Five Truths About Taxes (in the U.S.)

Before I get to an excellent NY Times article by David Leonhardt about taxes, I want to say why taxes shouldmust matter to scientists.

Even so often, I get a link or a comment which decries my posts about politics*. But the lay of the political landscape is vital for scientists--and not just for the 'science' issues, such as global warming. Quite simply, taxes are what fund much of U.S. science, especially 'basic' research, which is not only the cornerstone of applied research, but also comprises a lot of the cool stuff we discuss at ScienceBlogs. In a low-tax environment (when combined with massive budget deficits), science funding gets cut--or at the very least, does not keep pace with inflation, which is a de facto cut.

OK, onto Leonhardt's five truths (bold original; italics mine):

As a group, the rich pay a greater share of taxes than in the past.

The top 1 percent of taxpayers -- those with adjusted gross income of at least $267,000 in 2004 -- paid more than 25 percent of all federal taxes that year, according to the Congressional Budget Office. That was up from 15 percent in 1979.

People sometimes pick nits with these statistics, and the numbers are indeed imperfect. They don't include state and local taxes, which hit the middle class and the poor harder than federal taxes. On the other hand, the numbers ignore money that the government sends back to taxpayers, like Social Security, which mostly goes to the poor and middle class.

But don't get bogged down in all this. The big picture is clear enough. The main reason for the trend is also clear.

The affluent are paying more of the taxes because they're making so much more money.

.... Reading that, you would probably assume that the tax rates on high-income families have soared over the last generation. But they haven't.

A family in that top 1 percent of earners paid a total federal tax rate -- including everything from payroll taxes to income taxes to capital gains taxes -- of 30 percent in 2004. That was down from 41 percent a decade before. Since the 1950s, tax rates on high-income families have generally been falling.

The top earners pay a bigger share of the government tab than in the past because their incomes have risen so sharply -- even more sharply than their tax bills....

The affluent, in short, are paying less in taxes on every dollar they earn but earning many more dollars.

Now, let's look at the corporate side of the ledger:

Corporates taxes have dropped significantly in recent decades.

There are two strange facts about corporate taxes. Everyone from Mr. Rangel on the left to Fred Thompson on the right is saying that high corporate taxes are hurting American companies. But the effective corporate tax rate isn't any higher than it has been on average over the last 25 years, and it's far lower than it was in the 1960s and '70s.

....What's going on here? This country really does have a high corporate tax rate, but it also has so many loopholes that companies can often avoid paying the tax. A much smarter policy, economists say, would include a lower rate with fewer loopholes. "Both the incentive and the ability to avoid the tax would then be smaller," says Leonard Burman, director of the Tax Policy Center in Washington.

Which leads to this straightforward conclusion:

The nation's total tax bill hasn't changed much over the years.

Put it all together -- less corporate tax collection and lower individual tax rates, combined with more income for the people who face the highest tax rates -- and the trends mostly cancel each other out. The taxes that the federal government took in last year equaled 18.4 percent of the gross domestic product, almost exactly the average since 1980. The overall tax burden rose in the 1990s, fell during Mr. Bush's first term and has drifted up in the last few years as corporate profits and upper-end incomes surged.

The obvious conclusion is that moderate shifts in taxes don't dictate economic growth. Mr. Bush's father and Bill Clinton raised taxes -- and the economy grew for almost the entire decade of the 1990s. The current administration has cut taxes -- and the economy has grown for almost all of this decade.

So if short-term economic growth were the only thing to worry about, you could make a good argument either for cutting taxes or for raising them. Unfortunately, there is another problem out there.

Before we get to the "another problem out there", there is an obvious effect of lower taxes: decreased government services--which includes science funding (as well as public health funding, schools, and so on). If higher taxes don't have a significant effect on growth, then the primary reason to cut or increase taxes is to defund or fund government programs. Conservatives would call tax cuts 'starving the beast', even though the beast is us. Which leads to Leonhardt's final truth:

The budget deficit is worse than either party says it is.

Mr. Bush has predicted that the deficit will disappear by 2012. But that prediction depends on the fiction that the alternative minimum tax will be allowed to grow ever larger in coming years. The Democratic presidential candidates, meanwhile, are promising to pay for their new programs in part by getting rid of some of Mr. Bush's tax cuts. But those tax cuts are already scheduled to expire under current law. The official budget numbers have already taken their demise into account.

White House officials are absolutely correct when they note that the current budget deficit isn't especially large. But it will soar in coming years, as baby boomers stop working (and stop paying very much in taxes) and instead move onto the Social Security and Medicare rolls If nothing changes over the next couple of decades, the United States will build up a debt burden to resemble Argentina's, as Mr. Burman points out.

There are several ways to prevent that. Taxes could be raised across the board, or they could be raised on the affluent. Or the Medicare budget -- a much bigger problem than Social Security -- could be held in check if the government figured out how to say no to some expensive medical procedures. Or all of the above could happen. But something has to give. No amount of clever argument can pay the bills.

One thing to note: Social Security (as opposed to Medicare which suffers from spiraling healthcare costs) will most likely remain 'solvent'--not add to the deficit directly. However, the Social Security annual surplus will decrease; in addition, we'll have to tap into the Social Security Trust Fund. The former will increase the annual budget deficit (last year, Social Security brought in a surplus of roughly $150 billion, without which, the budget deficit would have nearly doubled), and the latter will increase the national debt (if the entire Trust Fund is spent, which is not that likely), the national debt would increase by about $2 trillion (yes, with a "t").

At which point, science funding would be dead. Or you could buy a loaf of bread with a wheelbarrow of cash....

*The most recent missive targets PZ, Nick Anthis, and me. Funny how it's most of the overt liberal Democrats at ScienceBlogs, and not, say, Ed Brayton who writes about politics far more than the three of us do. Also, left off the list: Bora, Mike Dunford, revere, Jason Rosenhouse, Josh Rosenau, Chris Mooney, Matt Nisbet--I'm really tired, so I'll stop there. You get the idea. Feh.

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And the US dollar is sliding ineluctably downward. Current prices are:

euro $1.4681 (Remember when it struggled to stay on par with the dollar?)
loonie $1.0994 (Canada) (Remember when it was about 65 cents?)
pound $2.1010 (UK) (Remember when it stood fast at about $1.64?)
ounce $839.50 (gold) (Remember when it slipped under $300 an ounce?)

So, in dollar terms the real deficit is smaller than you'd think, but all our dollar-denominated assets are sinking in value. Kiss your savings goodbye.

By Ken Shabby (not verified) on 07 Nov 2007 #permalink

Ed Brayton is more centrist/libertarian in his political posts. Therefore, even though he posts more about politics, there would less pushback.

The problem with the article you cited is that it excludes most of the extreme tax rates that occurred before 1980. Some of the top tax rates in the mid 1900's were insanely excessive. In contrast, since the 1980's the debate has pretty much been dickering over small changes.

Ken:
I saw on the news that the dollar has become so weak, that many foreign countries are possibly switching to the Euro for their offshore reserves.

By scienceteacher… (not verified) on 08 Nov 2007 #permalink