USA Today and the low-tax myth

Folks on the left this morning are having a heyday with an article appearing in USA Today with analysis that suggests that taxes are actually quite low and falling:

Federal, state and local taxes — including income, property, sales and other taxes — consumed 9.2% of all personal income in 2009, the lowest rate since 1950, the Bureau of Economic Analysis reports. That rate is far below the historic average of 12% for the last half-century. The overall tax burden hit bottom in December at 8.8.% of income before rising slightly in the first three months of 2010.

The problem is that this number is so incredible it beggars belief. Not that it’s fundamentally incorrect — just that it, perhaps inadvertently, leaves readers with an impression about the size of government spending that is utterly and completely untrue.

The article does point out that consumer spending has decreased in recent years, the stimulus included some tax credits, and tax rates have become even more progressive in the past decades and heavy with credits (traditional and refundable) to the point that almost half of American tax units pay no income tax. (Granted, this last point can be used misleadingly due to the recent bipartisan consensus that the tax code is a great way to institute social programs, a view to which I’m not entirely unsympathetic.)

But taken out of context, the average USA Today reader might well walk away from a quick skim of the article thinking that the government only spends 9.2 percent of gross domestic product. Less than a dime on the dollar. A bargain!

Let’s parse this out a bit.

First of all, ceteris paribus, as personal income decreases, we’d expect the percentage of personal income collected by the federal government to decrease. That’s evidence of our highly progressive tax system. So the story isn’t really one about tax rates at all — it’s about revenues collected.

Second, readers may walk away knowing that the US government costs much more than 9.2% of national income to operate, but figure that corporations or foreigners pay the rest. In other words, “we” pay 9.2%, “they” pay the rest. It’s an iron-clad rule of public finance that corporations don’t pay taxes, people pay taxes. All tax incidence ultimately rests on a person. If you tax a corporation’s profits, for instance, the people who pay are the owners of its shares, who are (ultimately) individuals.

Third of all, it’s important to get a sense of what state and local governments collect. In 2006, state governments collected over $710 billion in taxes, around 5.4% of GDP. When you include local governments, that figure goes to $1.24 trillion, or about 9.5% of GDP. In other words, in 2006, state and federal revenues were about to the percentage of personal income collected by all levels of government in taxes in 2009. That should give you a sense of how skewed this particular figure is. All levels of government in 2009 did not cost less than state and local governments in 2006.

Fourth, the historical tables in the President’s FY2011 budget give a good sense of what tax revenues look like. In 2009, according to table 2.1, the federal government collected $2.104 trillion in revenues. Assuming a GDP of $14 trillion, that means federal revenues were 15% of national income. Including receipts on the state and local level (see the last graf), even assuming they fell to 2006 levels, this means 2009 tax revenues at all levels of government were around $3.35 trillion, or about 24% of GDP.

But perhaps governments took in surplus revenues and spent less than that? Not hardly. The 2009 federal budget deficit was $1.4 trillion, the largest since 1945 at 9.9 percent of national income, and tripling the previous year’s deficit. The states face a total shortfall of another $113 billion.

In other words, in addition to collecting about a quarter of GDP in taxes, governments in the US at all levels tacked on another 10.7% of GDP in future costs. Add that up and governments in the US spent over a third of national income in 2009. A far cry from the 9.2% that the USA Today article inadvertently implies.

I have no doubt the BEA figures are accurate and that the article’s author, Dennis Cauchon, reported them faithfully. But by not giving context and not adequately defining terms, readers can walk away with a belief that American government costs about a quarter of what it really does.

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