Tax Tea Party Fantasy

I have spent most of my life trying to cut taxes. Back in 1977, while a staffer for Congressman Jack Kemp, I helped draft the Kemp-Roth tax bill, which was endorsed by Ronald Reagan and enacted into law in 1981. According to the Treasury Department, this is the largest tax cut in American history.

So one might assume that I was out protesting taxes along with many of my friends on April 15. But going to rallies is not my thing; I thought my time and skills were better spent analyzing tax burdens to see what evidence justifies the sudden appearance of mass protests against taxes.

The first thing I did was look at the U.S. tax burden compared to other similar countries. Vast amounts of such data are compiled by the Organization for Economic Cooperation and Development in Paris and easily available on its web site.

The first thing I did was look at total revenues — federal, state and local — as a share of the gross domestic product. This percentage is the best summary measure we have for the burden of government on the economy.

The latest complete data are for 2006. They show that governments at all levels consumed 28 percent of GDP in the U.S. Of the 30 OECD countries, we ranked 26, just slightly above Japan and Korea. Only Turkey and Mexico had significantly lower tax burdens.

The most heavily taxed countries are Denmark and Sweden, where government takes 49.1 percent of GDP. On average, the OECD countries of Europe had a tax ratio of 38 percent — 10 percentage points higher than the U.S.

Since the level of taxation here is already considered tyrannical by tea party organizers, any tax level approaching that in Europe would surely constitute slavery in their eyes. Of course, anyone who has ever traveled to Europe knows that the people there are no less free than we are.

For the most part, Europeans just prefer to pay higher taxes for universal health care, while Americans have the cost deducted from their paychecks by their employers. If Americans took all the money they pay for health insurance and added it to their tax bills, getting free health care in return, our tax/GDP ratio would be about the same as that in Europe.

Keep in mind that Americans have always been willing to pay higher taxes when they got something they need in return. Every family with children looks carefully at the quality of local schools when buying a house and almost all are willing to pay higher property taxes to get good schools. States and localities with the lowest taxes are seldom the best places to live because of a concomitant lack of services.

I published my analysis at Forbes.com and sent it around to some of my conservative friends. The universal reaction was, “So what? Why should Americans care if foreigners are even more overtaxed than we are?”

I thought this was a fair point, so I did another analysis looking only at taxation in the U.S. Even if our taxes are low compared to those in other countries, tax protests might be justified by a rising tax level.

The first thing I did was look for more recent data on taxes as a share of GDP on the website of the Congressional Budget Office. It says that total federal revenues will consume 15.5 percent of GDP this year, down from 17.7 percent last year, 18.8 percent in 2007, and 20.9 percent in 2000.

This is a very sharp reduction in the tax/GDP ratio. As a consequence, the federal government will take less out of the economy in the form of revenue than any year since 1950.

But what about the average American, I wondered? Is it possible that the tax code has changed in some way that makes families worse off even though the aggregate level of taxation has fallen?

To answer this question, I went to the website of the Tax Policy Center. It has a table that looks at federal income taxes on the median family’s income. The median is the exact middle of the income distribution—half of all families make more, half make less.

In 2007, the latest year available, the median family paid 5.91 percent in federal income taxes. In every year from 1958 — the first year available — through 2002, it paid more. In 1981, before the Reagan tax cut took effect, the federal income tax rate on the median family was 11.79 percent—twice what it was in 2007.

Many commentators complained that these data are meaningless because they are skewed by the large and growing number of Americans that pay no federal income taxes. According to the Joint Committee on Taxation, 43 percent of federal tax returns filed in 2007 had no income tax liability.

My critics, however, misunderstood how the Tax Policy Center data are calculated. They are not affected in any way by the number of people not paying taxes. The data simply look at the median family’s income and use current tax law to estimate its tax liability.

In response, my tea party-attending friends said I had left out payroll taxes. But there has been no change in the payroll tax rate for many years and most people will get back cash benefits equal to everything they pay in Social Security taxes plus a lot more. Anyway, I didn’t see any signs at the various tax protests complaining about payroll taxes.

But what about state and local taxes, my critics replied? This is always a problem area, analytically, because they vary widely from one place to another. However, according to the National Association of State Budget Officers, the aggregate amount of state tax increases this year amounts to just $1.5 billion; all of that accounted for by one state, California. Two-thirds of states either cut taxes or had no increase.

Moreover, in surveying the location of tax protests compiled by a group called FreedomWorks, which organized the demonstrations, the bulk of tea parties appear to have taken place in Texas and Florida, which have no state income tax, or states where there has been no tax change. Few protests occurred in high-tax states; most were in states where they are low.

Finally, in desperation, my critics said that it is not actually the level of taxation today that they are protesting. It’s the implicit tax resulting from large federal deficits that really concerns them.

I might have been willing to buy this argument except for the fact that these same people justified a huge tax cut in 2001 on the grounds that large budget surpluses, which had arisen toward the end of Bill Clinton’s administration, were proof of over-taxation since the government was taking in more revenue than it needed to pay its bills.

Furthermore, the conservative line for the last eight years was that budget deficits don’t matter, as Vice President Dick Cheney famously remarked when Treasury Secretary Paul O’Neill raised concerns about them at a cabinet meeting in 2002. (O’Neill was fired shortly thereafter for not being on-message.) It’s at least a bit disingenuous for conservatives to suddenly change their view on deficits simply because their team is no longer in power.

In my opinion, these tea parties had little, if anything, to do with current or projected tax levels. They were just partisan pep rallies designed to make out-of-power conservatives and Republicans feel better. Secondarily, they were about building audiences for Fox News and right-wing talk radio hosts.

But I will grant that some of those attending tea parties are now genuinely concerned about our fiscal future even though they weren’t during the George W. Bush Administration. (Where, I wonder, were the protestors when Bush and a Republican Congress massively expanded Medicare in 2003?) But it’s not enough just to complain; specific proposals need to be developed that go beyond cutting foreign aid and earmarks — just about the only spending that conservatives ever talk about cutting.

In particular, anti-tax activists need to explain how we are going to cut Medicare by tens of trillions of dollars when its beneficiaries already represent the largest voting bloc in America and its ranks will grow sharply as the baby boom generation retires. Because of rising Medicare costs, we would be facing massive budget deficits in the near future even if Barack Obama had not been elected, Republicans still controlled Congress, and there had been no economic crisis.

Still, all movements must start somewhere. If the April 15 tea parties are really about more than just electing Republicans and increasing Fox News ratings, I may join them next year. In the meantime, protestors need to do a better job of figuring out what they are protesting and devise a real plan for dealing with our nation’s fiscal problem. Otherwise, their efforts will amount to nothing more than hot air.