By Bill Barclay
Don’t tax you, don’t tax me, tax the feller behind the tree. – Sen. Russell Long
Taxes are what we pay for civilized society. – Justice Oliver Wendell Holmes, Jr.
Taxes and taxation are an emotional issue in U.S. politics and, like most such issues, there are is a large amount of myth that defines the discourse. Our myths begin with our beliefs about the Boston Tea Party, the symbolic interpretation of which underlies much of the current politics and rhetoric of the Tea Party today. Contrary to popular belief – and probably contrary to what you were taught in school – the Boston Tea Party was not about an increase in taxes. It was actually triggered by a reduction in taxes that favored the East India Company, a chartered British monopoly; the protesters were unhappy that it was the British parliament who made the decision to reduce taxes. No word on whether any of the protesters were also among those who probably suffered the most from this tax break: smugglers bringing in untaxed tea from Holland.
Of course, our tax myths don’t stop with events of 1773. One of the most persistent myths is the claim that the U.S. is a high-tax country, another meme of the Tea Party movement. In reality the U.S. tax system collects only 70 percent of the Organization for Economic Cooperation and Development (OECD) members’ average share of GDP raised by taxes. Then there is the takers/makers myth, that people in states such as Alaska, Mississippi, Texas, etc. are less dependent on government than those in states such as New York, Illinois, California, etc. The reality is the direct opposite: the givers from the so-called blue states actually subsidize the red states. Most of the latter receive more back from the federal revenue system than their residents pay in taxes.
Overall, however, most of us in the U.S. probably have an attitude towards taxes that more closely resembles Long’s than Holmes’. And elected officials almost always act as if they believe Long’s dictum rather than Holmes’ argument. Despite this, the level of compliance among U.S. taxpayers is relatively high, although not as high as in several West European countries.
What may be more surprising is that, compared to many West European countries, the U.S. tax system is relatively progressive. This is mostly the result of the federal, and some states’, income tax. Outside of the income tax, the U.S. system has some significant regressive features that may account, in part, for the prevailing tax beliefs.
It may also be the case that taxes are more resented in the U.S. because the level of post-tax reduction of inequality is the lowest among wealthy countries, so many feel, correctly, that they are not getting much for their taxes. Along with collecting a smaller portion of total GDP via taxes than almost all other wealthy countries, we do very little with that revenue to counter the higher-than-average level of inequality generated by U.S. labor and capital markets.
Despite the modest progressivity of the federal income tax, there are two extremely regressive features of our tax system. First, sales taxes, because they are flat, are regressive in impact. This is because all goods and services subject to sales taxes are taxed at the same rate; I don’t pay a higher tax rate if I buy a Ferrari than you do when you buy a VW. Since lower-income households spend a larger share of their income on current consumption, they face the flat sales tax on a higher portion of their income than richer households, thus ending up with a higher overall tax rate.
A second, less discussed regressive feature of the U.S. tax system is the class bias in tax rates: income from labor (wage and salary) income is taxed at a higher rate than income from capital (dividends and capital gains). The top 0.1 percent (not even the top one percent) receive over half of all capital gains. For the 400 highest-income filers, capital gains constitute over 60 percent of total income. For assets held longer than six months, capital gains are taxed at the rate of 20 percent (15 percent from 2003-2012) – below the marginal income tax rate for an individual earning $36,900 or a jointly filing married couple with an income of $76,800. or household earning a mere $10,000. It was not always this way. It was not always this way. In 1978 the rate on capital income was 35 percent; it was reduced in the last days of the Carter administration to 28 percent and further reduced under both Bush administrations.
The U.S. individual income tax system differs from that in other wealthy countries in other ways as well. Germany, France, the UK, Australia, Japan, Austria and several other countries have higher top marginal rates than in the U.S. More significantly, and important in terms of revenue raised, the top marginal rate in most other wealthy countries is imposed on incomes that are two to four times the average for the country, while in the U.S. the (low by comparison) top rate is not imposed until the income received is almost 8.5 times the average.
And then, of course, there is the corporate income tax. Throughout the 1950s, the tax on corporate profits raised over 20 percent of the total federal budget. Today, corporations contribute only half that share. Although CEOs regularly bemoan the U.S. high statutory corporate income tax, they ignore the effective corporate tax rate of less than 15 percent. Again, the comparison with other wealthy countries is significant: as a share of total GDP, our corporate tax revenue is only a little over 80 percent of the OECD average.
More strikingly, however, there were 57 profitable corporations among the S&P 500 that reported an “effective” federal income tax rate of 0 in 2013. These include GE, Bank of America, Goldman Sachs, Honeywell, Verizon, Merck, Boeing, Alcoa, UPS, R.R. Donnelly and Time Warner. But the corporate income tax scandal doesn’t end there. Several of these same, very profitable companies not only paid no federal income tax, they actually received money from the federal treasury: Time Warner, Bank of America, Boeing, Merck, Honeywell, Verizon and Goldman Sachs.
Who do you suppose pays the federal income tax money that flows into one door of the U.S. Treasury and out the other?
So, overall we have a tax system that (i) is relatively progressive but (ii) raises a relatively small amount of revenue that (iii) is not significantly redistributive in impact, while (iv) favoring unearned over earned income and (v) transfers money from most of us into the hands of coporate “persons.” Is this the kind of tax system we really want?
Bill Barclay is on the Steering Committee of Chicago DSA, is a founding member of the Chicago Political Economy Group, and serves as DSA National Member Organizer.
Individually signed posts do not necessarily reflect the views of DSA as an organization or its leadership.