Tax Resentment

One of the issues that seems to resonate with voters is that of taxes. Nearly everyone feels that their taxes are too high. Even those who have had the largest tax cuts in the past few years still wish to see their taxes lowered.

Well, paying less taxes always sounds like a good idea, so why is it so much a US issue and not such a hot button in other industrialized countries? In countries like Sweden taxes can be as high as 50% yet there is not the same type of anti-tax resentment. The neo-con policies of Milton Friedman and followers of Ayn Rand do not figure in main stream economic discussions in Europe the way they do in the US. What is different? My answer below:

My thesis is that people resent taxes in the US because they are getting poor value for their money. In Scandinavia taxes pay for child care, health and retirement services, generous unemployment and child bearing benefits and even college education. The people see where they money is going. Even though many of these services are publicly administered these are capitalist countries. Firms like Ikea, Nokia, Saab and Volvo, to name just a few, are well known internationally. So generous social programs and not at odds with free enterprise.

In the US the federal government has been reducing aid to local and state governments. This has caused a rise in local taxes (especially property and sales tax) which has furthered resentment. Public sector workers are now being blamed as the source of high taxes. There was much criticism of the transit workers in NYC for making "too much" money. The same types of remarks have been directed against school teachers. School taxes are just about the only area where people can vote directly on the issue via annual school budgets. Thus, this has become a way for people to express their overall resentment. It is a strange society where public sector workers making $40,000-$60,000 per year are criticized for making too much, while those on Wall Street make $100,000+ without comment.

So, if people are getting poor value for their taxes where is the money going? The simple answer is into the military/police sector. This sector now gets about half a trillion dollars per year from the federal budget. This amounts to about 50% of all discretionary funds spent. See this site for a nice graphic showing the budget:

Federal Pie Chart

In addition there has been a large drop in the proportion of the federal budget paid by corporate taxes. Corporate taxes represented about 28% of federal revenues in the 1950's, they now represent about 7%. The shift has been to personal income tax. But this shift has not be neutral. During the Kennedy era the marginal tax rate was 91% it is now down to 38%. What this means is that the super rich are paying a smaller portion of the total taxes than previously. The diversion of so much of the federal budget into militarism has meant that not only are social programs lagging other developed countries, but projects designed to improve US competitiveness are being short changed as well. Not only are many public works projects being neglected (New Orleans being the current poster child), but funding for basic research is lagging as well. Much of the recent work in genetic engineering has come from elsewhere.

So, people know their taxes are "too high", but they don't realize the trends that have caused this to be the case. Some sites with interesting economic data:

101 Economic Questions

"The wealthiest 5 percent have 59% of the wealth and pay 38.4 percent of federal taxes. The wealthiest 1 percent have over 38 percent of the wealth and pay 24.8 percent of federal taxes. These households have an average wealth of $10.2 million and pay only 3.5 percent of their wealth in taxes. By way of comparison, the bottom 40 percent of taxpayers have an average net wealth of $1,100 and pay 163 percent of their net wealth in taxes.
If all taxpayers paid the same 10.5 percent of their wealth in taxes as median income families pay, the taxes of the lowest 40 percent would be cut by 94 percent while the taxes of the wealthiest would triple."

Marginal Tax Rate

The truth is that 90% of the US population is doing worse than previously, or at best stagnating. Even though the evidence piles up every day some people are slow to believe it. Just recently, for example, there were items in the NY Times about the elderly having to use their homes to pay for their retirements and students from professional schools starting off with $150-200,000 in debt. These are things that never existed before. Other stories about loss of retirement and health care benefits are widespread.

Now if the proportion of income being received by the top earners grows it is possible that the total amount they pay may increase as well. Even the amount that they pay as a fraction of the total receipts may grow as well. This does not prove that the rich are paying for the poor, just the opposite.

I haven't offered any suggestions on how things should be made more equitable. The British did it via "death duties". There are risks of allowing gross inequality to continue, including social unrest and loss of economic efficiency. Many people think that they need to protect the wealthy since they are in that class or may be within their lifetimes. This is how the estate tax got abolished. Many people thought they were protecting their estates, but actually they weren't. Only the top 2% of estates are covered by the tax, and the upward mobility into to the ranks of the super rich is much less than it was decades ago.

Moral: Tax Resentment is misplaced. Blame the super-rich and runaway militarism, not social programs for those in need.

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Copyright © 2006 Robert D Feinman
Feel free to use the ideas, but the words are mine.