Taxes, Tax Rates and Spending

The New York Times did a very comprehensive piece on taxes and spending in their November 30 issue.*

The only big economic complaint I have is the focus on average rather than marginal tax rates. Anyway …

Here’s the summary of the spending and revenue picture (I copied and pasted this image, but the original is here):

Several points are obvious over the last 30 years:

• Spending is up by 20%
• Total revenues are down a bit – about 5%.
• Current deficits are largely a spending problem.
• Federal income taxes are down 30%.
• Corporate taxes are down 20%.
• Payroll taxes (mostly Social Security and Medicare) are up 15%
• State and local taxes are up 15%

Here is a screen capture of an interactive graphic (go here to see and play with the real thing):

What can we learn from these 7 colored panels, each divided into 9 graphs by income level? Note that you could roughly view the leftmost graph as “the poor” and the 3 to the right of that as “the middle class”.

Panel 1 (gray): average tax rates are lower for everyone. The Reagan tax cuts are at the left of each graph, and they mostly affect people at the top incomes. The G.H.W. Bush (1990) and Clinton (1993) tax increases — that led to the surpluses of the late 1990’s are in the middle, and the G.W. Bush tax cuts are further to the right.

Panel 2 (blue): the rich have paid a bigger share of their higher income, and continue to do so. For example, someone with $100K in income paid about $16K in 1980, while someone with twice as much income paid almost 3 times as much in taxes — about $46K. That was 1980: now we take even more from the rich, with the comparables being $9.9K and $36K, or almost 4 times as much.

Panel 3 (green): average payroll tax rates are higher for everyone. They are not much higher for those with high incomes because we cap the taxable amount at around $100K.

Panel 4 (pink): average state and local tax rates are higher for everyone, but mostly on the poor. This is largely because states and localities have higher sales and sin taxes.

Panel 5 (orange): average corporate taxes are down too — the most for people near but not at the top. Note that the caption makes very clear that corporate taxes are not incident on the firms themselves, but rather on people. It’s unusual in the legacy media for them to take the textbook rather than the layman’s position on this.

Panel 6 (olive and black) is a bit misleading. The black shows the share of income earned by the different groups — and the share earned by the top group has gotten larger. It’s misleading because it gives the impression that this was taken from others. But with shares you can’t think about it that way  — the income earned by each share has grown through time. The olive lines show an interesting pattern though: there are more poor and more rich than in 1980.

Panel 7 (black): shows that the tax system is progressive, but not as progressive as it was in 1980.

* The New York Times was thorough in putting all this together. 

… This analysis offers a more complete picture of taxation in the United States — the combined impact of federal, state and local taxes on American households.

There are no comprehensive statistics on the distribution of state and local taxes, so The New York Times used other government data to estimate the distribution of those taxes.