BELLEVILLE, Ill. — Alan Hicks divides long days between the insurance business he started in the late 1970s and the barbecue restaurant he opened with his sons three years ago. He earned more than $250,000 last year and said taxes took more than 40 percent. What’s worse, in his view, is that others — the wealthy, hiding in loopholes; the poor, living on government benefits — are not paying their fair share. þþ“It feels like the harder we work, the more they take from us,” said Mr. Hicks, 55, as he waited for a meat truck one recent afternoon. “And it seems like there’s an awful lot of people in the United States who don’t pay any taxes.” þþThese are common sentiments in the eastern suburbs of St. Louis, a region of fading factory towns fringed by new subdivisions. Here, as across the country, people like Mr. Hicks are pained by the conviction that they are paying ever more to finance the expansion of government. þþBut in fact, most Americans in 2010 paid far less in total taxes — federal, state and local — than they would have paid 30 years ago. According to an analysis by The New York Times, the combination of all income taxes, sales taxes and property taxes took a smaller share of their income than it took from households with the same inflation-adjusted income in 1980. þþHouseholds earning more than $200,000 benefited from the largest percentage declines in total taxation as a share of income. Middle-income households benefited, too. More than 85 percent of households with earnings above $25,000 paid less in total taxes than comparable households in 1980. þþLower-income households, however, saved little or nothing. Many pay no federal income taxes, but they do pay a range of other levies, like federal payroll taxes, state sales taxes and local property taxes. Only about half of taxpaying households with incomes below $25,000 paid less in 2010. þþThe uneven decline is a result of two trends. Congress cut federal taxation at every income level over the last 30 years. State and local taxes, meanwhile, increased for most Americans. Those taxes generally take a larger share of income from those who make less, so the increases offset more and more of the federal savings at lower levels of income. þþIn a half-dozen states, including Connecticut, Florida and New Jersey, the increases were large enough to offset the federal savings for most households, not just the poorer ones. þþNow an era of tax cuts may be reaching its end. The federal government depends increasingly on borrowed money to pay its bills, and many state and local governments are similarly confronting the reality that they are spending more money than they collect. In Washington, debates about tax cuts have yielded to debates about who should pay more. þþPresident Obama campaigned for re-election on a promise to take a larger share of taxable income above roughly $250,000 a year. The White House is now negotiating with Congressional Republicans, who instead want to raise some money by reducing tax deductions. Federal spending cuts also are at issue. þþIf a deal is not struck by year’s end, a wide range of federal tax cuts passed since 2000 will expire and taxes will rise for roughly 90 percent of Americans, according to the independent Tax Policy Center. For lower-income households, taxation would spike well above 1980 levels. Upper-income households would lose some but not all of the benefits of tax cuts over the last three decades. þþPublic debate over taxes has typically focused on the federal income tax, but that now accounts for less than a third of the total tax revenues collected by federal, state and local governments. To analyze the total burden, The Times created a model, in consultation with experts, which estimated total tax bills for each taxpayer in each year from 1980, when the election of President Ronald Reagan opened an era of tax cutting, up to 2010, the most recent year for which relevant data is available. þþThe analysis shows that the overall burden of taxation declined as a share of income in the 1980s, rose to a new peak in the 1990s and fell again in the 2000s. Tax rates at most income levels were lower in 2010 than at any point during the 1980s. þþGovernments still collected the same share of total income in 2010 as in 1980 — 31 cents from every dollar — because people with higher incomes pay taxes at higher rates, and household incomes rose over the last three decades, particularly at the top. þþThere are now many more millionaires, in other words, paying more than they did in 1980, but they are paying less than they would have if tax laws had remained unchanged. And while they still pay a larger share of income in taxes than the rest of the population, the difference has narrowed significantly. þþThe trend can be seen by comparing three examples: þþ¶A household making $350,000 in 2010, roughly the cutoff for the top 1 percent, on average paid 42.1 percent of its income in taxes, compared with 49 percent for a household with the same inflation-adjusted income in 1980 — a savings of about $24,100. þþ¶A household making $52,000 in 2010, roughly the median income, on average paid 27.7 percent of its income in taxes, compared with 30.5 percent in 1980, saving $1,500. þþ¶A household making $22,000 in 2010 — roughly the federal poverty line for a family of four — on average paid 19.4 percent in taxes, compared with 20.2 percent, saving $200. þþJared Bernstein, who served as chief economist to Vice President Joseph R. Biden Jr., said the Times analysis highlighted the need to raise taxes on the affluent and cut taxes for the poor. He cautioned that the middle class most likely would need to pay more, too. þþ“When you look at these numbers, you understand why we’re not collecting the revenue we need to support the spending we want,” said Mr. Bernstein, a senior fellow at the Center on Budget and Policy Priorities, a liberal research group. “We’ve really gutted the system.” þþBut Douglas Holtz-Eakin, a prominent conservative economist, said the changes in taxation over the last three decades reflected a conscious and successful strategy to encourage economic growth that should be reinforced, not reversed. þþMr. Holtz-Eakin, a former director of the Congressional Budget Office who is the president of the American Action Forum, said government should reduce deficits primarily through spending cuts, particularly to Medicare and Medicaid, the health programs that are the largest source of projected increases in the federal debt. þþ“We can’t grow our way out of it, and we can’t tax our way out of it,” he said of the government’s fiscal predicament. “We have a spending problem, period.” þþMr. Hicks, like many residents of Belleville, views this debate with unhappiness. He would like the government to cut spending but not reduce services. He is certain that the government should not raise taxes on the middle class, a group in which he includes himself, but he is ambivalent about asking anyone to pay more. Higher taxes would hurt his businesses, he said, so raising taxes on those who make more money seems likely to hurt their businesses, too. þþ“At this point, I guess it’s inevitable in order to get us out of this hole,” Mr. Hicks said of higher taxes. “Illinois is in bad shape, along with a lot of the nation. But I don’t feel like we should tax the middle class any more than we are right now. There’s going to come a point where they take the incentive out of working hard.” þþIf the government cut his taxes, Mr. Hicks said, he would use the money to put a roof over the picnic tables outside the restaurant, expanding the year-round seating area. He already employs 14 people; then he could hire more. þþAnd if taxes rose? Would Mr. Hicks, who started working when tax rates were higher, really choose to slow down? þþHe smiled. “No,” he said. “I like it. What else would I do with my time?” þþCutting From Both Endsþþ The federal income tax, which will turn 100 next year, is in decline. þþCongressional Republicans and Democrats have repeatedly voted to reduce the share of income that people must pay. Over the last decade, annual revenues from federal taxation of individual and corporate income averaged just 9.2 percent of the nation’s gross domestic product, the lowest level for any 10-year period since World War II. þþThe recession and new rounds of tax cuts further reduced revenues, to 7.6 percent of economic output in the 2009 and 2010 fiscal years. Stronger economic growth has produced a modest increase in tax collections, but the White House budget office estimates that collections for the fiscal year that ended in September will total 9 percent of economic output, still less than before the financial crisis. þþFederal spending, meanwhile, grew faster than the economy over the last decade — particularly during the recession. To pay those bills, the government borrowed more money than it collected in income taxes in each of the last three fiscal years, something it had not done in even a single year since World War II, federal data show. þþCongress could have eliminated those deficits by cutting spending. It might also have averted those deficits by leaving the tax code unchanged. The government on average would have collected an additional $800 billion in each year from 2006 to 2010 if the 1980 code had remained in effect and economic activity had continued at the same pace, the Times analysis found. The annual federal deficits during those years averaged $714 billion. þ
Source: NY Times
