Ultimately, the question of whether taxes are too high is a philosophical one. A tax burden that one person considers excessive might be viewed as appropriate by someone else. This may result from differences in how different people value the government services that taxes pay for. Or it may depend on the times.
A tax rate that is just right one year may be unreasonable in another. Nevertheless, there is mounting evidence that federal income taxes are too high by just about any standard of measurement. New studies from the Census Bureau and Congressional Budget Office support this view.
According to the Census Bureau, the average federal income tax rate hit 15.9 percent of household income in 1999. This is well above the next highest rate ever recorded, 15.3 percent in 1980. It also represents a sharp increase during the Clinton years. In 1992, the average federal tax rate was just 12.1 percent. Thus there was an increase in the federal income tax burden of 3.8 percent during the Clinton presidency.
To get an idea of how this massive tax increase affects typical families, it is useful to look at those with the median income. (The median is the middle of the income distribution, with 50 percent of families above and 50 percent below.) According to the Census Bureau, the median household in 1999 had a before-tax income of $40,816, an after-tax income of $33,676 and paid $7,140 in total taxes, for an effective tax rate of 17.5 percent. In 1993, this family had a before-tax income of $31,241, an after-tax income of $26,112 and paid $5,162 in taxes, yielding a tax rate of 16.4 percent.
The Clinton tax increase of 1993 is part of the reason for this extremely fast rise in the tax burden. However, a larger factor may simply be Clinton's resistance to tax reduction. Because federal income tax rates rise as incomes rise, economic growth automatically causes federal taxes to rise faster than income. According to the CBO, between 1995 and 1998, individual income taxes rose by $141 billion more than they would if taxes had only grown as fast as the economy grew.
Another consequence of this real bracket-creep is that those with upper incomes have borne most of the increase in federal income taxes. According to the CBO, those in the top 20 percent (quintile) of the income distribution now pay 78 percent of all federal income taxes. On average, they pay 27.9 percent of their income to the federal government in combined income, corporate, payroll and excise taxes. This works out to almost $46,000 per household, on an average income of $164,000.
These heavy taxes have an important impact of the distribution of after-tax income. Typically, when one sees figures on the distribution of income, showing a large and growing share going to the wealthy, it is before-tax income. One has to go to the Census Bureau's website to find after-tax data. They show that in 1999, the top 5 percent of households, in terms of income, got 21.5 percent of total income before-tax, but just 17.1 percent after-tax. Those in the top quintile saw a reduction in their share of total income from 49.4 percent to 44.1 percent.
Liberals, such as those at the Center for Budget and Policy Priorities, would have us believe that there are no economic consequences to high tax rates, especially on the well-to-do. But the CBO explains that there is an important efficiency cost to high taxes that impacts on economic growth:
"Taxes change behavior. Consumers buy less of taxed goods and more of untaxed goods. People decide whether and how much to work on the basis of their after-tax wages and thus may choose to work less when income taxes are higher. Firms pick production methods on the basis of input costs after taxes -- using less machinery, for example, in the face of higher taxes on capital. And individuals make decisions about saving on the basis of after-tax returns. All of those responses distort the economy from the way it would be in the absence of taxes and could lead to slow economic growth and thus a lower level of national well-being. Typical estimates of the economic cost of a dollar of tax revenue range from 20 cents to 60 cents over and above the revenue raised."
This last point is something economists call the "deadweight" cost of taxation. It means that when the government takes a dollar out of the economy, the economy loses more than a dollar. This deadweight economic loss takes the form of work that is not performed, investments that are not made and production that is not done as a result of the tax. And high marginal tax rates increase this deadweight cost disproportionately. In other words, as marginal tax rates rise, the loss in economic efficiency rises faster.
For this reason, virtually all economists believe that if taxes are to be cut, the best way to do so would be to reduce tax rates across the board. George W. Bush's plan would do this by reducing all federal income tax rates, lowering the top rate from 39.6 percent to 33 percent and the bottom rate from 15 percent to 10 percent. Thus those in the lowest tax bracket get a larger percentage reduction than those at the top.
Back in 1962, President John F. Kennedy, a very different Democrat from those on the national scene today, warned against the danger of excessive taxation. Tax rates that are too high, he said, "weaken the very essence of the progress of a free society -- the incentive for additional return for additional effort." I think if he were still with us, he would be among the strongest supporters of Bush's tax plan.