Think Middle-Income Americans Are Overtaxed? Think Again

April 3, 2012 at 3:08 pm

Do you think middle-income Americans are overtaxed?  By at least one standard — the standard of history — the answer is no, as our new paper explains.

In fact, federal taxes on middle-income Americans are near historic lows, and that’s true whether you’re talking about federal income taxes or all federal taxes, according to the latest available data.

Federal Income Tax Burden at Historic Low

When it comes to income taxes, a family of four in the exact middle of the income spectrum will pay 5.6 percent of its 2011 income in federal income taxes, according to new estimates from the Urban Institute-Brookings Institution Tax Policy Center.  Federal income taxes on middle-income families have fallen significantly in recent decades, and they have been lower under Presidents George W. Bush and Obama than at any time since the 1950s.

When it comes to overall federal taxes, households in the middle fifth of the income spectrum paid an average 14.3 percent of their income in taxes in 2007, the last year for which we have data, according to the Congressional Budget Office (CBO).   That’s just a bit above the 13.8 percent of 2003, the lowest level in data that dates back to 1979.   The 14.3 percent figure will likely fall as CBO gathers data for more recent years, due to the effects of the Make Work Pay tax credit in 2009 and 2010, the payroll tax cut in 2011 and 2012, and a weak economy that reduced many families’ incomes.

The United States remains a low-tax country by international standards as well, collecting less in combined federal and state taxes than nearly any other developed country.

The United States Is a Low Tax Country

Tax Foundation’s State “Tax Freedom Days” No More Valid than the Federal Version

April 2, 2012 at 6:18 pm

Today the Tax Foundation released its list of when “Tax Freedom Day” allegedly arrives in each state.  It’s a deeply flawed and misleading exercise for a host of reasons.

Each state’s Tax Freedom Day – just like the federal version — sharply overstates middle-class tax levels.  As my colleagues explained in an earlier post, the Tax Foundation calculates national Tax Freedom Day using an “average” tax rate that is likely higher than what 80 percent of American households actually pay.  That’s because the other 20 percent of upper-income households, many of them quite affluent, pay a big share of federal income taxes and drive up the average.  Because federal tax levels play a large role in the Tax Foundation’s state Tax Freedom Day calculations, the figures for each state also substantially exaggerate the tax bills of middle-class families in that state.

State Tax Freedom Day calculations tells us surprisingly little about state tax policy for two reasons.  First, the estimates reflect state affluence rather than state taxes.  Because we have a progressive federal tax system, states with higher numbers of very affluent households account for more federal taxes than states with fewer affluent households.  But that doesn’t mean that average households in those states are any more heavily taxed.

Second, the Tax Foundation measures a state’s overall tax level in part by the taxes that other states levy on its residents when they travel or import goods and services.  Alaska’s heavy taxes on oil production, for instance, are counted as taxes paid by energy consumers in the other 49 states.  Same for tourism taxes in Hawaii, gaming taxes in Nevada, and so on.

Finally, the estimates of state Tax Freedom Days for 2012 may be simply wrong – and they have been in the past. That’s because, together, many thousands of cities, counties, towns, school districts, and other local governments levy billions of dollars in taxes each year, and the only reliable source of data on all those taxes is several years old.  More up-to-date data on local taxes, however, wouldn’t solve the other problems with the foundation’s analysis.

What’s Wrong with the Tax Foundation’s “Tax Freedom Day” Report?

April 2, 2012 at 5:57 pm

We issued a paper this afternoon that explained the problems inherent in the Tax Foundation’s annual “Tax Freedom Day” report, the latest version of which the foundation issued earlier today.  Here’s the opening:

The Tax Foundation released its annual “Tax Freedom Day” report today that, once again, leaves a strikingly misleading impression of tax burdens — announcing an “average” tax rate across the United States that’s likely higher than the tax rate that 80 percent of U.S. households actually pay.

To project the day when Americans will have “earned enough money to pay this year’s tax obligations at the federal, state, and local levels,” the Tax Foundation calculates the “average” tax rate by measuring tax revenues as a share of the economy (similar to estimates of total revenues as a share of Gross Domestic Product, or GDP).  Its report suggests the “average” household pays this “average” tax rate.

In reality, in a progressive tax system like that of the United States, only upper-income households (the top 20 percent) pay tax at rates that are equal to or above revenues as a share of the economy.  The non-partisan Congressional Budget Office and other authoritative sources show that low- and middle-income (the other 80 percent) pay a smaller share of their income in taxes than the Tax Foundation report implies.

The Tax Foundation acknowledges this issue in a methodology paper accompanying its report, noting that its estimates reflect the “average tax burden for the economy as a whole, rather than for specific subgroups of taxpayers.”   Consequently, those who report on “Tax Freedom Day” as if it represented the day until which the typical American must work to pay his or her taxes are misinterpreting these figures and inadvertently fostering misimpressions about the taxes that most Americans pay.

Click here for the full report.

In Case You Missed It…

March 30, 2012 at 3:07 pm

This week on Off the Charts, we focused on House Budget Committee Chairman Paul Ryan’s budget, the federal budget, federal taxes, health policy, and poverty.

  • On the Ryan plan, Chuck Marr pointed out that it would be extremely difficult for Chairman Ryan to pay for his proposed tax cuts by cutting tax loopholes mainly for the wealthiest households, as he suggests, and we highlighted our report showing that the Ryan tax plan would provide $265,000-a-year tax cuts to the nation’s highest-income households.

    Jim Horney cautioned that the plan is unlikely to balance the federal budget for several decades.

    Paul Van de Water outlined the plan’s drastic and problematic Medicare proposals.

  • On the federal budget, we warned that the Medicaid cuts in the Republican Study Committee’s budget are even larger than those in the Ryan budget and explained why the budget from Reps. Jim Cooper and Steven LaTourette is well to the right of the Bowles-Simpson plan.

    Jim Horney further debunked the claim that the Cooper-LaTourette budget is as balanced as Bowles-Simpson and showed that the plan is tilted more toward spending cuts than its proponents claim.

  • On federal taxes, we noted that House Majority Leader Eric Cantor’s business tax cut would primarily benefit the wealthy and not create many jobs, and Chad Stone explained why “putting a price on carbon” would be smart energy policy and smart budget policy.
  • On health policy, Paul Van de Water rebutted claims that health reform’s tax on medical devices like pacemakers will seriously damage the economy, and January Angeles outlined the benefits to states of health reform’s Medicaid expansion.

    Also, in light of the two-year anniversary of health reform, Shannon Spillane noted several of its key accomplishments thus far, delineated some of the benefits set to take effect in the coming years, and corrected some common misconceptions about health reform.  She also explained health reform’s requirement that individuals have health coverage or face a penalty.

  • On poverty, Arloc Sherman showed that the Earned Income Tax Credit and Child Tax Credit lift millions of women and girls out of poverty.

In other news, we released reports on the Cooper-LaTourette budget, tax cuts for the wealthy in Chairman Ryan’s budget,  Medicare changes in the Ryan budget, Rep. Cantor’s business tax proposal, the Medicaid cuts in the Republican Study Committee and Ryan budgets, and the impact on states of health reform’s Medicaid expansion.

More Bogus Economics from the Medical Device Industry

March 30, 2012 at 12:33 pm

Industry lobbyists have trotted out still another bogus economic analysis in their campaign to repeal the health reform law’s 2.3-percent tax on medical devices (cardiac pacemakers, wheelchairs, surgical gloves, and so on).

A 2011 study financed by AdvaMed, an industry trade association, alleged that the tax would cause 10 percent of device manufacturing to move offshore, leading to the loss of 43,000 U.S. jobs.

In reality, however, the excise tax creates no incentive whatever for manufacturers to move production overseas, as we have explained.  It applies equally to imported and domestically produced devices, and devices produced in the United States for export are tax-exempt.

Bloomberg Government recently concluded that the study is “not credible.”

Now AdvaMed has commissioned another study, but it’s not credible either, and AdvaMed distorts its results.  AdvaMed hired the consulting firm Battelle to assess the effect of a “hypothetical economic event that results in a $3 billion decline in the [medical device] industry.”  (The medical device tax is projected to yield about $3 billion in annual revenues.)  Battelle uses what economists call an “input-output model” to conclude that this “hypothetical economic event” would cause a loss of 39,000 jobs — about 10,000 in the medical device industry itself and the rest in other sectors of the economy.

What’s wrong with this latest analysis?  First, there’s no reason to think that the medical device tax will cause a $3 billion drop in the sale of devices.  A 2006 study by Mathematica Policy Research found that demand for health-related items falls by just 2 percent for every 10 percent increase in price.  If this finding applies to medical devices, the Battelle study overestimates the tax’s impact on medical device sales (and thus on employment) by a factor of five.  Moreover, additional demand for medical devices from the millions of new customers who will gain insurance coverage through health reform could offset any drop in demand stemming from the tax.

Second, input-output models are not an appropriate way to analyze how changes in a given industry affect the economy as a whole because they don’t take into account any related changes in government fiscal or monetary policy.  For example, under the federal government’s “pay-as-you-go” law, Congress would have to offset the revenue loss from repealing the medical device tax by raising other taxes or cutting spending — either of which would reduce the demand for goods and services.  The Battelle study ignores that fact.

As The Economist rightly concludes, the effect of the excise tax on the medical device industry will be “trivial compared with other shifts,” such as “scandals, recalls, stingy customers, [and] anxious regulators,” all of which have left the industry in a “rut.”