United States Federal Spending: A Look At Taxes

Any discussion of federal spending would be incomplete without examining taxes. After all, the reason there is a deficit is that the United States government spends more money than it receives in taxes.

Historically,as a percentage of Gross Domestic Product (GDP), federal revues from the income tax have been remarkably stable as the chart below shows. Marginal tax rates were higher than today in both the early 1960's and the 1980's, yet the total revenue from income tax for the Unites States has remained much the same. (Data used to generate the chart obtained from U.S. Department of Commerce, Bureau of Economic Analysis and the Tax Policy Center.)

You can see the effect of the Reagan tax cuts and notice how revenues started to rise in the ensuing years. You can also see the Bush tax cuts in the revenue line. Here again, notice how revenues were steadily rising in the following years only to be zapped by the current economic down turn, when in the face of declining revenues Congress decided to send spending through the roof.

What is crystal clear in the chart is that marginal tax rates don't seem to make a lot of difference. Up to the current economic mess, income taxes appear to hover around 17-18 percent of the GDP. The revenue line is remarkably flat.

One could attempt to draw some deep and profound conclusions through the study of Economics about this. Or perhaps, it's as simple as Congress doesn't dare raise revenues beyond that point for fear of a voter backlash. Either way, historically it appears that 20% of GDP is a natural ceiling for the income tax. So lets look a little deeper and see who pays it.

A quintile is just a fancy name for a fifth, and thus we have broken taxpayers down into five categories depending on their income. Which is nice, but not worth much until we understand what the income ranges are for the various quintiles (2009 values).

• Lowest - $0-20,453 average $11,552
• Second - $20,454-38,550 average $29,257
• Third - $38,551-61,801 average $49,534
• Fourth - $61,802 - $100,000 average $78,694
• Highest - $100,001+up average $295,388

From the data for 2007, the highest quintile paid a whopping 86% of all income taxes. The fourth quintile paid a measly 12.7% and the third a miniscule 4.6 % of income taxes. Together they add up to more than 100% and that is because the bottom two quintiles actually paid a negative income tax - that is they received tax refunds fore more than their tax liability.

With the upper one fifth of taxpayers in the United States contributing 86% of the tax revenues can anyone reasonably make the claim that the rich are not paying their "fair share." The hoopla surrounding "marginal rates" coming from today's news does not tell you the whole story. The United States government is already being financed on the backs of a small fraction of wage earners.

The United States government currently spends much much more than it takes in in tax revenues. Can this gap be closed by taxing on the "rich?" The chart at the top of this article suggests otherwise. With marginal rates as high as 90% (in the 50's and early 60's) income tax revenues as a percentage of GDP were much the same as they were with lower marginal rates in later years.

Unfortunately, solving the spending problem, closing the budget gap and reducing the deficit will entail tax increases across the board, affecting all segments of the American public. And tax increases alone won't fix the problem. Tax hikes must be coupled with meaningful reforms in entitlement spending - which is completely out of control as was shown previously.