxes, and remits the remainder to the government. One of the grocery stores then sells a container of juice to an end-use consumer who also pays the taxes due. The grocery company subtracts what it has already paid in per-container taxes and remits the remainder to the government.
At each step taxes were paid only on the value added to the end product by the seller in each transaction. Each party in the process wants to get credit for the taxes that party has already paid, so is certain to collect the taxes from the buyer, regardless of whether that buyer is an end-consumer. Everyone pays the same tax rate. Businesses are able to recover VAT (input tax) on the products and services that they buy in order to produce further goods or services that will be sold to yet another business in the supply chain or directly to a final consumer. In this way, the total tax levied at each stage in the economic chain of supply is a constant fraction of only the value added by a business to its products, and most of the cost of collecting the tax is borne by business, rather than by the state. Only the end-user, the final consumer, pays the full tax.
Notes. If sales taxes are high enough, say above 10%, people start engaging in widespread tax-evading activity (like buying over the Internet, pretending to be a business, buying at wholesale, buying products through an employer, etc.). On the other hand, total VAT rates can rise above 10% without widespread evasion because of the novel collection mechanism, one with a built-in incentive to collect and remit the taxes due. However, businesses do incur an additional accounting cost, a cost not reimbursed by the government, but that cost can now be minimized with the use of computers. There usually are no problems with online sales from businesses – sellers and buyers – located within the country under a national VAT system, since all buyers pay the VAT. Consumption taxes like VAT are often considered superior to most other types of taxation because they distort incentives to work, save and invest less. Tax evasion with a VAT is also significantly less than occurs with an income tax, especially an income tax system as convoluted and arcane as that in the United States. An appropriate and sufficient VAT rate for the US would be about 16% (exempting groceries, rent and housing, health care, education, and charitable groups). US-European trade places US manufactures at a distinct disadvantage (annually about $525 Billion), since US sellers must collect and remit a VAT in Europe, but cannot get “credit” in the US for VATs paid, while European companies can. The absence of a VAT in the US contributes to the country’s huge trade imbalances, while also shortchanging the US government.