Do We Pay Too Much in Taxes?

I seem to have riled quite a few people with a blog entry last week expressing my personal concern about the heated rhetoric that passes for political discourse these days.

I seem to have riled quite a few people with a blog entry last week expressing my personal concern about the heated rhetoric that passes for political discourse these days. It drew a fair amount of heated rhetoric in response. I'm going to ignore the personal insults, but I would like to come back to the substantive issue raised by mentioning the tea parties. The underlying question has to do with the tax burden. In short, are Americans paying too much in taxes?

By historical standards, taxes today are pretty low. A recent study (opens in new tab) by the nonpartisan Congressional Budget Office put the total effective federal tax rate at 20.7% in 2006, the most recent year for which data is available. That's exactly the same rate as existed in 1982, when President Reagan's tax cuts were in effect. By the time Reagan left office, it had climbed back up to 21.8%. The highest overall rate in the 30 years covered by the CBO study came at the end of President Clinton's term, when it hit 23.0%.

A surprising 48% of Americans think that taxes are currently at about the right level, with 46% saying they are too high, according to a new Gallup Poll. At 48%, we're still talking less than a majority, but it's the highest level of acceptance that Gallup has recorded since it began asking the question in 1956.

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The total effective federal tax rate as measured by CBO includes income taxes, payroll taxes (Social Security and Medicare), excise taxes and corporate taxes. Because the income tax is progressive, the effective tax rate varies by income level. It was only 4.3% in 2006 for the lowest 20% of earners, while it hit 25.8% for the top 20%. The rate was 17.6% for the second highest quintile.

Clearly, the wealthy are paying the biggest share -- for the obvious reason that this is where the money is. And if President Obama gets his way, and he probably will, this group will see its total tax bite increase. What's more, if even a few of Obama's big programs get enacted, that increase won't be enough. You can count on higher taxes for the middle class as well (opens in new tab) in coming years, regardless of what's being said in Washington now.

But historical trends, polls and relative tax burdens only tell part of the story. The real question is whether we are getting our money's worth, and surely the tea parties demonstrate that many people don't think we are. Some of that is due to the bailouts, which we're still told were and may again be necessary, but which haven't worked out that well, suggesting taxpayer money was wasted. Indeed, a lot of money undoubtedly was wasted, but it's not so clear whether the waste could have been avoided. Defenders of bailouts (and I'm just repeating their arguments) say it's a little like throwing water on a fire; some of the water will miss but you still have to throw it to douse the flames. What is true is that some of that bailout money is going to be returned. Healthier banks are already itching to do that.

But the bailouts and the stimuli will end in time, and the big question will remain. Do we want to pay less in taxes, even if it means less in government service? I couldn't help but notice that one of the people who commented last week to complain of high taxes also commented on an earlier blog item that Obama should order more Navy ships to the coast of Somalia to fight pirates. Just how are we going to pay for that and other services that people want if we don't raise taxes?

These questions are obviously important and will get a lot of attention in the months and years ahead. Hopefully we can do that without calling each other names or questioning each other's motives and intentions. For those still interested in considering the level of political discourse, I'd suggest an interesting column on the subject published Sunday by the Washington Post's Dana Milbank (opens in new tab).

Mark Willen
Senior Political Editor, The Kiplinger Letter