POLITICS ASIDE, WE'RE UNDER-TAXED

Federal rates for America's rich and poor have fallen below historical standards

KEVIN G. HALL

MCT NEWS SERVICE

WASHINGTON

Here's a dirty little secret that most Americans don't want to hear: We're undertaxed.

That may sound like heresy; nobody wants to pay more taxes. But by historical standards, what we pay in federal taxes — rich, poor and everyone between — has gone down.

At a time when Washington is wrestling with how to end federal budget deficits and trim the national debt — huge questions that are expected to dominate the nation's politics through the 2012 elections — the fact that Americans are undertaxed compared with U.S. historical norms is central to the discussion.

This fact is separate from the politically charged questions of whether government spends to o much, the fairness of who pays how much and what we value or don't in government spending. It's simply that our tax burden is low in the long view of U.S. history, and there are many ways to measure that central truth.

One way is to look at the trend of total federal revenues, 81 percent of which come from income and payroll taxes, 9 percent from corporate taxes, 3.5 percent from excise taxes and 6.5 percent from other sources, according to the Office of Management and Budget.

The post-World War II historical average is that federal revenues equal about 18 percent of the U.S. gross domestic product, the broadest measure of annual economic production. In 2000, after the longest economic expansion in U.S. history, federal revenues equaled almost 21 percent of the economy. As a result, Washington cut taxes in 2001 and 2003.

Revenues plunged to around 15 percent of the economy in 2009 and 2010 amid the deep financial crisis, and dipped even further this year, to 14.4 percent, the lowest level since 1950.

Meanwhile, federal spending soared this year to 25.3 percent of the GDP, the highest since 1945, the last year of World War II.

The difference between spending and revenue yielded the federal budget deficit: $1.6 trillion this year, the highest ever.

Don't like that tax measure? Here's another: Americans across all income classes paid lower effective tax rates in 2007, the last year of complete Internal Revenue Service data, than they did in 2000. The effective tax rate is what people pay after all exemptions and deductions. This is according to the most recent comprehensive look at taxes by the nonpartisan Congressional Budget Office.

The highest 20 percent of tax filers saw their total average federal effective tax rate fall from 28 percent in 2000 to 25.1 percent in 2007, according to the CBO. That's considerably lower th an the current top marginal tax rate of 35 percent, and lower than the 27.5 percent effective rate in 1979, the first year that CBO data are available.

For the wealthiest 1 percent of filers, the effective tax rate fell from 33 percent in 2000 to 29.5 percent in 2007. The poorest 20 percent of filers saw their effective rate fall from 6.4 percent to 4 percent.

"It's hard to argue that we're overtaxed, and we're low by world standards," said David Wyss, the chief economist for the New York ratings agency Standard & Poor's.