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Wednesday, September 22, 2010

How to Create the Illusion of Low Taxes

To the surprise of opponents of big government, the U.S. Bureau of Economic Analysis (BEA) estimates that taxes at all levels of government take only 9.2 percent of our income, the lowest rate since Harry Truman was president. USA Today and various news-media personalities, like Chris Matthews of MSNBC, have used this statistic to hammer those who complain about President Obama’s profligate fiscal policies.

If this all seems too amazing to be true, you are on the right track. It’s obviously not the whole story. In fact, major taxes were simply left out of the account.

Most egregiously, Social Security “contributions” were treated as insurance payments not taxes. (This is improper since the government does not think of Social Security as insurance; no citizen has contractual rights in the matter.) BEA also left out state sales taxes. Inclusion of these additional taxes pushes the total tax burden to over 20 percent, which is quite a bit more than 9.2 percent. Federal, state, and local tax receipts added up to $3.3 trillion in 2009, 27.5 percent of personal income, as Kevin Drum of Mother Jones points out.

But that is not the largest problem with the BEA estimate.

Last year’s Recovery and Reinvestment Act (the “stimulus”) included tax credits that temporarily reduced the amount of money Americans pay in taxes. However, spending increased by over $500 billion, and this has been financed by record deficits. The deficit for 2009 was $1.6 trillion, and the one for 2010 is projected at $1.88 trillion. Deficits are deferred taxation. Taxpayers will pay interest on the additional debt the Obama administration has run up until we pay off the principal. The claim that the tax burden has fallen is, to say the least, disingenuous. Increased government spending is being financed in a way that will make its true burden apparent only at some later date.

Further difficulties arise with the BEA estimate of the tax burden when you recognize that business taxes ultimately get passed on to some group of consumers.

Real Resource Costs

Moreover, this account fails to include government’s real resource costs. The true costs of the State include not only money taxed and spent on resources, but the effects of increased regulation. In economic terms regulation is de facto taxation. There is no economic difference between the State controlling resources through tax-financed spending and its taking effective control of resources by regulation. There was already heavy regulation of American industry before Barack Obama entered office, and regulation has increased since then. (The cost of all regulation was estimated to have exceeded $600 billion in the 1990s.) The Omnibus Land Management Act of 2009 added over two million acres to the National Wilderness Preservation System. The Fraud Enforcement and Recovery Act and the Credit Card Accountability Act increased regulation over banking. We must also add in the takeover of GM by the Treasury, leaving out the part that went to the UAW.

More to Come

Obama’s policies will increase taxes even more in the future. So-called health care reform will result in heavier explicit and implicit taxes. High rates of taxation and regulation correlate with slower economic growth. Increased government borrowing deprives private investors of capital for projects. Since government borrowing crowds out private investment, deficits amount to a tax on future economic growth in private industry. Of course, Obama expects the Recovery and Reinvestment Act to propel America’s economy forward but his expectations are wholly unwarranted. Government has an extremely poor track record of investing money productively. One need only look at the record of countries like Sweden and West Germany after World War II to see how taxes stunt economic growth. They grew rapidly when they had low effective tax rates. Then expansion of the tax burden in the 1960s and 1970s corresponded with slower economic growth. The Swedes enjoyed improved economic performance during the 1990s but only after tax and welfare reform lessened the load.

The BEA staff itself estimates that the tax burden was 30.2 percent of national income in 2009 (as opposed to personal income). Taxes were 23.8 percent of national income during Truman’s presidency. Summing up all the aforementioned figures on spending and regulation leads to the conclusion that the real economic burden of government in America is over 50 percent, and rising.

The BEA is playing statistical games. In real economic terms the costs of spending and regulation have gone up substantially since Obama entered office. Worse still, Americans can expect to bear even higher burdens in the future. Concern over rising taxes is justified not merely because taxes are actually higher, but because higher taxes mean less prosperity and less freedom. Increased federal spending and regulation constitute real and unnecessary burdens for the American public. These burdens can and should be reduced. It might first, however, be necessary to educate more Americans as to the true nature of taxation.

  • D. W. MacKenzie is an assistant professor of economics at Dickinson College.