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Just how heavy is the U.S. tax burden?

May 03, 2012|By Jon Healey
  • A Tax Foundation graph comparies total U.S. tax collections to total U.S. spending on food, clothing and housing.
A Tax Foundation graph comparies total U.S. tax collections to total U.S.… (The Tax Foundation )

Are Americans taxed too much or too little? The answer depends on your frame of reference.

The Tax Foundation released a report Thursday declaring that Americans will cumulatively pay more in federal, state and local taxes this year than they spend on food, clothing and shelter. That's not exactly new news. Total tax payments exceeded total spending on food, clothing and housing in all but one year from 1987 until the latest downturn. So if the foundation's projection for 2012 holds true, it merely will be the resumption of a trend after a three-year recession-fueled lapse.

One graph in the report (shown above) demonstrates that tax revenues have risen almost in lock step with spending on food, clothing and housing. The author, Kevin Duncan, notes that as the amount of tax revenue has grown, so has the amount of "transfer payments":

"Transfer payments, or government social benefits, have grown to represent a substantial portion of money spent on living expenses, encompassing housing, food, clothing, healthcare, and transportation. This means that the government is picking up an increasing portion of the tab for these essential goods."

What Duncan doesn't point out is that "transfer payments" include more than just what people think of as "social benefits." For example, the biggest transfer payments are Social Security benefits, which are insurance proceeds, not handouts. The second biggest are in government health programs, including Medicare, much of which is funded through premiums and payroll taxes.

Nevertheless, Duncan has a point. Federal spending on New Deal- and Great Society-era programs is growing, driving up federal spending as a percentage of the nation's gross domestic product. According to a new report by the Hamilton Project, an economic policy initiative by the Brookings Institute, federal spending is projected to be 23% of GDP over the next 10 years, compared to an average of 21% over the previous three decades.

That's a feature, not a bug, the report's authors argue:

"[T]he historical spending benchmark is misleading because increases in government spending are increasingly the product of two irreversible forces: the aging of the population and the rise in healthcare spending. Because of these factors, spending for Social Security, Medicare, and Medicaid—programs that will compose 64 percent of the federal budget in 2020—are unlikely to return to their lower historical levels."

Now back to the question of the tax burden. The Hamilton Project's perspective is a bit different from the Tax Foundation's. Its report noted that federal, state and local governments in the United States collect significantly less in taxes (when measured as a percentage of GDP) than most other developed nations. And they are more reliant on comparatively volatile income and payroll taxes than their foreign competitors, all of whom impose a consumption-based value-added tax in addition to other levies.

"To put the magnitude of these differences in perspective, if the United States were to raise tax revenues to the OECD average, approximately 6 percent of GDP higher than our current level, and maintained currently scheduled spending, the entire national debt could be paid off in roughly nineteen years," the report says.

The report's authors aren't arguing for that kind of tax hike, mind you. They're just making the point that the U.S. tax burden doesn't look so onerous when you consider what many rival economies impose.

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