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Reality check: Almost all Americans pay too little tax

U.S. presidential candidate Mitt Romney recently release his tax return, which showed he was taxed slightly less than 15 per cent on income of more than $20-million. The U.S. Tax Policy Center has calculated that for nearly the last quarter-century, 75 per cent or more of U.S. tax filers have been taxed at a rate of 15 per cent or less.


After U.S. presidential candidate Mitt Romney acknowledged he pays taxes at a rate of around 15 per cent, he was forced to finally release his income-tax returns, which showed he actually paid a bit less than that. It has stoked the endless debate in the United States over tax rates, income inequality, and, as some call it, "class warfare."

Absent from the coverage was the assertion that Mr. Romney pays less taxes than most Americans -- because, as it happens, the vast majority of U.S. taxpayers pay at a rate of 15 per cent or less.

The Tax Policy Center, a joint venture of two left-of-center U.S. think tanks, used Internal Revenue Service data to show that for nearly the last quarter-century, 75 per cent or more of U.S. tax filers have been taxed at a rate of 15 per cent or less. The figure approached 80 per cent of filers in 2009, the most recent numbers available.

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Just 1.6 per cent of returns, by contrast, are in the 29 per cent to 35 per cent brackets, the Tax Policy Center says.

In 1958, the U.S. tax system had 24 brackets and a top marginal tax rate of 91 per cent; today, it has six brackets and a top rate of 35 per cent.

Much of the change occurred during the presidency of Ronald Reagan. As the Tax Policy Center notes, "before the Tax Reform Act of 1986 started to go into effect in 1987, the highest statutory marginal tax rate that applied to most taxable returns was between 16 per cent and 28 per cent. Since 1987, the highest rate that has applied to most taxable returns has been 15 per cent or less."

Put another way: For returns filed in 2011, married couples filing together were in the 15 per cent bracket all the way up to an income of $69,000. Per household income data from 2007 (an imperfect comparison), that level of income puts the couple close to the 80th percentile in household income.

Now, let me be clear: This analysis risks missing the larger issues involved in Mr. Romney's disclosure, which is whether a couple with an income in the $20-million per year range should be paying the rate paid by the vast majority of Americans. In a truly progressive tax system, the Romneys should not; however, the U.S. has decided to reward investment income with a lower tax rate than the wealthiest would pay on earned income.

The U.S. tax system is indeed progressive, to a degree, and so that vast majority of 15 per-cent-raters are paying, in the aggregate, less than 50 per cent of receipts. Taxpayers in the brackets from 29 per cent to 35 per cent are contributing 25 per cent of the income tax receipts.

Conservatives note the income distribution and tax statistics and argue, with some justification, that the U.S.' budget problems cannot remotely be solved by a "millionaire's tax" or any other Obama administration proposal that targets just the top one-tenth of one per cent of taxpayers.

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The Tax Policy Center figures that if taxable income in the top bracket in 2007 had been taxed at an average rate of 49 per cent (a pre-1982 average of top rates), instead of 35 per cent, income tax liabilities would have been $78-billion higher in 2007. That's an increase of just 6.7 per cent.

The numbers suggest a truth that neither Republicans nor Democrats are willing to admit: Absent a dramatic cut in the services the U.S. federal government provides, most Americans, not just the rich, are paying too little in taxes.

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About the Author
Business and investing reporter and columnist

A business journalist since 1994, David Milstead began writing for The Globe and Mail in 2009. During eight years at the Rocky Mountain News in Denver, Colo., he individually or jointly won nine national awards from SABEW, the Society of American Business Editors and Writers. He has also worked at the Wall Street Journal. More

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