Adjusting That Heavy Tax Burden
BOSTON — A typical American family pays 38 percent of its income in federal, state, and local taxes, so it is claimed.
"That's not just bad policy. It's immoral," Senate majority leader Trent Lott said in the Republican response to President Clinton's State of the Union address Jan. 27.
It's also not the case.
The Mississippi senator got the number from the Tax Foundation, a Washington nonprofit research group.
But another Washington think tank, the Center on Budget and Policy Priorities (CBPP), challenges the Tax Foundation number. The tax burden is really between 26 and 30 percent, the Center says.
Stephen Gold, a spokesman for the Tax Foundation, describes this huge difference as "a methodological dispute between economists."
It is more important than that.
The 38 percent number is used by conservatives and advocates of a flat tax or national sales tax to attack the present federal tax system and "big government." Both presidential candidate Steve Forbes and House Speaker New Gingrich (R) of Georgia have cited the number.
In order to get Congress to scrap the tax code, advocates of a new system must persuade middle-income voters that the tax burden is huge and growing.
"Whatever you come up with will then look better," notes Iris Lav, an economist at the CBPP.
Actually, the federal tax burden of a typical family is almost unchanged from 1977.
A family at the middle of the income spectrum will pay 19.7 percent of its $37,000 income this year to Uncle Sam, reckons the Congressional Budget Office.
Of this, $2,332 will be individual income tax. That is 6.3 percent of income. About $3,980, or 10.8 percent, will be Social Security and Medicare taxes. Another $956, or 2.6 percent, will be paid in excise taxes, an imputed share of the corporate income tax, which economists say is passed on to consumers, and other federal taxes.
States and local governments will take 10.1 percent of the $37,000, mostly with income and property taxes.
So the total tax burden is 29.8 percent. In fact, it may be a bit less, because the CBO hasn't yet calculated the impact of the tax cuts passed last year.
Congress's Joint Committee on Taxation puts the federal tax level for middle-income families at 18.9 percent, a little lower than the CBO.
The Organization of Economic Cooperation and Development, the Paris-based group of industrial nations, estimates the total tax burden - federal, state, local - for the United States to be 27.9 percent of the country's total income.
So, if the median single-income family (with half of families earning more, half less) pays 35.9 percent of its income in all taxes and the median dual-income family 37.6 percent, as the Tax Foundation maintains, then the average taxpayer is getting unfairly clobbered.
Actually, holds Ms. Lav, the foundation tax numbers exaggerate the burden. It has doubled-counted taxes, counted as taxes some items included in government receipts that are not taxes, and undercounted family income.
On April 15, the Tax Foundation will announce Tax Freedom Day for 1998 - the day when the average taxpayer will have worked long enough to pay all taxes due for the year. In 1997 it was May 9. It may be altered a day or so this year.
And it will be wrong, based as it is on the Tax Foundation's analysis, says Lav. It should be earlier.
This doesn't mean federal taxes, as a share of total national output, have not risen. Federal receipts, the foundation notes, ran about 18 percent in 1990 and now exceed 19 percent.
Combined with a shrinkage in federal spending as a percentage of national output, the deficit has disappeared.
A major reason for rising revenues is that Congress raised taxes on the well-to-do in 1993. They also have been enjoying huge capital gains in the stock market, and getting fat corporate bonuses and generous stock options. Uncle Sam takes his share.