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Are Americans
overtaxed?
Yes
we are, if the
right
measurement is
used. It is
solely a matter
of comparing the
cost of taxes to
the benefits
derived from
government
spending.
If
the marginal
benefit from an
additional
dollar of
government
spending is not
at least equal
to the marginal
cost to the
economy of
providing the
government with
an additional
dollar of tax,
we are
overtaxed.
Other measures,
such as whether
most Americans
have the
financial
capacity to pay
higher taxes or
whether
Americans are
less overtaxed
than people in
some other
countries, are
irrelevant from
the perspective
of those of us
who value a
bigger economy
more than a
bigger
government.
In
France, for
example, total
taxes are nearly
45 percent of
Gross Domestic
Product (GDP),
compared to 27
percent in the
United States.
Americans have
the financial
capacity to pay
higher taxes too
– but why would
we want to be
overtaxed as
much as the
people in
France? Their
per capita GDP
growth rate is
low (only about
half as much as
ours) and their
unemployment
rate is
astronomical.
If
Americans were
not already
overtaxed, our
GDP growth rates
and living
standards would
be much higher.
The overtaxing
of Americans
starts with the
fact that each
additional $1 of
tax costs the
private economy
more than $1,
whereas the
public benefit
of an additional
$1 of public
spending is only
sometimes
greater than $1
– and is often
less than $1 or
is negative.
Recent works by
Gregory Mankiw
and Martin
Feldstein at
Harvard lead
ineluctably to
the conclusion
that the total
cost to the
economy of an
additional $1 of
tax for the
government to
spend can be as
high as $5 and
is almost always
at least $2.
First, there is
the $1 in tax
paid, and then
there is an
additional $1 or
more in lost
income and jobs
that the economy
would have
produced but –
because of the
tax – does not.
The
most costly per
dollar of
revenue raised
is a tax
concentrated
solely on the
income from
capital. (In
addition to the
tax, the
deadweight
economic loss is
about $4.) The
next most costly
is an
across-the-board
rate increase on
the income from
both labor and
capital. (In
addition to the
tax, the
deadweight
economic loss is
about $1.) But
no matter
whether the
nominal tax is
primarily on
capital income
or on labor
income, and
without regard
to who files the
tax return and
pays the tax,
the real burden
of the resulting
deadweight
economic loss
falls primarily
on low and
middle-income
wage earners.
Thus, not only
is the real
level of
taxation in
America about
twice the amount
reported in the
budget, its
overall impact
tends to be flat
or regressive.
There is no
universal
formula for
measuring
exactly the
public benefit
of each
government
activity and
expenditure, but
it defies
credulity even
to suggest that
each $1 of
federal spending
buys enough
“good” for
enough people to
justify its $2
to $5 cost.
According to
Citizens Against
Government
Waste, obvious
pork barrel
spending was at
least $198
billion over the
last decade. In
2006 alone, the
basket of
suspect spending
earmarks was $29
billion. And a
new evaluation
study at the
Office of
Management and
Budget has
concluded that
25 percent of
all federal
programs are
“underperforming”.
Sunshine is the
key to
controlling
low-value
spending and,
therefore, to
limiting
overtaxation.
If each one of
the three
trillion dollars
in the federal
budget were
treated as the
last dollar
spent (and the
true costs of
paying for it
were publicly
acknowledged to
be at least $2),
it is certain
that a large
amount of
federal spending
would be
eliminated by
popular demand.
On the
discretionary
side of the
budget, when $1
of government
spending costs
$2 or more, and
when government
typically spends
$3 to do a $1
job, the price
tag for pork and
other low-value
projects becomes
ridiculous.
Entitlement
spending
includes vast
amounts of
high-cost,
low-value
subsidies for
the middle class
and wealthy.
This portion of
the budget is
already on track
to force future
tax increases of
such
unprecedented
magnitude that –
on a two-for-one
basis – the
associated
damage to the
economy and
living standards
will be
catastrophic.
Thus, not only
are Americans
already
overtaxed,
mostly in the
form of highly
predictable
“collateral
damage” to the
economy, the
amount of that
overtaxing is
soon going to be
drastically
increased.
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Ernie
Christian is a
Washington tax
lawyer who also
served in the
Treasury
Department. He
is now the
Executive
Director of the
Center For
Strategic Tax
Reform and an
Adjunct Fellow
at the Heritage
Foundation.
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