Hospitals
& Asylums
Tax Return Estimates Aren’t Sensible Or Necessary HA-15-4-07
A $300
billion estimate
By Tony
Sanders
A. Federal,
state, and local tax receipts have nearly tripled as a percentage of GDP over
the last 70 years - rising from 9.5 percent in 1929 to 26.2 percent by 2002. As a percentage of income the average US
taxpayers pay 34% of their income. From the late 1960s through the late 1990s,
the level of total government receipts largely stabilized, remaining between 25
and 27% of GDP. Since 1929, the federal
government has significantly increased rates and expanded the base of the
individual income tax and created contribution-based entitlement programs in
Social Security and Medicare (the receipts of which together measure 6.5% of
GDP in 2002, 13.5% of income). Social insurance receipts ballooned after the
introduction of Medicare in 1965. By contrast, the individual income tax, after
explosive growth in World War II, grew very slowly in the post-war era until
the late 1990s, when it eclipsed state and local taxation in 1998 and peaked at
10.2% of GDP or 18% of income in 2002.
B. The IRS reports that the Treasury received
receipts totaling $2,537 billion in 2006.
$1,236 billion were from individual income tax, $107.3 billion were from
corporate income tax, $815 billion were from employment taxes, $58 billion from
excise taxes collected by the IRS, $18 billion from the taxation of sales of
alcohol, tobacco and firearms and $18 billion from estate and gift taxes. Tax returns are to be filed today and net
revenues remain a mystery.
C. The BEA reported that gross receipts of
federal, state and local governments totaled $4,024.1 billion and expenditures
$4,173.7 billion in 2006, before the return.
1. The federal government had receipts of
$2,581.5 billion and expenditures of $2,712.7 billion. Federal tax receipts not
including contributions for social insurance totaled $1,590.6 billion, $1,086.2
billion from personal income, $97.9 billion from taxes on production and
imports, $388.5 from taxes on corporate income and $18 billion from taxes from
the rest of the world. $932.4 billion
were contributed to social insurance programs and another $27 billion from
income on assets.
2. State and local governments had receipts of
$1,800.8 billion and expenditures of $1,819.2 billion. State tax receipts totaled $1,243.7 billion,
$300.2 billion from personal taxes, $875 billion from taxes on production and
imports, $68.5 billion from taxes on corporate income. States also received $24.8 billion in
contributions to government social insurance, $78.2 billion in receipts on assets,
$463.3 in current transfer receipts, $358.2 billion in federal aid grants that
are excluded from revenue calculations and $105.2 billion in other
receipts.
D. Gross federal receipts show a growth of $268 billion
from 2005 to 2006 a 11.8% growth rate. The
BEA explains personal
income increased 6.3% in 2006, the highest annual growth rate since the current
expansion began in December 2001. In
2005, personal income grew 5.2%. Notably, personal current taxes, which are
deducted from personal income to obtain the amount available for spending or
saving, increased 13.1% in 2006, more than double the growth rate of personal
income. This does not make sense. Although there has been stepping up of tax
enforcement there has been no raise in taxes.
This increase in revenues is a continuing mystery from the end of fiscal
year 2006 when it was presumed that the military surplus, lent through Treasury
bonds from the social security surplus, was being returned through fictitious
or specially contracted corporate and personal income taxes in order to justify
further emergency supplemental military spending. On the other hand State
tax revenue grew 8.2 percent in fiscal year 2004 and 11 percent in 2005.
E. The Federal Reserve estimates
that economic growth in the
United States has slowed in recent quarters to an estimated 2 ¾ % annually in
2006, reflecting in part the economy’s transition from the rapid rate of
expansion experienced over the preceding years to a more sustainable pace of
growth. After rising at an annual rate of 3-1/4% over the previous two years,
real gross domestic product (GDP) increased at an annual rate of 2.6% in the
second quarter of last year. Real gross domestic product (GDP) rose at an
annual rate of roughly 2% in the second half of 2006. The BEA reports real gross domestic product (GDP)
increased 2.5%, revised up 0.3 percentage point from the “preliminary”
estimate. In
the third quarter, it increased 2.0 percent. For 2006, real GDP grew 3.3%,
compared with a 3.2% increase for 2005. The BEA GDP statistics in this report
seem to have been adjusted upward for 2006 to cover up the dramatic slump in
GDP growth that is making it difficult to justify the unexplained increase in
revenues.
F. The IRS reports that in 2005 $2,269 billion
in revenues were collected and $270 billion were returned for net collections
of $1,999 billion.
1. Of the $307 billion in corporate income taxes
collected $34 billion were returned for net collections of $273 billion.
2. Of the $1,108 billion in individual income
taxes collected $228 were returned for net collection of $880 billion.
3. Of the $771 billion collected in employment
taxes funding the Old Age, Survivors, Disability, Hospital Insurance and
Unemployment Insurance $5 billion were returned for net collection of $766
billion.
4. Of the $26 billion collected in estate and
gift taxes $0.9 billion were returned for net collections of $25 billion.
5. Of the $57 billion in excise taxes collected
$2 billion were returned for net collections of $55 billion.
G. More than one in six taxpayers in 2004 received
the Earned Income Tax Credit. The
federal credit, which offers tax refunds this year of up to $4,716 for a parent
with two children who makes $12,000 to $15,000, has emerged as one of the
largest aid programs for the working poor. The amount of the credit for such
parents gradually declines, reaching zero as their incomes hit $38,000. The number of people receiving the credit
rose to 21.7 million in 2004 from 18.8 million in 2000. At least 19 states and three local
governments, including New York City, San Francisco and Montgomery County, Md.,
offer similar credits against state and local taxes. Childless adults and non-custodial fathers receive little from
the earned income credit; their maximum benefit this year will be $428 and
begins phasing out at an annual income of $7,000. Of the nation’s 139 million estimated
nondependent tax units, 18 million do not file an income tax return. More than
60 percent of these non-filers are singles, but a quarter are married without
dependent children. Almost all non-filers have estimated adjusted gross income
of less than $10,000. They are also disproportionately elderly: those aged 65
or above account for less than 20 percent of all nondependent tax units, but
more than half of all non-filing units. An additional 42 million tax units file
an income tax return but owe no more than $500 in income tax after credits. Of
these, 34 million either owe no income tax or receive a net income tax refund
after credits.
|
Family Status |
Tax Units |
Nonfilers |
Nontaxable Returns |
Income Tax of |
||||
|
|
Number |
Percent of |
Number |
Percent of |
Number |
Percent of |
Number |
Percent of |
|
Single |
59,108 |
42.5 |
11,345 |
62.6 |
10,098 |
30.1 |
4,949 |
59.1 |
|
Single head of household |
21,242 |
15.3 |
1,533 |
8.5 |
13,036 |
38.9 |
966 |
11.5 |
|
Married without children |
30,992 |
22.3 |
4,681 |
25.8 |
3,548 |
10.6 |
1,461 |
17.4 |
|
Married with children |
27,617 |
19.9 |
573 |
3.2 |
6,861 |
20.5 |
996 |
11.9 |
|
All |
138,959 |
100.0 |
18,131 |
100.0 |
33,544 |
100.0 |
8,372 |
100.0 |
|
Source: Urban-Brookings Tax Policy Center Microsimulation Model
(version 0503-1). |
||||||||
H. The roots of IRS go back to the Civil War when President
Lincoln and Congress, in 1862, created the position of commissioner of Internal
Revenue and enacted an income tax to pay war expenses. The income tax was
repealed 10 years later. Congress revived the income tax in 1894, but the
Supreme Court ruled it unconstitutional the following year. In 1913, Wyoming ratified the 16th
Amendment, providing the three-quarter majority of states necessary to amend
the Constitution. The 16th Amendment gave Congress the authority to
enact an income tax. That same year, the first Form 1040 appeared after
Congress levied a 1 percent tax on net personal incomes above $3,000 with a 6
percent surtax on incomes of more than $500,000. In 1918, during World War I,
the top rate of the income tax rose to 77 percent to help finance the war effort.
It dropped sharply in the post-war years, down to 24 percent in 1929, and rose
again during the Depression. During World War II, Congress introduced payroll
withholding and quarterly tax payments.
In the 50s, the agency was reorganized to replace a patronage system
with career, professional employees. The Bureau of Internal Revenue name was
changed to the Internal Revenue Service. Only the IRS commissioner and chief
counsel are selected by the president and confirmed by the Senate. The IRS
Restructuring and Reform Act of 1998 prompted the most comprehensive
reorganization and modernization of IRS in nearly half a century. The IRS
reorganized itself to closely resemble the private sector model of organizing
around customers with similar needs.
I. The Tax Reform Act of 1986 (TRA86), the most
comprehensive revision of the Internal Revenue Code since 1954, had a major
impact on business decisions in the period after 1986 through broadening of the
tax base of both individuals and corporations, tightening the corporation
“alternative minimum tax,” limiting losses from passive activities, and
repealing the long-term capital gain exclusion. The most marked effect has been
on the changes made to the individual and corporate marginal tax rates. In
pre-TRA86, the highest individual rate (50 percent) exceeded the highest
corporation rate (46 percent) by 4 percentage points. TRA86 reversed this
trend, starting in 1987 and continuing with the phase-in of lowered rates in
1988-1990 of 34 percent for corporations and 28 percent for individuals.
However, for 1991 and 1992, this difference between the corporate and
individual marginal rates was cut in half when the top rate for the latter was
increased to 31 percent. Beginning for Tax Year 1993, the top individual rate
increased to 39.6 percent, surpassing the rate of 35 percent for the highest
corporation incomes, and restoring the pre-TRA relationship where the highest
individual rate exceeded the top corporate rate. In fact, the difference of
4.6 percentage points between the individual rate and the corporation rate is
similar to the pre-TRA86 difference of 4 percentage points, providing a
reversal of the post-TRA incentive to switch to business types taxed solely at
the individual level. However, this incentive declined with the lowering of
top individual rates beginning for 2001.
|
Income Group |
Effective Tax Rate (percent) |
Share of Taxes Paid (percent) |
Share of Pretax Income (percent) |
Average After-Tax Income (2000 $) |
||||
|
1979 |
2000 |
1979 |
2000 |
1979 |
2000 |
1979 |
2000 |
|
|
All |
22.2 |
23.1 |
100.0 |
100.0 |
100.0 |
100.0 |
40,700 |
57,000 |
|
Lowest 20% |
8.0 |
6.4 |
2.1 |
1.1 |
5.8 |
4.0 |
12,600 |
13,700 |
|
Second 20% |
14.3 |
13.0 |
7.2 |
4.8 |
11.1 |
8.6 |
25,600 |
29,000 |
|
Middle 20% |
18.6 |
16.7 |
13.2 |
9.8 |
15.8 |
13.5 |
36,400 |
41,900 |
|
Fourth 20% |
21.2 |
20.5 |
21.0 |
17.4 |
22.0 |
19.6 |
47,700 |
59,200 |
|
Top 20% |
27.5 |
28.0 |
56.4 |
66.7 |
45.5 |
54.8 |
84,000 |
141,400 |
|
Top 10% |
29.6 |
29.7 |
40.7 |
52.2 |
30.5 |
40.6 |
106,300 |
201,400 |
|
Top 5% |
31.8 |
31.1 |
29.6 |
41.4 |
20.7 |
30.7 |
140,100 |
299,400 |
|
Top 1% |
37.0 |
33.2 |
15.4 |
25.6 |
9.3 |
17.8 |
286,300 |
862,700 |
|
Source: Congressional Budget Office. 2003. Effective Federal
Tax Rates, 1997-2000. August |
||||||||
J.
Corporations, in this analysis, are subdivided into those taxed at corporate
rates (taxable or C corporations), and those electing to be taxed through their
shareholders at individual income tax rates. The latter group includes
Subchapter S corporations (or simply S corporations), Regulated Investment
Companies (RICs), and Real Estate Investment Trusts (REITs), all of which are
not taxed at the enterprise level but whose income similarly flows through to
their owners, where it is subject to tax. C or taxable corporate income is generally
taxed directly at the business level, then again at the shareholder level, at
the applicable rates on dividend income.
The number of businesses doubled between 1980 and 2002, from 13 million
in 1980 to over 26 million in 2002. Overall, the growth was relatively steady,
with increases in all years, including even those with declines in real GDP
(1980-1982, 1990-1991, and 2000-2001). Sole proprietorships were the largest
and most stable component of business entities, accounting for between 68.6
percent and 74.5 percent of overall business entities in all years and growing
by 3 percentage points in the 22-year period, from 68.6 percent in 1980 to 71.6
percent in 2002. C corporations, on the other hand, accounted for 16.6 percent
of business entities in 1980, but their percentage fell steadily to 8.0 percent
in 2002. S corporations accounted for only 4.2 percent of business entities in
1980, but their share increased substantially, particularly in the period
following the 1986 Tax Reform, to 11.9 percent in 2002. Partnerships were also
a relatively stable portion of the business entity types, declining modestly
from 10.6 percent in 1980 to 8.5 percent in 2002.
K.
State and local taxation is much more diversified than the federal system of
taxation. States tax personal and
corporate income, sales, cigarettes, alcohol, motor vehicle sales and
licensing, gasoline and property primarily in the form of home ownership. The Tax Policy Center reports that in 2004 the
national average of state and local expenditure totaling $1,819.2 billion
amounted to 19.61% of personal income estimated at $9.7 trillion, or $6,500 per
capita. By source these expenditures as
a percentage of personal income are 4.4% intergovernmental from the federal
government, 4.7% non tax charges, 3.3% property taxes, 2.5% general sales, 2.2%
individual income, 0.4% corporate income, and 2% other taxation. Forty-three states and the District of
Columbia have an individual income tax.
Arkansas, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming
do not tax personal income, while New Hampshire and Tennessee only tax
dividends and interest. Eight states (Colorado, Illinois, Indiana,
Massachusetts, Michigan, New Hampshire, Pennsylvania, and Tennessee) apply a
single tax rate to all taxable income. The remaining states mimic the federal
income tax and have multiple tax brackets and rates. Social security benefits
tend to be immune from taxation although in many states people with
equivalently low earnings are taxed.
L. Widening income inequality in the US is alarming. As executive compensation skyrocketed from 2003 to 2004, the average after-tax income for the richest 1 percent of U.S. households went up almost 20 percent, while after-tax incomes for the middle fifth of the nation — the middle of the middle class — went up only 3.6 percent. Looking back 25 years — starting in 1979 — the contrast is even greater. The top one percent saw a whopping 176 percent jump, while the middle fifth of Americans saw only a 21 percent rise. That's a big difference, but although 21 percent still seems high. In fact a new study shows that in 2005, the top 10 percent of Americans collected almost half of all reported income in this country. This is their biggest share since 1928. The economy is looking bright, with unemployment at 4.5 percent and 1.7 million new jobs added in 2006. A CBS News poll conducted for Sunday Morning this past week finds that almost 60 percent of Americans think that life for the middle class has gotten worse in the past ten years. The redistribution of wealth seems to be failing in the US and the widening gap between the rich and poor is hurting the middle class ideal of a thriving economy. Sen. Barack Obama (D-Ill.) said "As our economy changes, let's be the generation that ensures our nation's workers are sharing in our prosperity." Sen. Hilary Clinton (D-NY) said, "The leadership here in Washington seems to ignore the middle class and hardworking families across our country,"
M. The United States raises significantly lower tax revenues as a percentage of gross domestic product than do most other countries in the OECD. In 2003 taxes in the United States, including all levels of government, amounted to 25.6 percent of GDP, down from 29.6 percent of GDP in 2000. Other countries in the G7 raised 33.9 percent of GDP, while non-G7 OECD countries raised 34.7 percent. Within the OECD, Mexico raised the least tax revenues at 19 percent and Sweden the most at 50.6 percent. (The recovery of corporate profits and the stock market since 2003 subsequently boosted U.S. tax revenues to 26.8 percent of GDP in the first three quarters of calendar year 2005.). Compared with other OECD countries, the United States relies more heavily on income taxes as a source of revenue and less on taxes on goods and services. In 2003 the United States raised 43.3 percent of its revenue from corporate and personal income taxes, compared with 30.5 percent for the rest of the G7 and 34.3 percent for non-G7 OECD countries. But unlike other OECD countries, the United States does not impose a value-added or other form of national sales tax.
N.
Statistics regarding the GDP are likely to misleading whereas there are several
evaluations for GDP ranging from $11.5 trillion to $13.5 trillion. For most calculations the lower number is
more credible. The fact that there are
differing numbers for GDP render statistics on costs as a percentage of GDP
moot without explanation as to the GDP figure used. Furthermore in OECD
countries GDP estimates are more credible as estimates of Gross National Income
(GNI). It is likely that tax rates
between the US and OECD are actually similar although the US is much more
reliant upon income taxes and OECD nations have national sales taxes much like
individual states do in the USA. The BEA
reports,
1. Current-dollar GDP -- the market value of the nation's output of goods and services -- increased 3.9 percent, or $127.3 billion, in the fourth quarter to a level of $13,449.9 billion. In the third quarter, current-dollar GDP increased 3.8 percent, or $125.3 billion. 2. Real GDP, using chained 2000 dollars, increased 3.3 percent in 2006 (that is, from the 2005 annual level to the 2006 annual level), compared with an increase of 3.2 percent in 2005. Real GDP increased $63 billion to $11,506.5 billion in fourth quarter 2006. O. To be fair it is important to estimate taxation as a percentages of personal income because, for the most part, taxation comes directly out of the income of individuals. Estimates by the Tax foundation estimate that government at all levels now takes 32.7 percent of the nation’s income however this estimate presumes tax revenues of $3,988 bill and a national income of $12,199 billion. These statistics do not agree, particularly in regards to being far more than the highest estimate offered by the Bureau of Economic Analysis for Gross National Income (GNI). The BEA reports,
1. Personal income increased $108.1 billion, or 1.0 percent, to $11,225.1 billion and disposable personal income (DPI) increased $73.0 billion, or 0.8 percent, to $9,793.3 billion, in January.
2. In chained 2000 dollars disposable personal income is 8,480.1 billion.
3. The Tax Policy Center arrives at a figure of $9,705 billion
for pre-tax personal income for 2004.
4. To come to an agreement on what the Gross National
Income (GNI) is pre-tax this 2007 after enjoying an estimated 6.3% growth in
personal income in 2006, it therefore seems wise to go with the $11,225 billion
estimate for personal income given by the BEA whereas that preliminarily indicates
total payments of $1,432 billion in taxes as the result of the difference
between personal and disposable income.
P. The amount of taxes paid is highly controversial and varies widely between states. The $4,024.1 billion in gross revenues collected by the federal, state and local governments includes a significant number of non tax revenues, particularly on the part of states who generate an estimated 50% of their revenues from non tax sources such as the federal intergovernmental grants and license fees. Furthermore the vast majority of state taxation occurs innocuously in the form of general sales taxes and vice taxes on alcohol, tobacco and automobiles. Whereas these indirect forms of taxation impact upon personal income they are included in the 10.4% average rate of state and local taxation although not deducted from the calculation for post tax disposable personal income. Broken down this means that 3.3% of personal income is spent on property taxes, 2.5% general sales taxes, 2.2% state individual income taxes, 0.4% state corporate income tax, and 2% other taxation to state and local governments. The vast majority of taxes are paid to the federal government. In 2000 the lowest 20% of taxpayers pay 6.4% of their income as federal taxation. The second quintile pay 13%. The third quintile 16.7%. The fourth quintile 20.5%. The fifth, top quintile pay 28%. The top 10% pay 29.7%. The top 5% pay 31.1%. The top 1% pay 33.2%.
Q.
In conclusion, taxpayers pay between 8% and 44% of their income in taxation,
34% on average. Gross receipts by federal, state and local governments totaled $4,024.1
billion and expenditures $4,173.7 billion in 2006. The federal government had receipts of $2,581.5 billion and
expenditures of $2,712.7 billion. State and local governments had receipts of
$1,800.8 billion and expenditures of $1,819.2 billion. State tax receipts totaled $1,243.7
billion. Whereas
gross federal tax revenues have increased 11% it can be expected that tax
returns will increase from $270 billion to $300 billion. The
Tax Foundation estimates for Tax Freedom Day that Americans work longer to pay
for government, 120 days, than they do for food, clothing and housing combined,
105 days. Americans work and estimated 79
days to afford federal taxes and 41 days to afford their state and local
taxes. This makes taxation a bigger
financial burden than housing and household operation 62 days, health and medical
care 52 days, food 30 days, transportation 30 days, recreation 22 days and
clothing and accessories 13 days. Tax
Freedom Day is calculated as the day by which time the average American has
worked enough to pay their tax obligations to the government. According to the 2007 calculations of the Tax
Foundation this day falls on April 31.
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2006
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28 February 2007
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2007
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April 16, 2007
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Quotations
Daniel Defoe, in The Political History of
the Devil, 1726 wrote, "Things as certain as death and taxes, can be
more firmly believed."
Benjamin Franklin (1706-90) used the form we are
currently more familiar with, in a letter to Jean-Baptiste Leroy, 1789, which
was re-printed in The Works of Benjamin Franklin, 1817: “In
this world nothing can be said to be certain, except death and taxes.”
Margaret Mitchell's line from her book Gone With the Wind, 1936: "Death, taxes
and childbirth! There's never any convenient time for any of them."