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The Top 10 (Well, 11) Federal Tax Charts

April 15, 2014 at 11:05 am

To usher in Tax Day, here are our top 11 charts on federal taxes, which provide context for debates on issues like tax reform and deficit reduction.

Our first chart shows the sources of federal tax revenue.

Individual income tax revenues have held steady for many decades at a little under half of federal revenue.  The share of federal revenue from payroll taxes (mostly Social Security and Medicare taxes) grew sharply between the 1950s and 1980s and has since remained relatively stable.  Conversely, the share of federal revenue from corporate taxes fell sharply between the 1950s and 1980s and has remained at this lower level.

Our second graph reminds us what those taxes pay for.

Social Security, major health programs like Medicare and Medicaid, and national defense account for roughly two-thirds of federal spending.  Safety net programs (such as unemployment insurance and nutrition programs) and interest on the debt account for 12 percent and 6 percent of federal spending, respectively.  The remaining 18 percent goes to such other areas as roads, education, and health and science research.

The United States is a relatively low-tax country, as the chart below shows.  When measured as a share of the economy, total government receipts (a broad measure of revenue) are lower in the United States than in any other member of the Organisation for Economic Co-operation and Development (OECD), even after accounting for the modest revenue increases in the 2012 “fiscal cliff” deal and the taxes that fund health reform.

While high-income filers pay a large share of the nation’s taxes, the main reason is that they receive a large share of the nation’s income.  Moreover, focusing solely on the income tax — among the most progressive taxes — gives a distorted picture of the full set of taxes that different income groups pay.

The chart below provides a more complete picture.  It shows the share of all federal, state, and local taxes that each income group pays and what share of the nation’s income it collects.  As the graph shows, incomes in the United States are extremely polarized, and the overall tax system is only modestly progressive.  For example, the top 1 percent of earners received 22 percent of the nation’s income in 2013 and paid 24 percent of all taxes; the bottom 60 percent of people received 21 percent of the income and paid 17 percent of the taxes.

This largely reflects the fact that average tax rates increase modestly as you move up the income scale.  On average, the bottom 20 percent pays 19 percent of their income in taxes; the middle 20 percent pays 27 percent, and the top 20 percent pays 32 percent, according to Citizens for Tax Justice.

Policymakers considering tax policy changes should keep the economic context in mind, including the dramatic increase in inequality in recent decades.  Congressional Budget Office data show that incomes grew at much faster rates for high-income people than for everyone else between 1979 and 2010 (the most recent year available).

As the chart below shows, the average middle-income family had $9,500 less after-tax income in 2010, and the average household in the top 1 percent had $481,800 more, than if all groups’ incomes had grown at the same rate since 1979.

Many low-wage workers struggle to climb the economic ladder, particularly workers who are not raising minor children — the sole group that the federal tax code taxes into (and deeper into) poverty, as the chart below shows.  Often called “childless workers” — though many are non-custodial parents who have financial obligations to their children and play an important role in their lives — they pay substantial payroll taxes and begin paying income taxes while earning less than the poverty line (about $12,000 for a single worker).  The Earned Income Tax Credit (EITC) for these workers is far too small to offset their income and payroll tax liabilities.

The average childless worker who receives the EITC gets just $264, a small fraction of the EITC that other low-wage workers receive, as the chart below shows.  Moreover, childless workers under age 25 are ineligible for the EITC.

There are recent signs of bipartisan momentum to provide a meaningful EITC for childless workers.  President Obama as well as key House and Senate members have advanced proposals that would take a major step forward.  As the chart below shows, the EITC for a childless worker making poverty-level wages would rise from $171 to $841 under the President’s plan.  Moreover, the Treasury Department estimates that the President’s proposal would lift about half a million people out of poverty and reduce the depth of poverty for about another 10 million, under a poverty measure that includes the cash value of tax credits and benefit programs.  The congressional proposals are larger, and so would likely have larger anti-poverty effects.

Recent deficit-reduction measures, including the 2011 Budget Control Act’s funding caps and automatic cuts under sequestration, have been heavily tilted to spending cuts, rather than revenue increases.

If sequestration remains in place, 77 percent of the deficit reduction over 2015-2024 resulting from policy changes will come from spending cuts.  Just 23 percent will come from increased revenues, as the chart below shows. 

Policymakers agreed on a bipartisan basis last December to offset the cost of partially lifting sequestration for 2014 and 2015.

By contrast, however, the Senate Finance Committee has approved a package of “tax extenders” (expiring tax breaks, mostly for corporations) without offsetting the cost.  If continued for the next decade without offsets, the extenders would cost $484 billion.  That’s the equivalent of giving back more than half of the revenue savings from the 2012 “fiscal cliff” deal, which raised tax rates on very high-income taxpayers, as the chart below shows.  And if policymakers also continue the “bonus depreciation” tax for businesses — mistakenly in our view — the ten-year cost rises to $747 billion, wiping out nearly all of the fiscal-cliff savings.

Policymakers can reduce the deficit or finance investments by scaling back costly and inefficient “tax expenditures,” or spending delivered through the tax code in the form of tax credits, deductions and exclusions.

For example, House Ways and Means Chairman Dave Camp’s recent tax reform plan outlined dozens of specific cuts in tax subsidies.

As the chart below shows, tax expenditures cost well more than Social Security and also than Medicare and Medicaid combined.  Harvard economist Martin Feldstein, former chair of President Reagan’s Council of Economic Advisers, has said that “cutting tax expenditures is really the best way to reduce government spending.”

Greenstein on the New Ryan Budget

April 1, 2014 at 5:09 pm

CBPP President Robert Greenstein just issued a statement on House Budget Committee Chairman Paul Ryan’s new budget plan.  Here’s the opening.

House Budget Committee Chairman Paul Ryan’s new “Path to Prosperity” is, sadly, anything but that for most Americans.  Affluent Americans would do quite well.  But for tens of millions of others, the Ryan plan is a path to more adversity.

The budget documents that Chairman Ryan issued today laud his budget for promoting “opportunity,” even as his budget slashes Pell Grants to help low- and moderate-income students afford college by more than $125 billion over ten years and cuts the part of the budget that funds education and job training (non-defense discretionary funding) far below the already low sequestration levels.  The budget documents also claim to help the poor, even as the Ryan budget shreds key parts of the safety net; for example, it resurrects the draconian benefit cuts in SNAP (food stamps) that the House passed last fall and adds $125 billion of SNAP cuts on top of them.

The budget also swells the ranks of the uninsured by at least 40 million people.  It repeals the Affordable Care Act (ACA), taking coverage away from the millions of people who have just attained it, and cuts Medicaid by $732 billion (by 26 percent by 2024) on top of the cuts from repealing the ACA’s Medicaid expansion.  Yet it offers no meaningful alternative to provide health coverage to the tens of millions of uninsured Americans.

That’s only a partial list of its cuts.  The budget cuts non-defense discretionary programs by $791 billion below the sequestration level, shrinking this part of the budget to less than half its share of the economy under President Reagan.  These cuts are entirely unspecified, as are more than $500 billion of cuts in entitlement programs.

Meanwhile, the budget aims to cut the top individual tax rate and the corporate income tax rate to 25 percent, eliminate the Alternative Minimum Tax, and repeal the ACA’s revenue-raising provisions.  These tax cuts would cost about $5 trillion over ten years, based on past analyses by the Urban-Brookings Tax Policy Center.  Yet the Ryan plan doesn’t identify a single tax break to close or narrow to cover the lost $5 trillion, even though his budget assumes no revenue losses overall.  And it ignores the hard fact that, in his recent tax reform plan, House Ways and Means Committee Chairman Dave Camp only lowered the top individual tax rate to 35 percent even after identifying scores of politically popular tax breaks to narrow or eliminate.

The Ryan budget is thus an exercise in obfuscation — failing to specify trillions of dollars that it would need in tax savings and budget cuts to make its numbers add up.  No one should take seriously its claim to balance the budget in ten years.

It’s also an exercise in hypocrisy — claiming to boost opportunity and reduce poverty while flagrantly doing the reverse.  Here’s just one example: Ryan has criticized some of the poor for not working enough and says that he wants to promote work and opportunity.  But his budget eliminates Pell Grants entirely for low-income students who have families to support, must work, and are attending school less than half time on top of their jobs.

Click here for the full statement.

Why the New Ryan Budget Will Likely Be at Least as Extreme as Last Year’s

March 31, 2014 at 10:51 am

We’ve issued a short paper on what to look for in the budget that House Budget Committee Chairman Paul Ryan is expected to release this week.  Here’s the opening:

Basic budget arithmetic suggests that House Budget Committee Chairman Paul Ryan’s coming budget will be at least as extreme as his budget last year, and likely more so.  The Congressional Budget Office’s (CBO) latest deficit projections are roughly $1 trillion higher over the coming decade than last year’s projections.  If the new Ryan budget, slated for release this week, is to achieve the same goals as last year’s — reaching balance within ten years and reversing sequestration cuts in defense without raising revenues — it will need to expand its already steep cuts in domestic programs by hundreds of billions of dollars.

Last year, Ryan’s budget focused its deepest cuts on programs that benefit low-income people.  These cuts, which included massive reductions in Medicaid and SNAP (formerly food stamps) as well as the repeal of all health reform benefits, constituted about 72 percent of the budget’s total program cuts.  As a result, last year’s budget would have resulted in large increases in poverty and deprived many millions of affordable health insurance.  Further cuts in low-income programs are highly likely if the new Ryan budget again relies solely on program cuts while boosting defense funding and avoiding any cuts in Social Security and additional savings in Medicare.

As in past years, Chairman Ryan may not provide many details about how his proposed cuts would be achieved.  Last year, he called for converting Medicaid and SNAP to block grants, leaving it to the states to make the tough choices about which poor children, low-income seniors, or people with disabilities would not receive help.  Similarly, his budget included about $660 billion of unspecified ten-year cuts in mandatory programs — failing even to specify which programs would be cut.  And it gave little or no details on how to cut non-defense discretionary programs more than $600 billion below the already very austere post-sequestration levels.

With almost $1.3 trillion in unspecified ten-year cuts and its Medicaid and SNAP cuts occurring through block grants, last year’s Ryan budget obscured its real impact and the severe hardship it would impose.  Its lack of specificity, and the decision to wall off large parts of the budget from any deficit reduction at all, belied any attempt to portray that budget as a courageous document that makes hard choices.

Click here for the full paper.

A Tax Proposal Worthy of Support

March 19, 2014 at 4:01 pm

As youth across the country mobilize today on “Kick Butts Day” to raise awareness of tobacco’s dangers, it’s worth calling attention to President Obama’s proposal to raise the federal tobacco tax to pay for expanded early childhood education, which he first introduced last year and included again in his 2015 budget.  As we have explained, the plan would cut the number of premature deaths due to smoking and raise an estimated $78 billion over ten years to improve access to high-quality pre-kindergarten programs.

Here are three reasons why the proposal deserves Congress’s support:

  1. Cigarette smoking is the leading cause of preventable disease in the United States.  It accounts for about 443,000 deaths each year, or about 20 percent of all deaths — some 50,000 of them from secondhand smoke.
  2. Tobacco taxes are a proven strategy to reduce smoking, especially among younger people, and extend lives.  As the graph shows, a 10 percent rise in cigarette prices will reduce smoking by 5-15 percent among people under age 18 and by 3-7 percent among adults, the Congressional Budget Office estimates.  Cutting consumption among young people is especially important:  four in five adult smokers started before they were 18.
  3. The impact of the tobacco tax is less regressive than many people believe.  Some opponents argue that raising tobacco taxes would unfairly affect low-income people since they have higher smoking rates.  But low-income people would also benefit more from the health improvements from cutting consumption, since they smoke more and are more likely than better-off people to stop smoking (or not start) if tobacco taxes rise.  Lower-income families would also benefit more from the expanded access to early childhood education that these tax revenues would finance.

Greenstein on President Obama’s New Budget

March 4, 2014 at 1:47 pm

CBPP President Robert Greenstein has issued a statement on the President’s fiscal year 2015 budget:

President Obama’s new budget is a solid blueprint that would reduce deficits, alleviate poverty, and boost investment in areas needed for future economic growth, such as infrastructure, education, and research.

On the deficit front, the budget confounds the recent predictions of some pundits by including, rather than eschewing, deficit reduction.  While offsetting the costs of its new investment initiatives by cutting spending and scaling back tax breaks, the budget goes further by reducing deficits enough to put federal debt as a share of gross domestic product (GDP) on a declining path.  With about $1.7 trillion in deficit reduction over the next ten years (excluding the savings from winding down operations in Afghanistan), the budget would reduce the debt-to-GDP ratio to 69 percent in 2024.

As previously announced, the budget doesn’t include the proposal in the President’s budget last year to switch to the “chained Consumer Price Index” in calculating annual cost-of-living adjustments in Social Security and other programs.  It does, however, retain the $400 billion in Medicare savings in last year’s budget, including about $60 billion in Medicare beneficiary reductions (through increases in premiums for affluent beneficiaries, increases in some co-payments, and changes affecting Medigap coverage).

On the poverty-fighting front, the budget features an important proposal to boost the Earned Income Tax Credit (EITC) for low-income workers who are not living with minor children — a measure many analysts across the political spectrum believe holds considerable promise for reducing poverty and also increasing labor-force participation, including among young minority men.  Single low-wage men and women are the one group of Americans whom the federal tax code literally taxes into — or deeper into — poverty.  The Obama proposal, which builds on a long bipartisan tradition of support for the EITC, would substantially address that problem.

No one should declare this budget “dead on arrival,” for two reasons.  First, under the Murray-Ryan agreement of last year, both parties have agreed on the total amount available for appropriated programs this year, and the Obama budget includes program-by-program requests that hit that total.  Consequently, the budget’s appropriations requests will likely play an important role as the Appropriations Committees craft the annual funding bills this year.

Second, with no big budget showdowns or deadlines looming this year, 2014 likely won’t be a year of significant budgetary action beyond the appropriations bills.  But 2015 may well be.  Policymakers likely will seek to negotiate another budget deal to ease the scheduled sequestration budget cuts for 2016 and beyond and also may consider tax reform and other measures.  Both the new Obama budget and the budget proposal that House Budget Committee Chair Paul Ryan will unveil in a few weeks will offer dueling frameworks for a year-long debate on where fiscal and program policy should go, in advance of larger decisions next year.

The vision reflected in the Obama budget will provide a much sounder course than the one we’ll likely see in the Ryan budget.  That’s because the Obama budget curbs lower-priority spending and unproductive special-interest tax breaks in order to make investments that the nation needs for future prosperity, reduce poverty and better reward low-paid work, and give many young children a better chance of success, while reducing mid-term and long-term deficits at the same time.