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Republicans propose using the federal budget surplus to finance a tax cut. They argue that the tax burden on the average American has grown. A tax cut may be a good or a bad idea for other reasons, but the notion of a growing tax burden rests on two highly misleading statistics.
The first is that “a typical mother and father who both work paid nearly 40 percent of their income in taxes,” as Republican Rep. Jennifer Dunn stated in her reply to the State of the Union address. “That means,” Dunn explained, “40 cents of every dollar they earned went to the government.” Dunn also noted that the statistic “really bothers me.” Dunn can stop tormenting herself; the 40 percent figure is bogus.
The number derives from a study conducted by the Tax Foundation, a conservative research group. The study found that “typical” families pay 36.7 percent of their income in total taxes, which is commonly rounded up to a neat 40 percent. That’s a sneaky increase of almost a tenth right there. But even the 36.7 percent figure is inflated. (These errors were brought to light by the Center on Budget and Policy Priorities, a moderately liberal–and methodologically sound–research group.) For instance, the Tax Foundation assumes that the average taxpayer pays an average share of estate and capital gains taxes, which is absurd. Most people do not have any capital gains at all, and the estate tax only affects inheritances of at least $625,000 (and actually a lot more than that unless you’re exceptionally stupid about estate planning). The “typical” taxpayer paid estate taxes last year in the same sense that the “typical” golfer scored some fraction of a hole in one. That is, in almost no sense whatever.
Even more bizarrely, the Tax Foundation study counts as part of the tax burden things that aren’t taxes, such as private pension contributions by government workers or rental fees on property owned by the government. If you lease office space in the Ronald Reagan Trade Center, should your rent be considered a tax? The Tax Foundation’s miscounting of nontax taxes alone overstates the federal tax burden by one-seventh.
Legitimate differences of interpretation do exist. But the Tax Foundation’s calculation of the federal tax burden, which is nearly a quarter larger than the Congressional Budget Office’s, and half again larger than the Joint Tax Committee’s, is beyond the pale.
A more sophisticated statistical salvo, which conservative pundits have shot off recently, is that federal tax revenues now consume the highest percentage of the gross domestic product since World War II. This number is true: Last year Washington took in 20.5 percent of GDP, whereas in the decade before Clinton took office, the number ranged between 17.5 percent and 19.2 percent.
But this is misleading. The federal cup runneth over, in part, because the raging stock market has produced a gusher of capital gains tax revenues. But GDP does not include profits from stocks. This means that during a strong stock market, the numerator (tax revenues) will shoot up, but the denominator (GDP) will not.
The main problem with the tax revenue-to-GDP ratio, though, isn’t accuracy. It’s relevance. During the heyday of the Reagan deficits, conservatives maintained, quite logically, that the important statistic was not how much the government took in but how much it spent: Big government financed through borrowing was no better than big government financed through taxing. Today, the federal government spends 3 percent of GDP less than it did when President Bush left office.
Leading Republicans, who now complain about an alleged huge increase in tax revenues, insisted back in 1993 that President Clinton’s tax increase would cause a decline in tax revenues. (This was the “free lunch” logic in reverse: If a tax cut will increase revenues, a tax increase will reduce them.) That prediction failed spectacularly: Tax revenues have boomed with the economy. Now the boom they denied could even happen has become their main justification for a tax cut.