Friday, April 09, 2010

Set the Wayback Machine to 'Depression Era', Mr. Peabody!

It's another Obama record!

With tax day fast approaching, it's worth discussing the current state of revenues in the United States. Last year, revenue collection hit a 60-year record low of 14.8 percent of GDP -- which was enough to pay for only 60% of what we spent...

Overall, the income tax is quite progressive -- the top fifth of earners pay over 90% of taxes and the top percentiles pays 36%. In 2009, these earners paid income taxes equal to 13% and 18% of their incomes, respectively. By comparison, the average effective income tax rate is 8%, and nearly half of all taxpayers had no (or negative) net income tax burden at all. Payroll taxes are far flatter, and in fact are regressive on the top-end since workers pay no Social Security payroll tax on income over $107,000.

Whether the tax code should be more or less progressive is an open question, depending what one believes to be the appropriate distribution of income and the extent to which they want to use the tax code (or public policy more generally) to get there.

Distributional issues aide, though, most experts believe the current code is in many ways broken. The complexity of the code makes tax preparation costly in terms of time and money; hundreds of deductions, credits, and exclusions narrow the tax base and distort behavior; and higher than necessary corporate and individual rates tend to discourage work and investment, while reducing international competitiveness. Meanwhile, we still have no solution for dealing with the Alternative Minimum Tax, which is "patched" each year so as not to hit middle-class earners. And at the end of 2010, all of the 2001/2003 tax cuts are scheduled to expire.

Of course, one way to achieve some level of fiscal sanity is to outlaw public sector unions; fire the EPA, the Department of Commerce, the Department of Education, the Department of Labor and a few other useless agencies; and downsize Congressional staffers to one apiece.

And there is only one fiscal roadmap I've seen that really seems achievable.


 

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