Is "America the Undertaxed"?

Andrea Louise Campbell, a professor at MIT, has written an amazing article on the tax policy and history of the United States compared to other industrialized countries. She argues three things: "the United States has very low taxes, little redistribution of income, and an extraordinarily complex tax code."

Source: http://www.foreignaffairs.com/articles/137838/andrea-louise-campbell/america-the-undertaxed

To her first point, she claims that "U.S. tax revenue is not only low but also consistently low, having equaled roughly the same share of the economy for 60 years." She also points out that everyone--from the top one percent to the middle class to the bottom bracket--have the lowest effective rates in history. And, interestingly, "Americans pay more in payroll taxes than in federal income taxes."

In terms of income distribution, it is skewed toward the wealthy. "The share of total income going to the top one percent of earners," she claims, "increased from nine percent in 1970 to 23.5 percent in 2007." Further, this wealth share of the top one percent was the highest since 1928. It is also worth mentioning that while the top one percent in this country gained twenty percent of all income received in 2007, that same bracket holds thirty percent of the wealth. Meanwhile, "the bottom and middle have faltered," Campbell argues. "Congressional Budget Office data show that between 1979 and 2007, before-tax incomes increased by 240 percent for the top one percent but by just 20 percent for the middle fifth of earners and by ten percent for the bottom fifth." Perhaps most striking is that "almost one-third of Americans have low-incomes, meaning ones below 200 percent of the poverty line." This means the United States has the highest poverty rate among rich nations.

From: http://billmoyers.com/content/chapter-one-of-winner-take-all-politics/

From: http://billmoyers.com/content/chapter-one-of-winner-take-all-politics/

Finally, the tax code. Yikes. It's out of control. As Campbell alarmingly reminds us, "the Internal Revenue Code is almost 12 times as long as the New Testament." There is no question that this needs to be simplified. However, according to Fox News, tax-preparing firms have been lobbying Congress not to simplify the tax code so that people keep coming to them for help.

So how do we fix these problems? As I've said before, Simpson-Bowles is a good place to start. However, this plan didn't get through Congress (both Obama and Congressional Republicans are to blame). Since I am no tax expert, I'm not really sure how to explain many of these wonky things better. But here's what I do know: we need to debunk the notion that higher taxes mean less growth. Sure, very high rates taxes can bring the economy down; but we don't have very high tax rates. As Campbell has pointed out, they are historically low. According to two prominent economists mentioned in Campbell's article, there is "little correlation across the OECD countries between taxes as a percentage of the economy and the size of the economy itself, as measured by per capita GDP. Nor, according to their research, is there a high connection between taxes as a percentage of GDP and the annual rate of economic growth."

How you accept the data in Campbell's article and my (admittedly) lazy summary of it is up to you, but these are the facts. How we move forward says more about how we want to structure our society than how we want to structure our tax code.