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The American Tax Load

  • The Washington Post recently reported that Americans' income tax loads are at the lowest levels they've been in years. But it didn't report -- by selective omission -- that when you add up all the other taxes Americans pay, you're paying almost half your income in taxes.
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By Dan Pilla

Newspaper headlines across the nation trumpeted the results of three recent studies indicating a reduction in the income tax burden of American families. One study was done by the Treasury Department, another by the Congressional Budget Office and the third by the Washington-based Tax Foundation.

How can it be that federal taxes are so low and yet a growing number of families struggle to pay their tax bills and provide for necessary living expenses? The answer: Federal taxes are not that low. The studies in question address only one aspect of the federal tax load -- the income tax. Moreover, they address only a select portion of families in certain income groups. They do not examine the broad picture.

In fact, when you consider all of the federal taxes that the typical family pays, federal taxes exceed 20 percent of gross domestic product -- even higher when measured against income. That is the highest tax load in the peacetime history of our nation.

When you combine federal, state and local tax burdens, the typical family pays more in taxes than it does in food, clothing, shelter and medical care -- combined. The typical family now pays about 45 percent of its total income in taxes at all levels. That leaves only 55 percent of the family income available to pay all other living expenses.

While many families have been given additional tax breaks over the past few years to reduce their income tax burden, the fact is Social Security taxes continue to grow. Most Americans pay more in Social Security taxes than they do in income taxes. The Social Security ceiling on taxable benefits is up to $76,200 for 2000, up from $72,600 in 1999 and $53,400 in 1991.

In addition to the 7.65 percent Social Security tax taken directly from the pay of the typical worker, the employer must match that payment with an employment tax of 7.65 percent. This tax is, in practical effect, an additional tax on the worker since funds used to pay the tax would otherwise be available to the employer to pay higher wages. In other words, workers effectively pay 15.3 percent of earnings up to $76,200 in 2000 in Social Security taxes. This hit must be added to the effective income tax rate, which might well be 7 to 9 percent for many families. In addition, one must add all other federal taxes, such as excise taxes on manufactured products and services, gasoline taxes and import duties.

When I saw a story by The Washing ton Post promoting the studies, I immediately telephoned Bill Ahern, spokes man for the Tax Foundation, an organization I respect greatly and whose work I have used a great deal in the past.

Ahern explained to me that he told Post reporter Glenn Kessler "six times" during his interview that the total tax burden of the American family is as high as its ever been. Ahern explained that you cannot just look at one kind of tax on one narrow segment of the population as evidence of the overall burden.

It seems, however, that Kessler was not interested in the whole story. He seems to be carrying water for the political faction that insists America's families do not need a tax cut.

The Tax Foundation is the organization that puts out the annual Tax Freedom Day calculation. Tax Freedom Day is the day of the year on which you earned enough money to pay all your taxes -- federal, state and local -- if all the money you earned beginning on Jan. 1 was used solely to pay taxes.

Every year in the past decade, Tax Freedom Day has fallen on a later date. The typical American now works well into May to earn enough money to pay all his taxes.

The reason so many people do not recognize the tax burden for what it is, is that so much of it is hidden. Nearly 90 million of the 123-plus million tax returns filed this year will get a refund. People believe because they get a refund, they do not pay taxes. What is more, people never file Social Security tax returns. The totality of that burden is hidden in wage withholding. People no longer think in terms of how much money they earn at their jobs. Rather, they think in terms of "net pay." They ask: What's my take-home after withholding? This conditioning causes people to lose sight of the true cost of government.


Recent figures from the Federal Reserve Board show that our national savings rate, the level at which Americans save money, has plummeted to an all time low.

It would only seem logical that if Americans faced a tax burden as low as it was in the 1950s and 1960s, they might be saving money at the rate they did during those years. But they are not.

National savings rates in the 1950s and 1960s averaged about 8 percent. However, in the 1990s, our savings rate collapsed to virtually nothing.

Even more sobering is the rate at which Americans are borrowing money. Again, one could only assume if the tax burden of the typical family were low, it would stand to reason that its need to borrow would likewise be diminished. However, the facts tell a different tale.

Total consumer debt is in excess of $1.412 trillion, up 255 percent just since 1985. The Federal Reserve reports that for the first time in history, the typical family's total debt load now exceeds its annual income.

The tale gets even worse. Not only have Americans virtually stopped saving money, they borrowed to no end on their credit cards. They have also engaged in a steady, uninterrupted pattern of borrowing against the equity in their assets -- chiefly their homes.

Federal Reserve Board data show that the amount of collateralized assets has increased 203 percent just since 1995. This rate of growth should be troubling in that it is about twice that of the increase in consumer debt.

To top it all off, more Americans now owe more money to the IRS than at any other time. The latest IRS data shows the agency's accounts receivable ledger is in excess of $250 billion, up from just over $94 billion in 1990.

It is irresponsible to suggest that the tax load of the American family is as low as it has been in 40 years.