Hearing some politicians talk about taxes, one might be convinced the United States has one of the highest tax rates in the world.
But the reality is the federal tax rate, broadly measured, is the lowest it has been in 60 years, Bruce Bartlett writes in a new column. A look at the effective tax rate, which expresses taxes as a share of the country's economic output, belies the stream of political rhetoric arguing that taxes are relatively high, says Bartlett, who was a senior policy analyst under President Ronald Reagan.
Federal taxes will be 14.8 percent of the nation's economic output this year, according to a recent estimate from the Congressional Budget Office. That's compared to a postwar annual average rate of 18.5 percent, Bartlett notes.
With the nation's gross domestic product at about $15 trillion, that low effective rate means the federal government is missing out on hundreds of billions of dollars every year.
"Revenues have been at a historically low level for three years now, so we've probably left a trillion dollars on the table," Bartlett said in an interview with The Huffington Post.
He added that the most recent year when the federal government took less from the economy was 1950, according to the Office of Management and Budget. There's no evidence, he said, that lowering taxes further would help stimulate the economy.
The effective federal tax rate is "low by that historical standard, and it's rarely been as low," Mark Zandi, chief economist of Moody's Analytics, said in an interview.
"It's very hard to understand where the impression has come about that we currently have high taxes, or that our taxes are high in relation to those of other rich countries," said Gary Burtless, a former Labor Department economist and a current fellow at the Brookings Institution, in Washington. "These are low tax rates that we're currently facing, in relationship to our incomes, in relationship to the size of the national economy."
The low effective rate, Zandi said, is the result both of the weak economy and recent tax cuts. While Americans suffering in the wake of the recession might feel heavily taxed, the federal government takes a relatively small portion of the country's income.
For American corporations, the tax situation could hardly be sweeter. Measured as a share of economic output, the U.S. enjoys the lowest corporate tax burden of any of the member nations of the Organization for Economic Cooperation and Development, Bartlett notes in his column.
And yet, politicians and pundits insist that Americans are overtaxed. One way to do so is to use the statutory tax rate. That's the number that lawmakers discuss when debating tax cut legislation, and it can be made to seem even bigger if combined with state and local statutory tax rates. But the more relevant measure, economists say, is the effective rate, since it takes the country's income into account.
The economic importance of statutory tax rates is blown far out of proportion by Republicans looking for ways to make taxes look high when they are quite low. And they almost never note that the statutory tax rate applies only to the last dollar earned or that the effective tax rate is substantially lower even for the richest taxpayers and largest corporations because of tax exclusions, deductions, credits and the 15 percent top rate on dividends and capital gains.
Read the rest of the column here.