Tax Myths: It's Not as Bad as You Think

Article excerpt

Recently, when speaking to a number of businessmen, I came to realize how convinced they were that America is a high-tax country, which just happens not to be so. But, then, almost everything that everyone, liberals and conservatives alike, thinks about taxes is not so. Here are a few of the standard myths.

Myth 1: Americans Pay High Taxes Each year, the OECD (Organization for Economic Cooperation and Development), a research group sponsored by the thirty leading industrial countries, publishes an analysis of comparative tax burdens--taxes actually paid as a percent of the Gross Domestic Product. They include all taxes--sales, income, property, whatever, imposed by all levels of government. And they count actual tax revenues--in other words, they measure what governments do, not what they say.

The most recent data are for 2007. And guess what? The United States, as usual, ranked twenty-seventh out of the thirty, trailed only by Korea, Turkey, and Mexico. The total American tax burden is about 28 percent of GDP; the OECD median is about 36 percent; and the highest, in Denmark, is 48 percent.

Myth 2: Changing Tax Rates Changes Taxes The Congressional Budget Office has computed changes in "effective federal tax rates" for different income brackets over the twenty-five years through 2004, a period that included several major changes in the income-tax code. The table below charts the change in just federal income taxes actually paid by the wealthiest, the top 1 percent of earners, over that period. Very large changes in the federal income tax code clearly made very little difference in the income taxes actually paid.

Tax Environment                        Actual Income Tax Rate Paid by
                                       Top 1%

1979: Top Rate 70%                                                22%

1982: Top Rate 50%                                                20%

1987: Top Rate 30% (fewer deductions)                             22%

2000: Peak of Dot.com Boom                                      24% *

2004: After Two Bush Tax Cuts                                     20%

* The highest effective income tax rate paid by the top 1 percent over
the entire period

Effective Federal Tax Rate (Percent): All Federal Taxes

                 1979  1987 (1)  1994 (2)  2000 (3)  2004 (4)

Top 1%             37        31        36        33        31
Top 10%            30        27        29        29        27
Middle Quintile    19        18        17        15        14
Lowest Quintile     8         9         7         5         5

(1) Following Reagan 1986 Tax Reform Act.

(2) Following Clinton 1993 tax increases. …