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Taxes
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The issue of Tax Reform affects all of us and dealing with it is an important part of my work in Congress.
Tax Reform
Our tax system requires serious reform which broadens the base and lowers the rates. In 2011, federal government revenues were $2.3 trillion with nearly $1.3 trillion coming from individual and corporate income taxes and the rest coming from payroll taxes (Social Security and Medicare), Federal Reserve earnings, excise taxes, and other revenues.[1] At the same time, the value of individual and corporate income tax deductions, exemptions, credits, and exclusions was about the same as the amount of income tax that was paid[2]. Many on the left see these loopholes as lost revenue, but I view these loopholes as the cause of higher tax rates. If we reduced the value of these loopholes, we could lower the tax rate and government would bring in the same amount of revenue. Lower rates and broader bases make the tax system fairer and reduce the distortion on economic decision making that the tax system imposes.
Are Taxes Too Low?
The spending lobby argues that federal taxes as a percent of GDP are at or near their all-time low. However, total tax revenues have decreased because fewer people are working which means fewer people are paying taxes or are paying lower taxes because they are now working part-time instead of full time. In January 2008, 138 million Americans were employed. In January 2012, the number of employed Americans had decreased to 132.4 million, a reduction of nearly six million workers.[3]
The Congressional Budget Office projects that federal taxes as a percent of GDP will reach 18.3% in 2022, and this projection is based on ALL of the Bush tax cuts of 2001/2003 being extended[4]. Historically, federal taxes burdens have averaged about 18% of GDP which means the current system is not undertaxing individuals and businesses when compared to historical norms[5].
Even though taxes will return to historical norms once the economy recovers, President Obama says we need to raise taxes by $2 trillion over ten years[6]. According to his own projections, federal government revenues will reach 20% of GDP by 2022, significantly higher than the typical 18%[7].
Do the Rich Pay Enough Taxes?
President Obama argues that high income households do not pay their “fair” share of taxes. Spending groups argue that tax rates for dividends and capital gains (15%) are lower than the highest marginal tax rates for ordinary income (keep in mind that the highest marginal tax rate of 35% applies to taxable income above $379,150 in tax year 2011). However, spending groups are not telling you the following:
- According to the Congressional Budget Office, higher income households in aggregate have a much higher effective tax rate than middle and lower income households. The top 1% of households have an effective tax rate of about 30% compared to 14% of middle income households. These effective tax rates include federal individual and corporate income taxes, employer and employee share of Social Security and Medicare taxes, and excise taxes.[8] CBO uses a broad measure of income that includes employer paid health care benefits.
- The Joint Committee on Taxation came to a similar conclusion as the CBO. According to JCT’s analysis, households earning more than $1 million per year have an effective tax rate of 23.6% while household earning between $50,000 and $75,000 had an effective tax rate of about 14%[9]. The JCT analysis does not include corporate income tax burdens which most economists presume is paid largely by shareholders who tend to be high income.
- Dividends are taxed at a lower rate because of double taxation of shareholders. Shareholders face two levels of taxation: once at the corporate level and again at the individual level. (S-corporations and LLCs avoid this double taxation of profits).
Ordinary income tax brackets are indexed for inflation, but capital gains tax basis is not indexed for inflation.
[1]Congressional Budget Office, Budget and Economic Outlook, page 85, http://cbo.gov/ftpdocs/126xx/doc12699/01-31-2012_Outlook.pdf
[2] Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2011 – 2015, http://www.jct.gov/publications.html?func=download&id=4385&chk=4385&no_html=1 ; See also Pew’s Tax Expenditure Database http://subsidyscope.org/tax_expenditures/db/
[3] Bureau of Labor Statistics, Establishment Survey accessed January 2012, http://stats.bls.gov/webapps/legacy/cesbtab1.htm
[4] Congressional Budget Office, Budget and Economic Outlook, Alternative Fiscal Scenario, page 22, http://cbo.gov/ftpdocs/126xx/doc12699/01-31-2012_Outlook.pdf
[5] Office of Management and Budget, Historical Tables, table 1.2, http://www.whitehouse.gov/omb/budget/Historicals/
[6] Office of Management and Budget, Fiscal Year 2012 Budget, Table S-8, http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/budget.pdf
[7] Office of Management and Budget, Fiscal Year 2012 Budget, Table S-1, http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/budget.pdf
[8] Congressional Budget Office, Historical Effective Tax Rates, http://www.cbo.gov/ftpdocs/100xx/doc10068/effective_tax_rates_2006.pdf
[9]Joint Committee on Taxation, Federal Tax Treatment of Individuals, table 7. http://www.jct.gov/publications.html?func=startdown&id=4356