Feeling Undertaxed?

The Heritage Foundation ^ | 4-1-02 | Editorial Staff - Edwin J. Feulner, Jr

[vannrox]

 

Feeling Undertaxed?

By Edwin Feulner
President, The Heritage Foundation
March 26, 2002

In December, the governor of Arkansas created the "Tax Me More Fund," so people who consider themselves undertaxed can donate more to the state government.

Even with the economic recovery underway, state lawmakers nationwide are finding it tough to balance their budgets. As a result, many have been lobbying for - you guessed it - higher taxes.

They haven't made much headway in Arkansas, though. Gov. Mike Huckabee has refused to sign off on tax hikes, provoking howls of protest from those who warn of cutbacks in "vital" state programs.

Gov. Huckabee prefers to do what real-world people do when faced with tight budgets: Cut spending. (It's not as if the average citizen has the option of taxing someone when it looks as if he or she won't make this month's mortgage payment.)

But the governor doesn't want to stand in the way of those who want to pay more. "There's nothing in the law that prohibits those who believe they aren't paying enough in taxes from writing a check to the state of Arkansas," he said.

So in December, Gov. Huckabee created the "Tax Me More Fund," so people who consider themselves undertaxed can donate more to the state government.

Sounds reasonable. Surely those who derided the governor for his opposition to tax hikes would open their wallets for the sake of the "vital" programs they hold dear.

That's the theory, anyway. But things have worked out differently: At last report, the fund had raised about $1,900.

The Arkansas story illustrates what we already know: We're not undertaxed. In fact, we're overtaxed. And it costs us: According to the National Taxpayers Union (NTU), Americans shell out an average of 35 to 40 percent of their earnings each year in taxes. A relentless array of federal, state and local taxes chip away at our paychecks, while sales taxes and registration fees siphon off even more. The mortgage, utilities, food, etc., come out of what's left.

Most financial planners say it's smart to create a "rainy day" fund equivalent to six-months' worth of expenses. But most people have little disposable income after the government takes its share, so saving that much money could take years. Meanwhile, the car needs new tires. The washing machine breaks down. The roof starts leaking.

Now, it's clear that Gov. Huckabee didn't expect his "Tax Me More Fund" to do more than highlight the hypocrisy so prevalent among the tax-hiking elite. It seems that was the goal in Kansas, too, where state legislators opposed to Gov. Bill Graves' plan to raise taxes -- rather than cut unnecessary spending -- set up a "Tax Me More Fund," too.

It's an attractive idea. Lawmakers in Arizona, California, Massachusetts and Virginia also have considered creating "Tax Me More" funds. We encourage more.

The lesson these funds teach is simple: Americans don't want to pay more taxes. An NTU poll found that, by a margin of 63 percent to 26 percent, Americans prefer to accelerate the tax-rate reductions President Bush signed last year-or enact additional cuts.

But tax-hikers don't see it that way. While most families and individuals peg their spending to their income, tax-hikers do the opposite. They figure out how much they want to spend and then find creative new ways to gouge it out of us. It stems from a flawed belief that taxpayers exist to serve government.

Deep down, though, most Americans understand that it's really the other way around. Otherwise, Little Rock's "Tax Me More Fund" would be overflowing.

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--Edwin Feulner is president of The Heritage Foundation (www.heritage.org), a Washington-based public policy research institute.

3/26/02

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[vannrox]

Yep... They talk big but when it actually comes to putting cash on the barrel they (the Democrats) do NOTHING!

[1Old Pro]

I like the idea of this fund. Also, it should have full disclosure....so we can track all the contributions from Libs calling fro tax hikes LOL.

[vannrox]

Nah, Probably one person who can count his fingers would do. Why, Probably all he needs is one hand, even.

[randog]

LOL!

I like the idea of a 'Tax Me More' fund. I'm gonna have to see what I can do to get one started in my state.

[SR71A]

Anybody who would actually donate to such a fund should be immediately raided by the DEA, IRS, BATF, and/or the Boy Scouts. They are obviously smoking some pretty bad crack.

[SR71A]

Note to myself: next time close your sarcasm tags: < /sarcasm>. But what can you say with something so bizarre that it seems to be beyond sarcasm?

[2nd_Amendment_Defender]

Good article you posted here.

All these people who want to scream about government programs being cut. Well, if you really want to cry about that then dish out some money. Not too many people who want to give their own money to the government. They want someone else to empty their pockets so they can suck off it.

[Tench_Coxe]

That's why a 30% media tax is attractive.

[Paulus Invictus]

Undertaxed! You cannot be serious! (John MacEnroe said it best!). I just calculated again ( I do it every year as a hopeless gesture) that I paid 57% of my income in 2001 to various tax gatherers, the Feds, state, county and city, not to mention sales taxes, special "fees" and phantom taxes.

This is pure socialism at work and we are all captive socialists paying through our respective proboscises (sp.) with hardly a word of our unhappiness getting through to the lawmakers. You know, those idiots who passed the tax laws and regulate the incomprehensible tax code. We suffer what is called taxation with incompetent representation, but there is no expectation of a tax rebellion, more's the pity!

[Principled]

Bttt flag

[jcparks]

They figure out how much they want to spend and then find creative new ways to gouge it out of us. It stems from a flawed belief that taxpayers exist to serve government.

To our present government, I don't think this is a FLAWED belief.

I totally agree...this IS socialism. Yet, if no one utters the magic word, no body will ever know, huh?

[VRWC_minion]

It seems to me someone should set up a competing "Tax me Less" fund whose objective is to fund candidates who vote for less taxes. It would be interesting to see the relative amount of contributions.

[ancient_geezer]

Undertaxed! You cannot be serious!

We must . . . End Tax Slavery Now; Nov '97
by Jarret B. Wollstein

HOW MUCH DO YOU REALLY PAY?

     According to the Tax Foundation, in 1994 the average American paid 22.4% of his or her income in federal taxes, plus 11.8% in state and local taxes - 34.2% total.

     But that's just the beginning! Dr. James Payne of the University of California found that in addition to direct taxes we also pay huge, hidden taxes including:

• Compliance costs - record keeping, monies spent on tax planning, computers and software purchased to fulfill IRS requirements, etc.
• Enforcement costs - IRS audits, field investigations, service center corrections, criminal investigations, litigation, and forced collections.
• Emotional, moral and cultural costs - families forced onto welfare, time and creative energy lost figuring out how to avoid taxes, etc.

     For every $1 we pay in direct taxes, we spend an additional $0.65 in compliance costs. And even that figure doesn't include the cost of import duties, license fees and other government regulations. For a typical U.S. family, the real cost of taxes and regulations is at least:

Federal taxes              22.4% of [gross] income
State & local taxes      11.8%
Compliance costs        22.2%
Regulatory costs         12.7%

70.1% of your income is now consumed by government

And 70% of the voting public clamors for more from government looking for the top 40% of taxpayers to foot the bill.

What's wrong with this picture:

Walter Williams, World Net Daily, 10-25-2000

According to the most recent U.S. Treasury Department figures, in 1997 the top 1 percent of income-earners (those with income of $250,000 and higher) paid 33 percent of all federal income taxes. The top 5 percent of income-earners ($108,000 and over) paid 52 percent, and the top 50 percent ($36,000 and over) paid 96 percent of income taxes. Guess what the bottom 50 percent of income earners paid?

If you're among those who pay little or no federal income taxes, what do you care about tax cuts? Moreover, if you think tax cuts pose a threat to government handout programs, you might be openly hostile and support Al Gore's silly "risky scheme" talk. So many Americans paying little or no federal taxes makes for a natural spending constituency. It's like me in the restaurant: What do I care about extravagance if you're footing the bill?

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We suffer what is called taxation with incompetent representation, but there is no expectation of a tax rebellion, more's the pity!

Seems more like representation without taxation is the formula that got us where we are at today. The ability to hide or disguise taxation from the view of large sectors of the electorate allows the Congress to get away with the creation of the evergrowing monster that it fosters.

A government which robs Peter to pay Paul can always depend on the support of Paul.
-George Bernard Shaw

Liberty and freedom have a price, responsibility. If that price is avoided by a substantive portion of the electorate, or they perceive they avoid that price, there are no brakes on the growth of government, the ultimate result is the end of freedom through creeping socialism.

[GailA]

TN State Sen Jeff Miller tried to get a "volunteer tax me more fund" passed in Tennessee...even most of the republicans wouldn't back it.

[Rate_Determining_Step]

70.1% of your income is now consumed by government

I loathe taxes as much as anybody, but this just doesn't pass the smell test.

Aren't there objective measures on regulatory costs? I can buy the 34%+ direct tax number, but to double it sounds stupid. So, in essense, if there were no regs, I would double my purchasing power? I know if my business, we would not be able to lower our prices by 50% if we all we had to do was satisfy the customer & not the government.

[ancient_geezer]

Read the hyperlinked article.

The total burden on the economy is not just the revenues paid to state and local governments.

What brings the total burden of government up to that 70% level are the planning, accounting, litigation, administration, and enforcement costs associated with the income/payroll tax system as a whole(65 cents for every dollar of revenue collected); Plus the additional costs imposed on business as regards regulation such as OSHA, EPA, etc.

The total burden on production and the entire economy imposed by government at all levels is what the article is quoting.

[ancient_geezer]

The state and local tax revenue percentages can be comfirmed at the Tax Foundation's tax freedom day history:

http://www.taxfoundation.org/prtfdhistory.html

The main source study for % of tax compliance costs is derived from

Costly Returns
The Burdens of the U.S. Tax System
James L. Payne, '93

Where does $1.00 cost you $1.65? On your tax return, that's where! James Payne demonstrates that for every tax dollar the IRS collects, we pay 65 cents more in compliance and other costs.  This hidden financial burden is compounded by the arbitrariness, invasion of privacy, denial of civil rights, and other abuses of a coercive tax system.

An additional source Payne's figures is an article in Reason Magazine written by Paine which summarizes his findings.

Where Have All the Dollars Gone?
How the government robs Peter to pay him back.
By James L. Payne, Reason Magazine February '94

When the overhead costs are added together, (24 percent compliance costs, 33 percent disincentive costs, and 8 percent other costs), they total 65 percent of tax revenue. Although future studies may come up with slightly different numbers, there is no doubt that the overhead costs of taxation are substantial. This means that every act of self-subsidy entails a significant waste. When the government takes a dollar from Peter to give it back to him later, there is a huge loss attached to the transaction.

Unfortunately, the bad news doesn't end there. Peter is never going to see this dollar, even if it is destined for him, because of the waste in the system for disbursing subsidies."

Payne's studys have been peer reviewed widely accepted and have been used by many in the tax reform movement in and out of government, including Hall & Rabushka of the Flat Tax folks

The Flat Tax; Hall & Rabushka, '95:

What the Income Tax Cost the American People

The science of estimating compliance costs and indirect economic losses is, as noted, relatively new, and findings differ widely. Payne, for example, estimated the total costs of the federal tax system in 1985 at $363 billion, or 65 percent of actual collections. Others have reached higher costs in some categories of compliance and lower costs in others.

***

Total Costs

It’s time to sum the figures. Direct compliance costs, both in filing and in buying expert advice, exceed $100 billion. Direct tax-planning costs—consulting with lawyers, accountants, purveyors of tax shelters, and financial planners—exceed $35 billion. Revenue lost to the Treasury due to evasion exceeds $100 billion. Distortions from pursuing tax-advantaged investments in the form of lost output may exceed $100 billion. Finally, the lobbyists who inhabit Washington’s K Street corridor probably cost the economy more than $50 billion. Total individual and corporate income taxes for the 1993 fiscal year (October 1, 1992–September 30, 1993) were about $625 billion

***

Notes & References:

A comprehensive review of all the studies that attempt to measure the costs associated with the federal income tax appears in James L. Payne, Costly Returns: The Burdens of the U.S. Tax System (San Francisco: Institute for Contemporary Studies Press, 1993). Payne summarizes the estimates of compliance costs that appear in the following studies: Joel Slemrod and Nikki Sorum, "The Compliance Cost of the U.S. Individual Income Tax System," National Tax Journal 37 (December 1984): 462–65; Arthur D. Little, Inc., Development of Methodology for Estimating the Taxpayer Paperwork Burden (Washington, D.C.: Internal Revenue Service, 1988), pp. III–23; James T. Iocozzia and Garrick R. Shear, "Trends in Taxpayer Paperwork Burden," in Internal Revenue Service, Trend Analyses and Related Statistics, 1989 Update (Washington, D.C.: U.S. Government Printing Office, 1989), p. 56; Annual Reports of the commissioner of the Internal Revenue Service; and a variety of other IRS memoranda

I have other confirming references but Payne is the most widely accepted.

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As far as the regulatory cost of 12.7%, You will have to inquire of Wollstein who wrote the hyperlinked article, on that percentage.

A google search for regulatory costs came up with sources

http://mwhodges.home.att.net/regulation.htm

quoting, for 2001:

Complying with regulations consumes $1.1 Trillion
($826 billion federal mandates, $276 billion state & local government mandates)
- 13% of the economy - $3,964 per man, woman and child -

Which is confirmatory if not conclusive,

Another source

http://www.heartland.org/ia/novdec01/regulation.htm

cites the following for 2000:

In a new study commissioned by the U.S. Small Business Administration, Professors W. Mark Crain of George Mason University and Thomas D. Hopkins of Rochester Institute of Technology estimate Americans spent $843 billion in 2000 to comply with federal regulations. This works out to an average cost to every American household of $8,164 per year--slightly less than half of the average tax bill of $19,613 each household contributes (directly or indirectly) to federal revenues.

I'm willing to accept the Wallstein's values on the basis of the above cites, and that's just a quick look for via Google for comfirmatory articles and cites.

[Psycho_Bunny]

"by a margin of 63 percent to 26 percent, Americans prefer to accelerate the tax-rate reductions"

This CAN'T be right. An AP article posted TODAY said the exact opposite!

The AP must be correct. I can't imagine people wanting to be taxed less. That's absurd! Insane, I tell ya!