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Tax Report
- with pictures -
(updated Dec. 2011)
By Michael Hodges - email
- a chapter of the Grandfather Economic Reports -

The Grandfather Economic Reports is a series of picture reports of threats to the economic future of families and their children, compared to prior generations - - from incomes to debt to education quality to health care to international trade balances to energy and national security. You are now at the brief chapter on Taxation, since unacceptable trends in taxation is one of those serious threats facing our young generation. Welcome. We hope your visit will find useful information to help you and your loved ones. Knowledge is Power.


tax time

TAX DAY IS EVERY DAY
FOR 5 MONTHS EACH YEAR

chart of months worked to pay all taxesThat's 267% more months 'working for government' than it used to be, as shown in the chart.

The government taxes when you earn it, taxes you when you save it, taxes you when you invest it, taxes you when you spend it, and, when you die, they tax what's left over. What did they leave out?

5.3 months working for taxes is 43% of a year. In 1776 Thomas Paine argued that if a king demanded 50% in taxes, we wouldn't  pay it. We are nearly there.

Who said the 'era of big government is over?'

- other charts below show the road traveled, but first a few questions -


Since we hear about tax cuts, are Taxes going down?
Answer > April 2006 recorded the 2nd highest federal government tax collection in history.

And - In April 2012 the U.S. has the highest corporate tax rate in the developed world,
a federal/state integrated rate of 39.2 percentc- compared to 25% OECD average.

And - spending by federal, state & local governments
set another all-time high in 2010 - at $5.9 Trillion - 50% of national income.


QUESTIONS

Who said 'the era of big government is over?'
Eight (8) color pictures below tell a lot. Since 'a picture is worth a thousand words.'

Quick Links to sections this Tax Report

Months we work for government

Taxes rise - savings plummet

Consumer Basket of Goods, incl. Taxes

Family tax rates compared to past

Social Security tax rates

Top Tax Rate History

Marriage Penalty

State & Local taxes

Gasoline tax

Hidden Taxes

Budget Surplus Game

Conclusion and Actions

MONTHS WE WORK FOR GOVERNMENT
(Note - to save time, read the full page before clicking referenced links)


chart of months worked to pay all taxesSince we just gave you the data, we repeat the above chart, showing the average worker needed to work 1.4 months in 1928 to pay for federal plus state/local government spending, compared to working 5.1 months today. This means today we must work an extra four months each year to cover government spending, compared to before. That's 267% more working time to cover federal, state & local government spending. (Note: this chart is a representation of the ratios of months worked each year, in relation to total government spending % national income trends - since in the end all revenue to governments comes from citizens in the form of taxes on income or property, excise & sales taxes and higher prices paid for goods & services to cover corporate and import taxes).


comparative trends family taxes vs. savingsTAXES INCREASE -
SAVINGS PLUMMET

This chart shows a relative comparison of personal taxes (percent personal income) to personal savings (percent disposable income).

The red curve on the chart is for personal taxes, where the ratio of taxes to personal income increased from 1959 and soared in the latter 1990s the ratio soared to near 15% by 2000, followed by a 2002 tax cut. Taxes increased 36% faster than personal income in this period until the 2002 cut.

The black line represents the portion of disposable income that was saved - the savings ratio. Note the saving ratio rose steadily up to the early 1970s, which was the same period of strong inflation-adjusted median family income growth, when most families were supported by but one wage earner. Savings rates plummeted during the 1990s - - and by 2006 reached the lowest savings rate in history at negative 1.7% - - and that includes the Great Depression period.

In 2000, income and social security taxes on individual incomes fueled an 82% share of all federal revenue collected, compared to a 51% share in 1950 - - that's an increased share of 60%. And, part of that increase was supposed to fund the social security trust fund surplus for their future retirees, yet it was all siphoned-off and consumed on other stuff as fast as it arrived - - leaving the trust fund with zero marketable assets. (this is covered in the Trust Fund Report chapter, accessed from the home page). Meanwhile, the share of federal revenue covered by corporate income taxes and other sources declined from a 49% share in 1950 to an 18% share in 2000.

And - house hold debt ratios soared to historic record highs.


HOW OUR MONEY IS SPENT
we know from above that we work 5 months for government
- here's another view, compared to food, clothing, etc. -

Consumer Goods & Services, with Government Taxes includedThis chart shows the 'consumer basket of goods and services' used by the government to define the consumer cost of living index (CPI) - - with one addition - - it adds government spending impacts shown by the red slice, and adjusts the ratio of each of the original CPI components accordingly.

First, we notice from the chart that the red slice of the pie, 42% of the total pie, is represented by that required to support all federal, state, and local government spending.
Government is a real cost to each of us, just as food and housing are real costs to each of us, and guess who pays for the cost of government? You guessed it, we all do - - by direct and indirect (hidden) taxes, franchise fees, etc..

This 42% figure is from The Government Growth Report - - for 2002. The 2007 number is up to 43%.

This 42% for government, you will notice, is more than the sum of the food, housing and clothing components in the chart which total 37%. Many will say one needs food & housing more than government - - especially more than large government.

We know government's taxes and regulations impact family cost of living and inflation, just as any other item faced by individuals and families.


GUESS WHAT? - the above chart proves the best way to reduce a family's cost of living is to reduce TOTAL taxes, which means reduce the share of the economy controlled by government at all levels.

WHY, why, why - - are so few demanding spending & tax cuts at all levels of government?

Is it because nobody believes it will happen, as shown by record low voter turnout?


IMPACT OF TAX RATES,
COMPARED TO PAST

Above we have been looking at combined federal and state/local spending, and the number of months of work required on average to pay for same.

Before we leave this Tax Report, let's repeat 2 charts shown in the Family Income Report.   The first chart shows the change over the years in federal tax rates and social security (FICA) tax rates are covered in the 2nd chart.

family tax rate trend Federal Tax Rates up 1,250% for Families of 4

This chart compares the federal income tax rate for 1994 with that of 1948 for a family of 4 at median income level. (data: Family Research Council, reported October 1996 by presidential candidate Steve Forbes, Impris)

The tax rate has jumped from 2% to 25% - - an increase in tax rates of 1,250%.

Primarily to fund social 'entitlement' programs of consumption, which increased 14 times faster than did the economy in this period. (see Federal Budget Report).

Which reduced savings & productivity growth rates by 70% in the past 40 years. This is one of the many negative impacts on family living standards, compared to prior generations.

This chart's 1948 data point for income tax was levied on individuals rather than couples. Now the married are penalized with higher rates - - amounting to $28 Billion.

"Between 1995 and 1998, GDP rose by $1213 billion or 16.7%. Federal revenue rose by $390 billion, or 26.9%. Stated differently, extra federal taxes took 32% of the total growth in GDP between 1995 and 1998. This is an extraordinary revenue surge, which has led federal tax collections to their highest share of GDP in history. In the last three years personal income taxes have surged 43 percent, two and one half times as fast as personal income." Dr. Lawrence B. Lindsey, Arthur F. Burns Chair in Economics, The American Enterprise Institute before the Senate Budget Committee 1/20/99.


How about 2006? The federal government took in 13% more revenue than the prior year. That jump in revenue was the 2nd highest in 25 years. Who said the era of big government is over? J. Sahadi, CNN on July 11, 2006




% population required to file tax returns And - portion of population required to file federal tax returns increased 16 times in my generation

"In 1939, 26 years after the Sixteenth Amendment was adopted, only 5% of the population, counting both taxpayers and their dependents, was required to file (federal tax) returns. Today, more than 80% of the population is under the income tax." (Source: The History of the 16th Amendment by W. Cleon Skousen at http://www.cats.org/16hist.html ).

From 5% of the population to 80% required to file tax returns is an increase of 16 times during my generation.

The following chart shows additional tax rate impacts



social security tax ratesEscalating Impacts Financing the Senior Generation 5 times larger than before

This chart shows the increase in social security & Medicare tax rates on employee incomes - - today vs. 1950. - see the Grandfather Social Security Report

Such tax rates grew from a 2.96% rate on employee incomes to a 15.3% tax rate - 5 TIMES LARGER than today's seniors were paying during their working days in the 1950s. (note: these tax rates are calculated on employee incomes - half paid by employee and half by the employer. If today's tax rates were the same as in 1950 not only would employees take home another 6% but employers could give employees an additional 6% raise on top of that - - meaning families would have an extra 12% to save for their future).

This picture understates the drain on families compared to the past, since the maximum salary taxed has escalated from $3,000 of earnings in 1950 to $84,000 in earnings today - causing tax dollars paid to rise more than 2,100%, inflation-adjusted.
- - a trillion dollars of which was in surplus to that needed to cover senior pensions, and all that surplus was siphoned off for non pension spending by the general government - - meaning this extra FICA tax was nothing more than a hidden extra income tax over and above marginal income tax rates.

Despite paying a dramatically higher share of their income than did seniors, today's young, when they retire, will not receive anywhere near the benefits & purchasing power of today's seniors.

There is zero doubt families have lower living standards and savings as a result of this imbalance. (for a chart on savings trends, now at an all-time low, see the section in the Family Income Report on savings).

And, just before family incomes ceased to grow, there were two major impacts on families: in 1968 Medicare was born and in 1972 Social Security pensions became inflation-protected - - both programs imposed significant added loads on family NET incomes which, unlike seniors, were not inflation protected or given near-free health insurance.


Not only must working people pay a larger percentage of their incomes than prior generations to support today's seniors, but they pay higher federal income taxes than today's seniors earning the same amount. Dr. Lester Thurow, MIT Economist, reports that a couple with one child earning $30,000 pays $2,449 in federal income taxes, while an elderly couple needing to support only two with an equal income of $30,000 pays only $791 in taxes. Should a working family pay more taxes than seniors earning the same income?


As we saw in the Family Income Report that inflation-adjusted median family incomes have not increased in 2 decades. Some will say, how can this be? MIT economist Lester Thurow, 1996, ("the future of capitalism, pg. 41): "If per capita incomes are up yet wages are down, someone has to be getting all that extra income. That someone is the elderly. The share of the elderly has doubled in the last 2 decades. It is they who are the big economic winners." The dramatic increase in family tax rates, compared to those paid by today's retirees, has resulted in a whopping income transfer from working families to seniors - - and, a negative impact on the capacity of families capacity to save, and invest in higher quality education to better prepare their children to meet the soaring competitive pressures of the global market-place. See the Grandfather Social Security Report and the Grandfather Education Report








history top tax ratesTOP PERSONAL TAX RATES

The left chart shows a recent history of top personal tax rates.

In 1981, at the beginning of the Reagan Era (see Reagan Era Report), the top personal tax rate was cut from 70% to 50%. Another cut occurred in 1986, as the top rate was reduced to 28%. That means 1986 tax rates were a whopping 60% less than 1979's.

But, in 1991 and again in 1993, tax rates were increased. A combined increase of 41% - - each the largest in history. Note from the chart that the tax increases 1991 &1993 combined to cancel about half the 1986 tax cut.

Some hated tax cuts, claiming only the rich benefit - which is but a smoke screen for reality - - "Most studies find the share of tax income generated by the highest-income Americans rose after both the 1981 and 1986 tax cuts." (The Economist, pg. 75, 1/24/98).

'Martin Feldstein of the National Bureau of Economic Research showed that the taxable income of those at the top fell after the 1993 tax hike, while those whose tax rates did not go up rose.'(above Economist article). This shows tax increases may more negatively impact the non-rich, than the rich, while tax cuts cause the wealthy to pay a higher share of total tax revenue - - indicating political rhetoric to the contrary may be political 'smoke' for other agendas rather than consideration of the average American.


Who Pays - per the tax code ??

The U.S. tax code is a so-called progressive system, calling for those who have the highest income to provide most of the taxes the government collects, not only because they have the highest income, but also because they pay a much higher percentage of that income.

As a result, the top 1% of taxpayers by income pay roughly 36% of all income taxes paid. The top 5% of taxpayers pay 57% of all taxes paid. The top 10% pay 68% of all taxes paid.

So the small group of the wealthiest 5% of taxpayers will pay more than half of the taxpayers’ cost of the rescue efforts.

Stepping down from the top 5% echelon, taxpayers who rank in the top half of taxpayers by income, pay virtually all individual income taxes collected. Taxpayers in this group pay 97% of all income taxes.

That leaves half of taxpayers paying just 3% of the total, to say nothing of the many workers who pay no income taxes at all.

Even that is only part of the equation. Individual income taxes account for only about 40% of the government’s tax revenue. Payroll taxes paid by corporations, corporate income taxes, and estate and gift taxes, account for most of the rest, and that also tends to come mostly from the very wealthy. So half of taxpayers pay what, maybe 1% of the country’s total tax revenues?


A PENALTY TO BE MARRIED

According to the Congressional Budget Office, in 1996 43% of couples were penalized by tax laws for being married, compared to had they been un-married. This means they paid an extra $28 billion in taxes that year due to the marriage-penalty - - money that that could have been used to improve family finances by reducing debt and increasing savings, plus providing more funds to enhance choices for improving their children's education quality. (data source: The Economist, 18 Oct. 1997, pg. 29). According to the Treasury Dept. November 1999 the ratio has jumped to 48% of all joint filers paying a marriage penalty, representing 25 million couples paying an average marriage penalty tax of $1,131 per couple.

The marriage penalty results mainly from steeply progressive tax rates. In effect, the lower-paid spouse is taxed at the higher- paid spouse's marginal tax rate. Other provisions of the Tax Code that also give rise to a marriage penalty are the standard deduction and the Earned Income Tax Credit (EITC). It is estimated that more than 60 different provisions of the Tax Code cause tax liability to vary with marital status.The Family Income Report proves that the earnings of full-time working males has declined, forcing more mothers into the workforce - - which is a negative for family values - - and now we see that government capitalizes on that event via an extra $28 billion in revenue siphoned from these families.

Is the government trying to penalize family formation and marriage? Is that fair? (NOTE - although repeal, over time, is in a new tax bill, said legislation is facing many changes.)

state & local taxesTHE TAX TAKE FROM THE ECONOMY BY STATE & LOCAL GOVERNMENTS

The chart at the left shows the percentage of the economy consumed by state & local government taxes.

This is the sum of property taxes, state personal & corporate income taxes, sales taxes and other tax-charges (revenues from federal grants are excluded).

If state & local taxes had not increased faster than the size of the economy in the past 50 years then the right bar on this chart would be the same height as the left bar.

But the chart clearly shows that as such taxes used to be 5.9% of the economy (left bar), they are now 16.1% of the economy (right bar).

This means the 'tax take' of state and local governments increased 275% faster than growth of the entire economy.

This reduced the effective share remaining to the private sector, and reduced the share of family income power, compared to prior generations.

Just as we all know each citizen today carries on his back more senior citizens than before, each also carries on their back more state and local government employees than before.

A major reason for this state & local tax increase, from 5.9% of national income to a 16.2% ratio, is because today citizens carry on their back 3 times more state & local government employees than before, because their head-counts increased many times faster than general population growth. If today's government employee ratio was as in the past, there would be 11.3 million fewer government employees than there are.

According to Economy.com in March 2003 - since 1995 property taxes nationwide have jumped 48%, that’s 30% higher than inflation.

(for proof and more charts see the Grandfather State & Local Government Spending Report)


GASOLINE TAXES

Gasoline Taxes - - as of 2003, the federal government tax on gasoline was 18.4 cents/gallon - - state tax averaged an additional 22 cents/gallon. Total = 40 cents per gallon. When gasoline cost $1.20 per gallon this tax equates to a tax rate of 33%. For a $1.60 per gallon price this tax equates to 25% taxation. In the state of Florida, for example, a gallon of gas is taxed as follows > federal tax 18.4 cents, state tax 14.3 cents and county tax 7 cents - - total 39.7 cents.


LONGER TO FILL OUR YOUR TAX RETURN - - lost productivity for everybody

Speaking of the Regulatory Compliance Cost Report, here is a perfect example of how government mandates REDUCES PRODUCTIVITY for nearly every citizen > the huge costs of complying with the tax code. Compliance costs in terms of time have skyrocketed from an average of 17 hours and 7 minutes fifteen years ago to 28 hours and 30 minutes today. Lost productivity is in the billions of hours. The cost in dollars in 2005 was about $200 billion.


HIDDEN TAXES - an EXAMPLE OF A NEW (hidden)TAX
INDEPENDENTLY BY ANOTHER AGENCY

Government continues to expand its power of extracting resources from the public, without accountability.

James Glassman of the American Enterprise Institute and the WASHINGTON POST has a knack for spotting government power grabs, and exposing them for what they are. In his column (December 2, 1997) he discusses a subtle telephone tax imposed on consumers through bureaucratic edict by the FCC. The rationale for the new fee is that revenue is needed to hook up the nation's classrooms to the Internet, at a time, notes Glassman, when students "can barely read the volumes of Mark Twain and Shakespeare already in the school library." Glassman's article can be read at: http://www.washingtonpost.com/wp-srv/WPlate/1997-12/02/014l-120297-idx.html .

This is another example of big government, outside local school boards, throwing more money at the education system, which now produces the lowest quality in relation to per student spending in decades with piles of evidence that education quality is inversely proportional to spending - - as proven in the Grandfather Education Report. Many teachers, after reading this education report, have written that computers shoved into schools significantly dilute teacher capacities to get the education process back to the basics of reading, writing and math - - closer to what it was in prior generations. Additionally, they point out that teachers are not educated on computers, and most equipment is obsolete as fast as it arrives. Schools should be concentrating on the basics, not being forced by those above who dilute their own thinking by believing that computers can make up for the huge school quality deficit. And, this new tax is another example of the transfer of local school board power to higher levels of government under the guise of 'helping education' while increasing power above. Computer decisions should be left to the local school boards, the closest to teachers and parents. Our president recently said he needed volunteers to teach kids to read, a clear indictment of the current system in need of massive overhaul - - and de-centralization.

LET'S GET ONE THING STRAIGHT,
THERE HAS NOT BEEN A BUDGET SURPLUS IN RECENT YEARS!

Because we know total debt increased each year to a new record,
despite the highest percentage tax revenue intake in peace-time history

POLITICIANS ARE NOT LEVELING WITH US!

IF WE EVER SEE A TRUE BUDGET SURPLUS
IT SHOULD BE RETURNED VIA TAX RATE CUTS FOR ALL CITIZENS

because history shows we cannot trust government to refrain from siphoning off even trust fund surpluses and spending on other stuff, while proposing new spending initiatives.

CONCLUSION

BOTTOM LINE SUMMARY of ACTION
to IMPROVE FAMILY INCOMES and CONTROL

  1. It's not taxes, it's the spending Stupid!. Therefore, reduce government spending ratios at both the federal and state & local level from today's near 40% of national income toward the 22% ratios of spending to national income achieved before and right after World War II. (see charts) Those claiming ratios came down a bit in recent years are not counting all the spending - - but for sure they are not comparing same to the above target period. The only politically effective means of accomplishing this is to reduce all tax rates - - starting with elimination of the marriage penalty tax, death (estate) taxes, and taxes on pensions. Recognizing historically low rates of savings, consideration should be given to reduce tax rates even further on all savings - - both ordinary and capital gains. Targeting tax reduction to specific groups for social engineering purposes must be discouraged - - taxes should be proportionally reduced for those who now pay. In addition, government must stop siphoning off surpluses from any of the trust funds - - the social security trust and all the other trust funds - - trust should be trust - - keep your fingers out.
  2. Since history has shown that all revenue will be consumed by more spending, tax cuts are the only remedy to prevent said spending. However, we know that the very basis of political power is the capacity to spend, and politicians will resist with 'full court presses' any tax reduction - - throwing up smoke screens like children will not get schooling, or seniors will be thrown in the street and/or deficits will return. But tax cuts are the only way to cause spending reductions. Therefore, more citizens must feel the real 'pain' of the taxes they pay, and this can only happen when they have to write their own tax checks, instead of having it withheld from their pay checks, out of sight. This calls for eliminating withholding taxes and pay employees gross instead of net pay. This will also stimulate the economy because employers can cease the cost of being the government's tax collector. Now, politicians will resist with all means possible eliminating of the withholding tax, because they know that once workers take home that pay (instead of having it withheld) they will be up in arms at tax payment day when they have to write the check - - and will therefore start placing real 'tax cut' pressure on their elected officials, and those officials are scared of that. They want it withheld in quiet - - they just want the money with no pressure. Eliminate withholding taxes would be truly an all-American event, giving the power of spending back to those who earn it in the first place.
  3. And - - if there ever is a real surplus we know Congress will find all ways possible to spend it on something. We know they are not going to just allow cash to sit around in a cookie jar without digging in with their fingers. Therefore, should there be any 'budget surplus' all should be returned to the private sector via across the board reductions in tax rates, without strings and without showing preference to any segment of society (such as favoring credits for families using daycare for their kids over parents who sacrifice so mother can be full-time with her kids so as not to farm them out to daycare by others, etc.).
  4. To be fair and treat every citizen equally, all tax reductions should be an equal reduction in tax rates across the board.
  5. We should never allow the following statement to stand: "if we reduce taxes then budget deficits might return." Our answer should always be that if they reduce taxes and reduce spending there will be no deficits - - it's up to them to cut spending. We will always remember what Nobel laureate Milton Friedman said, "I would rather have one trillion dollars of spending with a half trillion dollars of deficit to finance that, than to have two trillion of spending with zero deficit." Now that's wisdom, right on!!
  6. Restructure the education delivery system that gives parents more choice to select any school (private or public) - - to seek significantly higher levels of education quality (especially in math and hard sciences), than is now provided by the current system. Only with significantly higher education quality can today's young people effectively improve their own family incomes, while facing accelerating competition for said income from the global market place.

TO TOP

From here, we offer a few suggestions:

Read a Powerful History of U.S. Taxation - it's easy to follow and will open your eyes

or, Return to the HOME PAGE of the Grandfather Economic Report,
to review other economic trends facing families and youth, compared to prior generations.

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