Americans pay less income tax than they think

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Americans who met their federal tax-filing deadline this week perhaps once again complained about the crushing burden they have when paying their annual levies.

Completely without justification, of course.

The Center on Budget and Policy Priorities, a left-leaning economic think tank, noted federal taxes on middle-income Americans are near historic lows, rivaling levels of the 1950s.

A family of four in the exact middle of the income spectrum will pay only 5.6 of its 2011 income in federal income taxes, according to a new analysis by the Urban Institute-Brookings Institution Tax Policy Center.

The average rate climbed above 6 per cent in the second half of the 1950s, rose to roughly 12 per cent in 1980, and began to fall during Ronald Reagan's presidency. It dipped below 6 per cent several years ago in George W. Bush's term.

These rates are the effective tax rates, or the percentage of its income that a family pays in taxes, the CBPP says. The rates are well below the 15-per-cent marginal tax rate – the rate paid on a filer's next dollar of income – that filers face. Why is the effective rate lower? A family takes the standard or itemized deductions, personal exemptions and tax credits.

Also, some of a family's income is not taxed, some is taxed at a 10-per-cent rate and some at 15 per cent, the CBPP notes.

Canadians will not be surprised by the fact that the United States is a low-tax country; the CBPP, using data from the Organisation for Economic Co-operation and Development, notes only Korea, Turkey, Chile and Mexico rank behind the United States among OECD countries in the measure of total tax revenue as a share of GDP, using the most-recently-available 2007 data. All are below the 30-per-cent mark. (Canada, just above the 30-per-cent mark, is slightly behind the overall OECD average.) Alas, however, U.S. citizens feel deeply burdened by taxes, and have little idea how little they are taxed.

Economist Bruce Bartlett, who served in the Reagan and George H. W. Bush administrations, notes the disconnect in his new book The Benefit and the Burden. Mr. Bartlett cites a CBS News/New York Times poll from April 14, 2010, that asks: "On average, about what percentage of their household incomes would you guess most Americans pay in federal income taxes each year?"

The respondents said they believed 5 per cent of Americans pay less than 10 per cent of their income in federal income taxes; the correct answer is 86.5 per cent.

They also said the believed 38 per cent of Americans pay over 20 per cent of their income in federal income taxes; the correct answer is 0.6 per cent.

(For more on this issue, please see this blog post from Rebecca Thiess, an analyst at the Economic Policy Institute.)