Senior Fellow Kevin A. Hassett
The British imposed taxes on everything from molasses to tea, and Americans smuggled the molasses, tossed the tea into a harbor and reached for their muskets. Thomas Jefferson's incendiary Declaration of Independence listed King George III's basest transgressions; prominent among them was that he had "sent hither swarms of Officers to harass our people and eat out their substance." The descendants of those royal minions are now, of course, nestled in thousands of cubicles in Internal Revenue Service offices across the country.
Looking at that history, it's astonishing how low the taxes were. Talk about men being men. One historian estimated the combined burden of the infamous "Navigation Acts," for example, to be 1 percent of income. The other assorted taxes added up to about the same, making the total bite a measly 2 percent.
And that set off a war.
Today taxes eat up about 30 percent of income, a much heavier burden. And like our ancestors, we don't believe that our money is particularly well spent. A Washington Post-ABC News poll taken last April found that Americans believe that 51 cents of every tax dollar is wasted. But where's the outrage? Most of us don't even own muskets, and the few of us who have revolted against the IRS are settled safely behind bars, to popular acclaim.
Which makes the U.S. tax system, ugly as it is, something of a marvel. It raises revenue without raising a ruckus. A simpler and more efficient system would undeniably serve everyone better, but the current hodgepodge is so entrenched as to have become a political third rail, and attempts to reform it almost always fail or are gradually reversed. Witness Ronald Reagan's Tax Reform Act of 1986.
Like a finch in the Galapagos Islands, the tax code has gradually evolved in a manner that maximizes its chances for survival.
Like a finch in the Galapagos Islands, the tax code has gradually evolved in a manner that maximizes its chances for survival. So a natural history of our tax system provides an interesting mirror on ourselves and reveals some surprising facts.
Perhaps the most contentious question about taxes is: Who should pay them? Progressives argue that the government should use the tax code to redistribute income from the wealthiest to others, while economic conservatives worry that high taxes will slow the economy and hurt the poor.
To a large extent, the poor have been taken off the tax rolls altogether, reflecting the unanimous view of both conflicting political camps that government should not unduly stress the down and out. With the expansion of the Earned Income Tax Credit and child tax credit, for example, many poor people have negative federal taxes, often to an extent large enough to offset other taxes paid elsewhere, such as sales taxes. In 2004, a single mother with two children and an income of $14,000 had a total tax burden that was on net a subsidy of $1,127.33. Governments mailed her more money than she paid.
What about those who do pay taxes?
To analyze them more carefully, I turned to the U.S. Department of Labor's Consumer Expenditure Survey, which contains data on household expenditures, as well as on income and taxes for a large sample of Americans. Using it as a base, I calculated the average taxes paid (including federal and state income taxes, sales taxes, property taxes and federal payroll taxes) for typical families and compared that, for context, to the other things these families spent money on.
The accompanying chart* contains the calculations for two scenarios--a family of four with an income of $50,000, and a family of four with an income of $150,000. The chart shows the average total taxes paid and average expenditures for two years, 1983 and 2003 (the last year for which data are available). Looking first at the average American family with a $50,000 income, a couple of things jump out. First, even though the family has a relatively low income, the amount of money it paid in taxes at all levels was strikingly high in both years. In 1983, it paid 29 percent of income in taxes. In 2003, it paid 31 percent.
Taxes were easily the largest budget item for this family in both years. In 2003, for example, the family spent 24.6 percent of its income on its home, and 9.9 percent on transportation.
The second point worth noting is how little things have changed over time. Congress has been very busy tinkering with the tax code since 1983--adding child credits, expanding individual retirement accounts, patching the alternative minimum tax, etc.--but the basic take after all the kerfuffle has changed very little for this family.
Looking now at the family with the $150,000 income, taxes are once again the No. 1 item in the household budget in both years. In 1983, the government's take was 30 percent, compared with 23.7 percent spent on the next biggest item, the family's home. In 2003, the take was 30 percent, compared with 23.5 percent going into the home.
Lots of things have changed, but one thing is constant: Government has been robbing Peter to pay Peter. The similarity between the tax proportion for the high-income family and that of the middle-income family will surprise many. That's because the federal income tax, which is steeply progressive--the higher your income, the more you pay in taxes--gets all the media attention. But other taxes that are less visible, such as sales taxes, hit lower-income families with a heavy thud and quickly fill in the gap between their lower federal income taxes and the higher rates paid by those with high incomes.
This is evident in the calculations that went into this chart. The federal income tax in 2003 for the family earning $50,000 was about $3,800, whereas it was about $17,500 for the family bringing in $150,000. But everything else worked to more than offset this difference. Middle-class families spent a larger share of their income and thus paid more sales tax. Gasoline and property taxes also ate up a larger share of the middle-class family's budget. Finally, the payroll tax is limited to $97,500 of earnings, so the wealthy paid a smaller share.
Governments at all levels have voracious appetites for cash, but taking revenue from the middle class is a politically risky maneuver; after all, that's where the votes are. So lawmakers have crafted ingenious ways around the dilemma, imposing hefty levies on those with lower incomes but relying on stealth taxes to do it. If you're going to tax widows and orphans, you'd better be quiet about it; use a sales tax.
Government thus takes more from the wealthy through income taxes, but extracts more from the poor with all the other taxes. By doing this, politicians get to pretend that they are virtuously redistributing wealth from the richer to the poorer, and they can maintain that fiction without sacrificing the cash. Voters seem to like this approach.
Countless other minor features add to the tax system's near-immortality. For example, the mortgage-interest deduction, an economically unjustifiable bauble, pleases millions of homeowners, creating a natural constituency against change. But the most interesting phenomenon is the steady scale of the overall take. If federal taxes are lowered, then people will have more money to spend, and they will end up paying more in sales taxes. Because of this, and more explicit offsets, governments at all levels have for some time been taking a bit more or a bit less than 30 percent of income from a large fraction of taxpayers.
Which must mean that 30 percent is something of a magic number. In fact, a recent review of polls by my colleague Karlyn Bowman found that "people think Americans should not pay more than 25 percent of their total income in taxes." If you consider that payroll taxes that go into Social Security deliver future benefits and so may not be fully thought of as a tax, then the amount that government raises from citizens seems to be a little less than the amount they tend to think is fair.
King George III's taxes came to the colonies like a new species but failed to survive. Unlike today's government, which spends tax revenue on parks and schools and other things that citizens cherish, the king failed to provide a good story about why he needed the money. But other taxes found their way here and have evolved and flourished.
A simpler, more economically efficient code is indisputably desirable. Recently reviewing the economic literature, Berkeley economist Alan Auerbach and I concluded that a fundamental tax reform could theoretically increase all our incomes by an average of about 10 percent over 10 years, simply by removing the current inefficiencies in the tax code.
But such a broad change may never happen, because lawmakers would have to acknowledge that the existing code was forged in a political environment. And who's to say that politics wouldn't lead a reform back to the same place again? Our policies often look bizarre and irrational in isolation, but viewed as a response to the give and take of democracy they can acquire a newfound luster.
The tax beast that has evolved in this land may be a monstrosity, but it is our monstrosity.
Kevin A. Hassett is a senior fellow and director of education policy studies at AEI.
[*Editor's note: To view this chart, please refer to the original version of this article in the Washington Post on April 15, 2007.]