Top Ten Federal Tax Charts

April 17, 2012 at 2:24 pm

In recognition of Tax Day, we’ve collected our top ten charts related to federal taxes.  Together, they provide useful context for the coming debates about how to reduce soaring budget deficits and reform the tax code.

Our first chart, below, reminds us what taxes pay for:  three-fifths of federal spending goes for national defense, Social Security, and major health programs like Medicare and Medicaid; the rest goes for safety net programs, interest on the debt, and a wide variety of other areas.

Our second chart, below, shows that the United States (including both the federal government and the states) collects less in taxes as a share of the economy than nearly any other developed country.

The next three charts show some of the factors that have made the United States a low-tax country.  They include the downward trend in taxes on middle-income families, the steep drop in federal taxes at the top of the income scale, and the decline in corporate income tax revenue as a share of the economy.

As our third chart, below, shows, federal taxes on middle-income Americans are near historic lows, according to data from the Urban-Brookings Tax Policy Center (TPC):

  • A family of four in the exact middle of the income spectrum will pay only 5.6 percent of its 2011 income in federal income taxes; and
  • Average federal income tax rates for this middle-income family have been lower during the Bush and Obama Administrations than at any time since the 1950s.

Overall federal taxes — which include income as well as payroll and excise taxes — are also near their lowest level in decades.

As our fourth chart, below, shows, the share of their income that the country’s highest-income 400 taxpayers pay in federal income taxes has also fallen considerably since 1992, according to IRS data.  Over that same time, the incomes of those taxpayers has skyrocketed.  While the Great Recession (like the 2001 recession) caused a sharp drop in incomes at the top, the most recent data show that incomes at the top have since begun to rebound.

As our fifth chart, below, shows, corporate tax revenues are at historic lows as a share of the economy.

Although the top U.S. statutory corporate tax rate is high by international standards, the average tax rate — that is, the share of profits that companies actually pay in U.S. taxes — is substantially lower because of the many deductions, credits, and other write-offs that corporations can take.  U.S. corporate tax revenues are low compared to other developed countries as a share of the economy.

The next two charts highlight critical facts to keep in mind when evaluating tax proposals.

As our sixth chart, below, shows, the nation is on an unsustainable fiscal track if we continue current policies.  Higher tax revenues are an essential part of a balanced deficit-reduction package.    

As our seventh chart, below, shows, the top 1 percent of taxpayers have enjoyed enormous gains in after-tax incomes in recent decades, dwarfing the gains among other income groups.  (For more on the growth in income inequality, see our slideshow series.)

The sharp growth in income inequality suggests that higher-income taxpayers can and should contribute more in taxes to help reduce deficits.

As our eighth chart, below, shows, the 2001 and 2003 tax cuts benefit millionaires much more than middle-income households — a sign of how heavily they are weighted toward the top of the income scale.  A good start to raising revenues for deficit reduction would be to allow the tax cuts aimed exclusively at people earning over $250,000 to expire on schedule at the end of 2012.

As our ninth chart, below, shows, policymakers can also can reduce deficits — and make the tax code more equitable and economically efficient at the same time — by reforming tax expenditures (tax credits, deductions, and other preferences).   Tax expenditures are expensive, costing $1.1 trillion in 2011 (more than Medicare or Medicaid), and in many cases they provide the biggest benefits to the people who least need them.

As our tenth and final chart, below, shows, one of the most top-heavy tax expenditures is the preferential tax rates for investment income, which are much lower than the rates for wage income.  Since the large bulk of investment income goes to upper-income households, these preferential rates are the major reason why the tax code violates the “Buffett Rule” — in other words, why many middle-income Americans pay more of their income in taxes than some millionaires.

Middle-income people who receive most of their income from their paychecks (as middle-class people generally do) pay 14.9 percent of their income in federal income and payroll taxes, according to TPC.  This is higher than the rate for people with incomes over $1 million who receive more than a third of their income from investments (that is, capital gains and qualified dividends).

Greenstein on the Safety Net, Part 1

April 17, 2012 at 12:08 pm

Testifying today before a House Budget Committee hearing, “Strengthening the Safety Net,” Robert Greenstein urged policymakers to “step back from the usual type of Washington debates and political battles and consider what policies would be best for ‘the least among us.’  I urge you to follow the Hippocratic oath and ‘do no harm.’  I also implore you to adopt the Bowles-Simpson principle of protecting the disadvantaged and avoiding measures that would increase poverty and hardship in a nation as abundant as ours.”

The following excerpts are from the first section of his testimony, which looks at the safety net as a whole:

The safety net is far from perfect and contains areas that merit strengthening.  Yet as a result of a series of mostly bipartisan decisions over several decades, it is functioning far better than is often understood.

Let’s start with its effect on poverty.  Analysts across the political spectrum agree that to measure the safety net’s impact on poverty, one cannot use the “official” measure of poverty — which completely ignores SNAP (formerly known as the food stamp program), the Earned Income Tax Credit, rental subsidies, and the like and also fails to adjust for taxes that are withheld from paychecks and that families thus can’t spend. . . .

In the mid-1990s, a National Academy of Sciences’ expert panel recommended use of such a broader measure of poverty, and the Census Bureau issues several alternative, broad poverty measures.  Under the measure most closely resembling the NAS recommendation, the poverty rate stood at 15.5 percent in 2010.  Yet under the same measure, the poverty rate without the safety net — that is, the poverty rate based on household incomes before government assistance is counted — was 29 percent.  In other words, the safety net cut poverty nearly in half compared to what it otherwise would be. . . .

One also can look at the Census data on how many people individual programs lift out of poverty.  In 2010, for example, the Earned Income Tax Credit and the Child Tax Credit lifted about 9 million people in low-income working families above the poverty line, including 5 million children.  SNAP lifted about 4 million out of poverty.

Among the most striking figures are those that track poverty rates over the last few years.  Given the depth and severity of the economic downturn (sometimes called the Great Recession), one would have expected poverty to have soared.  It didn’t. . . .  The “automatic stabilizer” response of programs like SNAP and unemployment insurance, supplemented by the temporary increases in assistance in various safety net programs that were provided under the Recovery Act, counteracted most of the increase in poverty that would otherwise have occurred.  This is a substantial accomplishment, and one that speaks well for our nation.

Click here for the full testimony.

A Guide to Understanding U.S. Taxes in One Place

April 16, 2012 at 4:32 pm

As we approach the April 17 tax filing deadline, we have highlighted the following pieces that take big-picture look at the U.S. tax system.

  • We discussed how federal income taxes on middle-income families remain near historic lows.
  • We examined where our federal and state taxes go.
  • We pointed out the misconceptions and realities about who pays taxes.
  • We showed the strikingly misleading impression of tax burdens represented by the Tax Foundation’s annual “Tax Freedom Day” report.
  • We examined states that continue to tax working-poor families deeper into poverty rather than supporting their efforts to climb into the middle class.

And, finally, in our blog series Thinking About Tax Policy, we looked at the current state of the U.S. tax system and opportunities for reform.

Thinking About Tax Policy, Part 5: Three Good First Steps

April 16, 2012 at 2:17 pm

After decades of sharp increases in income inequality and dramatic tax cuts at the top, the case for reversing course and raising taxes at the top is overwhelming.  That’s especially true given the sacrifices that policymakers will likely ask of Americans of modest means to help reduce long-term deficits.  Below are three good first steps:

  1. Sunset the high-end Bush tax cuts. President Bush’s tax cuts are an obvious place to start.  They were unaffordable from the start and are heavily tilted toward the nation’s richest people (see first graph).


    Letting the Bush tax cuts aimed exclusively at people making over $250,000 expire as scheduled at year-end — thus returning the top marginal rates to those during the Clinton years — would save about $968 billion over ten years.  That would pose little risk to the economy, which did quite well under the Clinton rates.  As the economic expansion continues and unemployment drops, we should phase out the rest of the Bush tax cuts as well.

  2. Implement the Buffett Rule. The tax code should not be so easy to manipulate that millionaires can pay a smaller share of their income in federal taxes than middle-class people.  But today’s tax code is:  21 percent of millionaires — about 50,000 people — pay a lower tax rate than 3 million people making between $50,000 and $100,000, according to the White House National Economic Council.

    The Buffet Rule would ensure that people earning $1 million or more a year pay at least middle-class tax rates.  By itself, it would raise only a small share of the extra revenue the country needs.  But it would mark an important step in making the tax code fairer.

  3. Reform tax expenditures. Tax expenditures (tax credits, deductions, and other preferences) are expensive, costing $1.1 trillion in 2011.  They’re also tilted towards the top of the income scale.  The top 20 percent of tax filers received 66 percent of the benefits of tax expenditures that year (the top 1 percent alone received 24 percent of the benefits), while the bottom 20 percent of filers received only 3 percent of the benefits, according to the Urban-Brookings Tax Policy Center (see graph).

    Moreover, many tax expenditures are “upside down”:  they give the biggest benefits to high-income people, who are least likely to need a financial incentive to do whatever the tax incentive is designed to promote, like buy a home or save for retirement.

    The home mortgage interest deduction is a prime example:  high-income people in the 35 percent tax bracket save 35 cents in taxes for every dollar they pay in mortgage interest, while middle-income people in the 15 percent bracket save just 15 cents.

    In addition to turning these tax expenditures right-side up, policymakers should reform one of the most top-heavy tax breaks:  the current preferential tax rates for investment income, which are much lower than the rates for wage income.

    In reforming tax expenditures, policymakers must use the resulting additional revenue to reduce deficits — not to regressively lower tax rates, as House Budget Committee Chairman Ryan’s plan would.  As I said at the start of this series, all tax discussions need to keep our long-term deficit problem in mind.

Migration Myth Strikes Again

April 16, 2012 at 12:41 pm

Proponents of the migration myth are at it again, trying to sell the idea that if states with lower taxes gain more population than states with higher taxes, taxes must be the reason.

To prove that people migrate from state to state in search of lower taxes, the latest edition of the American Legislative Exchange Council’s (ALEC) “Rich States, Poor States” report notes that, over the past two decades, Hawaii (which has an income tax with a relatively high top rate) has lost twice as many residents to other states as Alaska (which has no income tax).

Wait, you might ask.  What about differences in the job market?  Oil prices?  Housing costs?  Shouldn’t we take these and other potential factors into account?

Indeed we should.

As we discussed in a major report last year, the vast majority of people live their whole lives in the state where they were born, and the main reasons people move from one state to another are job prospects, housing costs, family considerations, and climate. So, for instance, to draw any meaningful conclusions about our two newest states, you’d want to factor in that housing in Anchorage is a bargain compared to Honolulu.  Studies by economists and demographers that take into account the wide range of other factors show consistently that taxes have little if any impact on migration.

The ALEC report ignores the growing body of research that debunks the tax-flight myth, instead citing statistical tidbits that might seem compelling at first glance but wilt under scrutiny.

For example, ALEC attributes Florida’s 46 percent population gain between 1990 and 2010 to its lack of an income tax, ignoring the fact that neighboring Georgia — which has an income tax — grew by 50 percent over that period.

As for Alaska and Hawaii – the states that ALEC uses to illustrate the tax-flight myth — IRS data show that, in fact, slightly more households are moving from no-income-tax Alaska to high-income-tax Hawaii than the other way around.  In 2010, the last year for which data are available, 300 households moved from Alaska to Hawaii; 287 moved the other way.

As our report stated:

It would not be credible to argue that no one ever moves to a new state because of the desire to live someplace where taxes are lower.  But neither is it credible to say that taxes are a primary motivation, nor that migration has a large impact on the revenue impact of tax measures.