[lit-ideas] Middle-Income Tax Burdens
- From: Eternitytime1@xxxxxxx
- To: lit-ideas@xxxxxxxxxxxxx
- Date: Wed, 25 May 2005 21:08:45 EDT
Hi,
This addresses some of the tax information...
I apologize if the formatting comes out weird...
Best,
Marlena in Missouri
http://www.cbpp.org/4-7-05tax2.htm
Center on Budget and Policy Priorities
April 7, 2005
TAX FOUNDATION FIGURES DO NOT REPRESENT MIDDLE-INCOME
TAX BURDENS
Figures May Mislead Policymakers, Journalists and the Public
By Joel Friedman, David Kamin, and Robert Greenstein
Highlights
* The Tax Foundation employs averages in a misleading fashion that
overstates the tax burdens of the vast majority of families. Analysis
by authoritative institutions such as the Congressional Budget Office
shows most Americans pay significantly less in taxes than the Tax
Foundation reports.
* In figuring the percentage of income that U.S. families as a whole pay
in taxes, the Tax Foundation counts taxes paid on capital gains but
ignores the capital gains income on which these taxes are paid. This
approach, which Alan Greenspan has said is invalid, artificially
inflates the percentage of income consumed by taxes.
* The Tax Foundation analysis also counts as taxes certain non-tax
items, like the premiums that older American can elect to pay for
Medicare Part B, intra-governmental transfers, and rents that
individuals or businesses pay to rent property that state or local
governments own. This further inflates tax burdens.
Each year shortly before April 15, the Tax Foundation releases a report
projecting "Tax Freedom Day," which it describes as the day when
"Americans will finally have earned enough money to pay off their total tax
bill
for the year." Over the years, pundits and policymakers often have
misinterpreted the Tax Foundation's report as reflecting the tax burdens
that
the broad swath of middle-income families must shoulder; the Tax
Foundation's presentations invite this misinterpretation. In fact, however,
middle-income taxpayers pay significantly less in taxes as a share of their
income than the Tax Foundation's report implies.
* The Tax Foundationâ?¢s annual Tax Freedom Day reports consistently
show significantly higher tax burdens than those that authoritative,
nonpartisan sources find middle-income taxpayers actually bear. This
can be seen by comparing the Tax Foundation estimates of tax
burdens to Congressional Budget Office estimates. As the table on
the following page shows, CBOâ?¢s estimates of the share of income
that the middle fifth of American households pay in federal taxes
have consistently been well below the levels of taxation that the Tax
Foundation reports suggest Å?averageÂ? Americans pay.
* The most recent CBO estimates cover years through 2002. In that
year, CBO found that that the middle fifth of households â?? those in
the middle of the income spectrum â?? paid 14.4 percent of their
income in federal taxes. In contrast, in its report from last year, the
Tax Foundation estimated that the Å?averageÂ? American paid 19.7
percent of income in federal taxes in 2002.
In its report last year, the Tax Foundation estimated that federal taxes
will
consume an average of 17.9 percent of the income of Americans in 2004.
Even though this estimate represents the lowest average tax burden since
1949, according to the Tax Foundation, it is still higher than what CBO
found
the middle fifth of households paid in federal taxes as a percentage of
their
income in 2000, before the Bush tax cuts were enacted. Our update of the
CBO estimate indicates that the middle fifth of households paid about 14
percent of their income in federal taxes in 2004.
Percentage of Income Paid in Federal Taxes
1998
2000
2002
2004
Congressional Budget Office (middle fifth of households)
16.8%
16.6%
14.4%
14.0%*
Tax Foundation
(average)
22.4%
23.1%
19.7%
17.9%
*The 2004 estimate is made by CBPP based on CBO data; CBO estimates for
1998-2002
are from Å?Historical Effective Federal Tax Rate: 1979 to 2002,Â? March 2005.
The Tax Foundationâ?¢s conclusions about federal tax burdens conflict with
CBO findings because the Tax Foundation uses a seriously flawed
methodology. This methodology distorts â?? and inflates â?? tax burdens. The
Tax Foundationâ?¢s estimates of state tax burdens are similarly flawed and
inflated (see box below).[1]
The Problems with the Methodology
In computing what it says is Å?the average American tax burden,Â? the Tax
Foundation divides what it says is total tax receipts by what it says is the
total
amount of income in the nation. The Tax Foundation method suffers from the
following problems.
Average Tax Figure is Misleading
Under our progressive tax system, high-income taxpayers pay significantly
larger percentages of income in federal income taxes than middle-income
families do. Under the Tax Foundation methodology, the higher taxes that
high-income taxpayers pay are used to make the taxes that average
Americans pay look considerably larger than they actually are.
Suppose four families with incomes of $50,000 each pay $2,500 in income tax
â?? five percent of their income â?? while one wealthy family with $400,000 in
income pays $80,000 in income tax, or 20 percent of its income. If one
averages these figures, one finds that 15 percent of the total income of
these
five families goes to pay federal income taxes. (Dividing the families'
total tax
payments of $90,000 by their total income of $600,000 shows that 15 percent
of their total income is paid in income taxes.)
Greenspan Warns Against Seriously Flawed Approach Tax Foundation Uses
In a 2002 Congressional hearing, Federal Reserve Chairman Alan Greenspan
warned
that the type of approach the Tax Foundation uses â?? dividing total tax
receipts by
the Gross Domestic Product (or a similar measure), to determine the overall
average
tax rate (i.e., to determine the percentage of total income in the nation
that is paid in
taxes) â?? is not valid. Greenspan flatly stated: "you can't use tax receipts
over
nominal GDP as a tax rate."
Chairman Greenspan explained one reason that such an approach is improper:
although capital gains taxes are counted as part of federal tax receipts,
the capital
gains income on which such taxes are paid is not counted in GDP. The Tax
Foundation uses a closely related Commerce Department income measure â?? NNP,
or Net National Product â?? that also omits capital gains income. Counting
capital
gains taxes as part of tax receipts while failing to count as income the
capital gains
income on which these taxes are paid distorts â?? and inflates â?? average tax
rates.
In its report last year, the Tax Foundation attempted to respond to such
criticism. It
asserted that the NNP measure Å?fully accounts for capital gains.Â? This claim
is flatly
false. As the Bureau of Economic Analysis at the Commerce Department
confirms,
NNP does not include capital gains income.
Under the Tax Foundation methodology, this 15 percent figure would be used
to say or imply that the average family in this group pays 15 percent of its
income in income taxes and must work until 15 percent of the year has
passed to pay its income tax bill. Yet the 15 percent figure is highly
misleading as an indicator of the typical tax burden of families in this
group.
The four moderate-income families in the group pay five percent of their
income in income tax, or one-third of the average 15 percent rate. Using
averages in this fashion when talking about tax burdens, as the Tax
Foundation does, produces skewed results; it essentially ascribes to average
taxpayers the tax rates that only people at considerably higher income
levels pay.
Taxes Counted, but Taxed Income Not Counted
Making the problem worse, the Tax Foundation methodology fails even to
provide an accurate representation of the average tax rate for the nation as
a
whole. In 2002, Alan Greenspan declared in a Congressional hearing in 2002
that the type of approach the Tax Foundation uses is not valid (the box
above
explains why, as Chairman Greenspan stated, the Tax Foundation approach is
invalid). Despite Chairman Greenspan's warning that "you can't use" this
measure, an admonition that other tax experts also have made in the past,
the Tax Foundation has repeated this error every year.[2]
The Tax Foundation's State-by-State Data Also are Seriously
Flawed
In past years, the Tax Foundation's reports also have included a
list of the dates described as representing "Tax Freedom Day" for
each state. The serious flaws that mar the Tax Foundation's
estimates of tax burdens nationally plague its state-by-state
estimates and make them invalid as well.*
About two-thirds of the tax burdens in the Tax Foundation
calculations are federal tax burdens. The amount of federal taxes
paid by the residents of a state thus has a large impact on that
stateâ?¢s Å?Tax Freedom Day.Â? Since, as this analysis explains, the
Tax Foundation methodology substantially overstates the federal
tax burden of middle-class families, the Tax-Freedom-Day figures
for each state also substantially exaggerate the tax burdens of
middle-class families.
Because the federal income tax system is progressive, states with
relatively wealthy residents end up under the Tax Foundationâ?¢s
methodology with a higher federal tax burden than other states. The
fact that one state has higher-income residents than another state
has nothing to do with the level of state and local taxes in the
state. Yet by trumpeting state-level Tax Freedom Days that differ
across the states, the Tax Foundation misleadingly implies that
differences in burdens imposed by state and local taxes account
for the differences across states in the Tax Foundationâ?¢s Å?average tax
burden.
The Tax Foundation uses a procedure to allocate state corporate
and severance taxes based on the residence of the consumers
who purchase products that businesses sell (adjusted for taxes
that tourists pay). This is likely to lead to further misimpressions
about the role of a stateâ?¢s tax policies on the tax burdens its
residents are said to face. For example, when Alaska collects
taxes from oil companies based on the amount of oil they produce
in the state, the Tax Foundation does not count those taxes as part
of Alaskaâ?¢s revenue. Rather, they add those taxes to the tax
burden in the states where oil is consumed. Maine residents, for
example, consume a significant amount of fuel and so get
allocated a large share of these Alaska taxes. Yet state legislators
in Maine cannot have much impact on the level of taxes that
Alaska or other oil-producing states levy on oil.
Further, the Tax Foundation highlights the tax burden for the
current calendar year, making its own estimates of the taxes that
will be collected during the year in the thousands of state and local
jurisdictions around the country. Despite presenting these
estimates as definitive, they are in fact speculative projections that
are often proven wrong when the actual data on state and local
taxes are subsequently collected and published by the Census
Bureau. For example, the Tax Foundationâ?¢s 2002 report claimed
that tax burdens had risen since 2000 in 38 states, while five
states had lower tax burdens and seven had no change. By 2004,
the Tax Foundation had revised its 2002 estimates to show that
only nine states had higher tax burdens in 2002 than in 2000, while
38 had lower tax burdens and three had no change. When the
Census Bureau released its data for 2002, it found that only four
statesâ?¢ tax burdens had risen, while in 43 states tax burdens had
fallen (burdens were unchanged in three states). In its reports, the
Tax Foundation does not acknowledge the possibility that its data
may be erroneous. Nor does it give prominent attention to the
revisions it makes in subsequent years when its previous
estimates prove to have been faulty.
As a result, the Tax Foundationâ?¢s proclamations of state Tax
Freedom Days are misleading and do little to inform legitimate
debates over levels of state and local taxes and the services those
taxes support.
____________
* See Iris Lav, Joseph Llobrera, and Nicholas Johnson, Å?Tax
Foundation Estimates of State and Local Tax Burdens Are Not
Reliable,Â? Center on Budget and Policy Priorities, April 7, 2005.
Non-Tax Items Are Counted As Taxes
The Tax Foundation also counts as taxes certain items that are not taxes.
These include Medicare premiums that older Americans elect to pay if they
wish to receive coverage for physician's services under Medicare, intra-
governmental transfers that are solely bookkeeping devices and not taxes,
and rental payments that individuals or businesses pay to state or local
governments to rent property those governments own.
Given these and other problems with the Tax Foundation measure, it is not
surprising that the Tax Foundation's claims are inconsistent with the
findings
of the leading authoritative, institutions that study tax burdens, such as
the
Congressional Budget Office and the Urban Institute-Brookings Institution
Tax Policy Center.
Tax Levels versus Expenditures on Food, Clothing and Medical Care
Finally, the Tax Foundation claims that families must pay more in taxes than
they pay for food, clothing, and medical care combined. This Tax Foundation
claim, which apparently compares total tax payments in the nation to total
food, clothing, and medical care expenditures, is likely to create further
misimpressions.
If the statement that total tax payments exceed total expenditures for food,
clothing and medical care is accurate (one cannot determine the accuracy of
this assertion based on information that the Tax Foundation has provided in
its reports), this tells us little about the relationship between taxes and
spending for families in the middle of the income scale. It is no doubt true
that upper-income families pay more in taxes than they spend for these
items.
It also is true that low- and moderate-income families pay significantly
less in
taxes than they spend for such items; necessities consume most of their
income. The precise family income level at which taxes typically exceed
expenditures for food, clothing and medical care is unclear. In the past,
the
Tax Foundation has failed to provide any information on that matter.
End Notes:
[1] See Iris Lav, Joseph Llobrera, and Nicholas Johnson, Å?Tax Foundation
Estimates of State and Local Tax Burdens Are Not Reliable,Â? Center on
Budget and Policy Priorities, April 7, 2005.
[2] One should note that taxes as a percentage of GDP can offer some
meaningful insights; for instance, it provides a sense of the share of the
economy devoted to the public sector. But this calculation is inappropriate
and misleading as a description of average householdsâ?¢ tax burdens.
_____________________________________________________
Marlena Boggs mboggs@xxxxxxxxxxxxxx
Adults Services Specialist 816-836-5200
Mid-Continent Public Library http://www.mcpl.lib.mo.us
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