The 2012 presidential race will be dominated by discussion of the economy -- why it collapsed in 2008, why it continues to struggle, and what we might do to improve it. Since Republicans are generally opposed to large-scale government intervention to improve things, their solutions tend to revolve around taxes. They'll say that cutting government spending and trimming regulations will help, and they'll justify various other policy moves they favor in economic terms, but in today's GOP, taxes is where the economic action is.
So it's worth taking a look at just what the candidates are saying -- and will continue to say over the next year -- to establish the context in which this debate is going to take place. While most of the candidates have only the vaguest of plans, they proceed from a shared set of ideas that will guide the proposals they end up delivering. Unfortunately, the most central of these ideas are questionable at best and false at worst. While some candidates put more emphasis on some features of the tax system than others, they'd all agree on the following:
- In general, taxes are too high.
- Specifically, taxes on the wealthy -- pardon, "job creators" -- are too high, which hampers economic growth.
- Too many people get away without paying taxes.
Let's take these one at a time. Are taxes in America too high? In order to answer, you'd have to ask, "Compared to what?" Compared to other Western democracies, our taxes are extremely low. Every country in Europe has higher taxes than we do, some dramatically so -- taxes make up almost half of gross domestic product in Denmark and Sweden, for instance, nearly twice as much as in America. On the other hand, those countries have far more generous welfare states than we do, so they're getting what they pay for, and you can understand our relatively low taxes as a choice we've made as a society.
How about taxes now compared to other times in our history? Surely we're suffering under a particularly weighty tax burden, what with Barack Obama in the White House? Well, no. First, the only tax increase that has taken effect under Obama was an increase in tobacco taxes. That's it. There are some increases in the Affordable Care Act, but they haven't taken effect yet. He also lowered taxes for almost everyone as part of the 2009 stimulus bill. Most Americans don't know that, but it's true. And when you look at the portion of the economy being taken up by taxes, you see a picture that belies the rhetoric:
The total taxes taken in by the federal government are at their lowest level since 1950. So one simply can't argue truthfully that as a whole, Americans are overtaxed today.
That, though, lumps everyone together. What about different groups of people? This brings us to the next part of the Republican argument, that taxes on the wealthy are too high. This comes up in particular with regard to the question of extending the Bush tax cuts, which, among other things, lowered the top tax rate (currently paid on income over $380,000). This is seldom articulated as a matter of fairness but rather as a question about the economy in general. Increase the top rate, Republicans say, and the economy will suffer; reduce it, and the economy will boom. The underlying rationale is that changes in the top rate have an immediate and significant impact on economic and job growth. The only problem is that this theory has no evidence to support it.
You might remember that in 1993, when Bill Clinton's first budget included some tax cuts for the middle class but an increase in the top rate to 39.6 percent from 31 percent, Republicans cried that passage of the budget would create a "job-killing recession." It didn't, of course -- 23 million jobs were created during Clinton's presidency. Then in 2001, the same conservatives assured the country that a reduction in that top rate to 35 percent would unleash terrific growth. It didn't -- only 3 million jobs were created during Bush's eight years in office. The point isn't that increasing the top rate necessarily creates jobs and reducing it kills them, but rather, that changes in the top rate, particularly small ones, seem to have no effect whatsoever.
When we look at the history of the federal income tax, we see that today's top rate of 35 percent -- and even the 39.6 percent rate of the Clinton years -- are low by historical standards:
Just after World War II, the top rate was a remarkable 94 percent. During the 1950s, a period of tremendous and widely shared growth, the top rate remained in the 90s. So an increase of 4.6 percentage points (which would happen if the Bush cuts were allowed to expire at the end of 2012) doesn't seem like such a radical change.
But maybe you think that even the current top rate is just unfair. After all, not everyone believes in progressive taxation, the principle that the more you make the higher a proportion of your income you should pay. Many conservatives prefer a "flat tax," or at least a flatter tax, in which everyone at every level pays the same proportion of their income. Guess what, though: Our tax system, taken as a whole, is already pretty flat. Which brings us to the last part of the Republican argument: that half of Americans are sucking off the rest of us and not paying any taxes.
In his speech announcing his presidential candidacy, Rick Perry said, "We're dismayed at the injustice that nearly half of all Americans don't even pay any income tax." It's an interesting use of the word "injustice," but perhaps not that surprising when you consider the moral supremacy the principle of low taxes on the wealthy has assumed in the conservative catechism. His opponents agree. "Half the people in this country pay no income tax at all," complained Mitt Romney recently. "Part of the problem is today, only 53 percent pay any federal income tax at all -- 47 percent pay nothing," said Michele Bachmann. "We need to broaden the base so that everybody pays something, even if it's a dollar." When they trot out this factoid, Republicans are referring only to federal income taxes, but they hope you'll hear "taxes" and assume they mean all taxes. You pay taxes, don't you? So you're in the group that's doing the right thing, and you should be mad at those shiftless scammers taking advantage of you.
To understand why this is so misleading, you have to appreciate the differences between the various kinds of taxes Americans pay. Federal income tax is progressive, meaning that the higher your income, the higher your marginal rate (the tax you pay on the last dollar you earned). Once you factor in provisions like the standard deduction, child tax credit, and earned income credit, many people at low incomes end up with a federal income tax liability that drops to zero. Add in people who don't pay income taxes because they don't have much wage income -- the tens of millions of retired people and unemployed people, mostly -- and in total, 46 percent of households pay no federal income tax.
Before you think they're getting off easy, however, remember that those low-income workers are paying payroll taxes, the ones that fund the Social Security and Medicare systems. They also pay plenty of other taxes -- state income taxes, property taxes, and sales taxes. The net result is that although conservatives like to paint a picture of the rich shouldering all the burden of taxation, the actual picture looks like this:
So when it comes to taxes in America, the poor pay a little less, while the middle class and the rich all pay about the same -- between 25 percent and 31 percent of their income. Those "job creators" at the top may pay a slightly higher marginal rate on their wage income, but they also make a lot of money from their investments, which are taxed at a lower rate than money you actually work for.
We should acknowledge that on some tax questions, the Republican candidates are at least setting up camp in the vicinity of a legitimate point. For instance, they all want to reduce the corporate tax rate, which is probably a good thing to do -- provided we accompany it by eliminating the absurd array of loopholes that allow the biggest and most powerful corporations to pay almost nothing (for example, General Electric has managed in recent years to make billions in profit and not only pay no taxes but actually get huge rebate checks from the government). The main arguments they'll be making, though, about taxes are the same ones Republicans have been making for decades: We're overtaxed, the rich pay too much, the poor get off easy. None of it is true. That won't stop them from making those arguments, of course. But if nothing else, they ought to be forced to confront the evidence.
