Recently syndicated columnist Walter Williams noted that April 17th was Tax Day – the day until which we had to work this year to pay our combined federal, state, and local taxes.
Williams made this observation as preface to his argument that taxes are excessive and that federal budget deficits are strangling the economy. This position is also Republican Party dogma and is cited as justification for demanding tax and budget cuts.
Deficits, Williams explains, stifle economic growth because they result in government borrowing and inflation. Borrowing drives up interest rates leaving individuals and businesses with less to money to spend while inflation is “taxation by stealth” that debases the currency and takes yet more money out of our pockets.
Federal income taxes compound these problems by burdening the top 50% of earners with high marginal rates that they must endure because the other half of Americans pay little or nothing. Moreover, since non-payers have no stake in lowering tax rates, they support big-spending politicians and see tax cuts as a threat to the government’s ability to give them “handouts”.
It’s a simple and compelling narrative -- until it’s compared to reality. So, let’s do the comparison starting with Williams’ criticism of the tax system.
Williams states that “the top 1 percent of American income earners paid almost 37 percent of federal income taxes. The top 10 percent paid about 70 percent of federal income taxes, and the top 50 percent paid nearly 98 percent. Roughly 47 percent of Americans paid no federal income tax.”
This sounds grotesquely unfair and would be, if federal income taxes were the only taxes we pay. But, when pointing out that it took us 107 days to reach Tax Day, Williams included all federal, state, and local taxes. So, when complaining about uneven distribution of taxes, why does he mention only the federal income tax?
Because, had Williams included all federal and state taxes, his claim that the burden is distributed unevenly would have been destroyed.
When all federal and state taxes are included, the top 1 percent of taxpayers, who earn an average of $1.4 million annually, shoulders just 21.6 percent of the burden matching almost exactly their share of the nation’s total income – 21 percent.
Additionally, the top 1 percent’s total combined tax rate of 29 percent is almost the same as that of families making $68,000 per year whose combined rate is 28.3 percent. The only people who pay less than 20 percent of their income in taxes are the lowest earners whose average income is $13,000 per year. They pay 17.4%.
In short, the higher federal income tax rates experienced by the wealthy are almost entirely offset by Social Security and state taxes which exact a much larger share of incomes from middle and lower income earners.
As a side note, Williams’ accompanying surmise that “people who pay little or no taxes become constituents for big-spending politicians”, seems odd when most o f the income-poor states, including West Virginia, that pay comparatively little in income taxes and depend heavily on federal “handouts” voted decisively for the Republican presidential candidate in the last election.
But, what about Williams’ implication that deficits and inflation suffocate the economy?
In the late 1990’s the federal government ran budget surpluses. Then came the income tax cuts passed under President George W. Bush and increases in military spending for wars in Iraq and Afghanistan. Large deficits ensued and the national debt grew by more than half. Then came the housing bubble and the economy crashed in 2007 and 2008. Tax revenues plunged and deficits became even greater as more people required assistance from safety-net programs.
It was exactly the high borrowing, deficit spending doomsday scenario Williams described and, if his theory were correct, the result by now should have been years of high interest rates and rampant inflation. But, both continue to be at lows not seen in fifty years.
Meanwhile, Williams’ other predicted result, slow economic growth, is contradicted by history. In 1947 , after years of deficit spending during World War II and continued deficit spending on the GI Bill and other programs, the national debt reached an all-time high as a percent of GDP – even larger than today’s debt. Yet, we didn’t cut budgets and impose austerity measures. And the result wasn’t economic ruin. It was the longest and most robust economic expansion in history during which deficits shrank and the debt declined as a percent of GDP.
We could have the same result today if Williams’ Republican co-religionists in congress would support rather than fight stimulus measures. Economic text books have long taught that, instead of hewing to the dogma of always balanced budgets, deficit spending can and should be used to stimulate the economy in times of slowdown and surpluses should be run in times of growth. The wisdom of that approach was proven in the bountiful decades that followed World War II and the price of ignoring that wisdom is evident in the now years-long economic downturn of European countries that made the mistake of actually applying Williams’ preferred policies.
In summary, Williams’ fears are repudiated by our historically low interest and inflation rates and by the post-World War II boom. And his belief in the virtues of austerity is repudiated by what has become a European depression. The question is whether Williams and Republicans in congress will finally give reality its due.
Posts
