By every possible measure, the tax burden on Americans today is excessive and tax rates are too high. As the following statistics indicate, the time has come for across-the-board reductions in tax rates:
Federal tax revenues this year are projected to consume 20.5 percent of the economy's output. This is the highest peacetime level of taxation the United States ever has experienced, exceeded only in 1944 at the height of World War II.
The federal government is expected to collect $1.722 trillion from taxes this year, more than $13,500 for every worker in the country. This is nearly 50 percent more than the government took in as recently as 1993 and more than twice the level collected in 1987.
According to the Tax Foundation, taxes at all levels now consume nearly 38 percent of the average dual-income family's income. Medieval serfs, by contrast, had to give the lord of the manor only one-third of their output.
LOOKING AT HISTORY'S LESSONS
There is a distinct pattern throughout U.S. history: When tax rates are reduced, the economy prospers, tax revenues grow, and lower-income citizens bear a lower share of the tax burden. Conversely, periods of higher tax rates are associated with subpar economic performance and stagnant tax revenues. This evidence demonstrates that:
The tax cuts of the 1920s: Revenues from personal income taxes increased substantially during the 1920s despite a reduction in rates. Revenues rose from $719 million in 1921 to $1.164 billion in 1928, an increase of more than 61 percent (this was a period of virtually no inflation).
The Reagan tax cuts (1980s): Total tax revenues climbed by 99.4 percent during the 1980s, but the results are even more impressive when looking at what happened to personal income tax revenues. Once the economy received an unambiguous tax cut in January 1983, income tax revenues climbed dramatically--by more than 54 percent by 1989 (28 percent after adjusting for inflation).
The tax cuts of the 1920s: The share of the tax burden paid by the rich rose dramatically as tax rates fell. The share of the tax burden borne by the rich (those making $50,000 and up in those days) climbed from 44.2 percent in 1921 to 78.4 percent in 1928.
The Kennedy tax cuts: Just as happened in the 1920s, the share of the income tax burden borne by the rich increased following the tax cuts. Tax collections from those earning more than $50,000 per year climbed by 57 percent between 1963 and 1966, while tax collections from those earning below $50,000 rose 11 percent. As a result, the rich saw their portion of the income tax burden climb from 11.6 percent to 15.1 percent.
The Reagan tax cuts: The share of income taxes paid by the top 10 percent of earners jumped significantly, climbing from 48.0 percent in 1981 to 57.2 percent in 1988. The top 1 percent saw its share of the income tax bill climb even more dramatically, from 17.6 percent in 1981 to 27.5 percent in 1988.
CLASS WARFARE MYTHS
Fact #1: According to data from the Internal Revenue Service, the top 1 percent of income earners pays more than 30 percent of the total income tax burden; the top 10 percent pay more than 60 percent; and the top 25 percent pay more than 80 percent. The bottom 50 percent of income earners, on the other hand, pay less than 5 percent of the total income tax burden.
Fact #2: President John F. Kennedy was right: A rising tide does lift all boats. Data from the Bureau of the Census show that earnings for all income classes tend to rise and fall in unison. In other words, economic policy either generates positive results, in which case all income classes benefit, or causes stagnation and decline, in which case all groups suffer. The high-tax policies of the late 1970s and early 1990s are associated with weak economic performance, while the low tax rates of the 1980s are correlated with rising incomes for all quintiles.
Fact #3: President Bill Clinton's own Council of Economic Advisers reported in 1997 that "studies indicate a reasonably high degree of [income] mobility over time" and that "almost two thirds of households change income quintiles over 10 years." A Treasury Department study of those filing tax returns finds that, over a 10-year period, the poorest 20 percent were more likely to have climbed to the top 20 percent of taxpayers than to have remained in the bottom 20 percent.
High tax rates and a tax code that punishes working, saving, and investing do not comprise a recipe for long-term prosperity. History shows clearly that lower tax rates are an integral part of a reform package to maximize freedom and prosperity. A flat tax is the best way to ensure that all income is taxed at a single, low rate. The movement to implement across-the-board tax rate reductions also is a positive step in this direction.
Daniel J. Mitchell, Ph.D. is McKenna Senior Fellow in Political Economy for The Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.