18 May 2010

Overall Tax Rate At 60 Year Low

Federal, state and local taxes - including income, property, sales and other taxes - consumed 9.2% of all personal income in 2009, the lowest rate since 1950, the Bureau of Economic Analysis reports. That rate is far below the historic average of 12% for the last half-century. The overall tax burden hit bottom in December at 8.8.% of income before rising slightly in the first three months of 2010.

From USA Today via Square State.


Michael Malak said...

Parking, photo red light, and photo radar tickets are probably not included in "local taxes".

On a more serious note, the USA Today piece takes a dig at Tea Party activists yet ignores the tax that Tea Party activists complain about the most: the inflation tax -- namely, that Bush and Obama have been printing money to pay for wars and bank bailouts now and Social Security and Medicare in the future.

According to shadowstats.com, which computes the CPI according to pre-Clinton formulas, I make the same salary now as I did 20 years ago, despite having gained 20 years of experience as a software developer.

Jon W. said...

The Tax Foundation agrees in general with the article, but disagrees on some of the particulars.

Andrew Oh-Willeke said...

Tea Party activists do complain about a rising federal debt, but I've seen few so sophisticated that they are seeing the federal debt as an inflation tax.

In any case, Tea Party activists would be pleased to know that in addition to record low taxes, that inflation and interest on the national debt are also at near record lows. So, the status quo on that front also seems to be quite tolerable.

Andrew Oh-Willeke said...

The Tax Foundation Concerns linked by Jon W. (and appropriate ones at that) are as follows:

"The 9.2 percent figure is almost exclusively personal income taxes (federal, state and local) and does not include real estate property taxes, sales taxes and most other taxes.

By counting as taxes what the Bureau of Economic Analysis (BEA) calls "Personal Current Taxes" and dividing by a well known BEA measure of income called "Personal Income," the author came to 9.2 percent as being the overall tax rate. Personal Current Taxes includes federal, state and local income taxes, as well as personal property taxes and personal motor vehicle licenses. But many taxes are not tallied in that category. It does not include the bulk of property taxes (i.e. those paid on homes or business property), and it does not include sales taxes (general or selective), severance taxes, and other taxes imposed on businesses. Finally, the figure does not include corporate income taxes, estate taxes, or payroll taxes (acknowledged by the author).

Despite these problems of data definition, the headline's claim about 2009 being a year of historically low taxes isn't far off. Tax Freedom Day, which is calculated by taking total taxes divided by a broad income measure, NNP (which is somewhat close to personal income), had a rate of about 26.6 percent in 2009, which was the lowest since 1959."

By the Tax Foundation's measure, we are at a 50 year low in tax burden, rather than a 59 year low as claimed by the BEA study cited by USA Today.

As it happens, property taxes are becoming a smaller share of the national mix, mostly due to anti-property tax ballot measures in states like Colorado and California and due to declining property values from the housing bubble bursting, sales tax revenues are down dramatically since spending on sales taxable items is highly cyclic, estate taxes were at a modern time low in 2009 due to increased exemptions and decreased asset values and will be essentially zero in 2010, and corporate income taxes are at near record lows (in part because highly leveraged corporate profits fall greatly during rececssions).

It is also worth recalling that the vast majority of people get more back from Social Security and Medicare than they pay in payroll taxes with an effective interest rate at least as good as an ordinary savings account at a bank. Unmarried people with high incomes don't, and neither do people who die young, but at a full program level the tax and benefit balance out for the vast majority of people even at an individual level, and the general fund cost of the Social Security and Medicare program is tiny for a program so effective (it has been highlighted as one of the most important automatic stabilizers in the United States economy; a key recession busting tool).

Michael Malak said...

Ron Paul, the ideological father of the Tea Party movement (before neocon radio hijacked it), talks and writes frequently about the inflation tax, such as:


"Inflation" is an ambiguous term with two distinct possible meanings: monetary inflation (increase in the money supply) and price inflation. E.g. over the past year we have had 100% monetary inflation, but little or no price inflation, because all the created money just went to shore up the big banks' balance sheets. That monetary inflation has or will end up in price inflation -- either past price inflation (excesses of the past decade) or future price inflation.

Monetary inflation is more straightfoward to measure than price inflation. The changes to the way CPI is computed over the past couple of decades have made it an unreliable measure: e.g. treating a house in West Virginia (suburb 70 miles from Washington, DC) as an equal substitute to a house in Arlington, Virginia (5 miles from DC) because they are in the same Metropolitan Statistical Area (MSA), valuing housing solely on rentals instead of sales, and treating the intrinsic value of a DVD player to be a multiple higher than the value of a VHS deck because the improvement in technology represents a supposed higher value to the consumer.

Complicating matters is that monetary inflation cannot be used alone as a proxy for price inflation due to the reserve status of the dollar. Created dollars get soaked up by the rest of the world as their savings.

But the low CPI numbers are falacious.

Andrew Oh-Willeke said...

I don't share your view of the CPI measure as profoundly flawed.

Empirically, the link between changes in the money supply relative to GDP size, and the overall inflation rate by a variety of measures (chained GDP numbers, for example, in addition to price surveys of which the CPI is an example), is exceedingly strong.

The money supply turns out to be considerably more difficult to control than the "printing press" model suggests, because an economist's definition of money describes something that ordinary private actors can and do create and destroy every day (e.g. by paying off loans or making new loans), not an ordinary fixed in supply commodity. But, monetary policy makers aren't bad at regulating it with reasonable accuracy in practice.

The main economic harms from inflation, moreover, are mostly those associated with inflation not expected by economic actors in transactions denominated in nominal dollar terms. Inflation itself is largely harmless so long as economic actors in long term nominal dollar contracts know what to expect.

Changes in prices with non-money supply influenced causes are another story of course. Inflation adjusted price fluctuations reflect importance changes in the fundamentals of the economy (e.g. the stagnant value of unskilled labor and relatively growing value of skilled labor in our economy), but theses are usually easily adjusted for.

The one time when monetary source inflation can be conflated with something else is when it is driven by changes in GDP or shifts in the real prices of goods purchased in international trade (which removes the amount of GDP available by giving a large share to people in a different economy).

Inflation caused by a declining GDP can't be fixed simpy by increasing the money supply (although inflation can be used as a way of redistributing income invisibly). Likewise, no amount of domestic policy, monetary or otherwise can solve macroeconomic harms caused by rising real prices for major imports of the economy, or declining real prices for major exports of the economy.