Fiscal Fitness

Felix Salmon posts this chart and waxes pessimistic about the sorry state of our tax code:


This chart should be ingrained in the mind of anybody who cares about fiscal policy. The main things to note:
    • Federal taxes are the lowest in 60 years, which gives you a pretty good idea of why America's long-term debt ratios are a big problem. If the taxes reverted to somewhere near their historical mean, the problem would be solved at a stroke.
    • Income taxes, in particular, both personal and corporate, are low and falling. That trend is not sustainable.
    • Employment taxes, by contrast--the regressive bit of the fiscal structure--are bearing a large and increasing share of the brunt. Any time that somebody starts complaining about how the poor don't pay income tax, point them to this chart. Income taxes are just one part of the pie, and everybody with a job pays employment taxes.
    • There aren't any wealth taxes, but the closest thing we've got--estate and gift taxes--have shrunk to zero, after contributing a non-negligible amount to the public fisc in earlier decades

My interpretation is rather different. We have an awkward tax structure, to be sure--if you were designing a code from scratch, you probably wouldn't set it up this way.  However, the payroll tax isn't particularly different from what the tax code looks like in many places in Europe--most people pay a broad, low rate, and then the carriage trade pays something more progressive. And it has grown over time largely in support of two social programs much beloved of progressives.  If those programs were smaller, the employment taxes would be, too.

To me, this chart shows how dependent the US federal tax take is on income taxes on higher earners, which tend to plummet precipitously in recessions, and are at historical lows simply because we're in an exceptionally bad recession.  Even the things that presumably worry progressives, like the lower revenues from corporate income taxes, are to some extent simply showing up elsewhere, as taxes on capital gains income.  But you can't complain about this, and also complain that tax revenues are so low right now; broadly, the most stable taxes are also the most regressive--they're the taxes on necessities.  In bad times, non-luxuries tend to get cut back and then so does your tax revenue.

This chart doesn't show the things that are really badly wrong with our tax code, like the massive inefficiency of all the deductions, and the punitive imputed marginal tax rates faced by poor workers who lose benefits as they gain a little income.  It leaves out the state and local governments, which tax and spend quite a lot on their own, with the majority of revenue coming from less regressive taxes like property, income, and corporate taxes.

And as far as I can tell, the only thing it tells us about fiscal policy is that tax revenues are really remarkably stable outside of recessions, even though we've had many different tax regimes over the years.  I suppose this should worry us, on the grounds that we won't be able to raise them much above 19% no matter what we do, but I find this argument pretty unpersuasive.