Who Should Celebrate, Who Should Mourn on Tax Day?

On Tax Day, April 15, protesters gathered on town squares and along city streets around the country. "BORN FREE, TAXED TO DEATH!" was the text of one popular sign. Who were these protesters? For which taxpayers does protest of the federal income tax, and other taxes, really make sense?

Not, it seems, for taxpayers in lower income brackets. According to IRS estimates, for the 2009 tax year, some 47 percent of all households will pay no federal income tax. Many of those will actually receive payments from the government under the Earned Income Tax Credit, and other tax credits.

In 2007, the most recent year for which full data are available, tax units in the lower half of the income distribution paid just 3 percent of all federal income taxes. (Tax units are not quite the same as households. One household may contain more than one tax unit, for example, spouses filing separately.) The top 1% of tax units paid 40% of all income taxes. The middle class, defined as tax units with $32,000 to $113,000 adjusted gross income, paid a surprisingly light 16% of the total.

Of course, the federal income tax is not the only tax, even if the most vigorous protests occur on the day income taxes are due. For lower income taxpayers, the payroll tax (Social Security and Medicare) is the most burdensome tax. Upper bracket taxpayers pay substantial sums in estate, capital gains, and corporate income taxes. State and local taxes are another burden that nearly everyone shares. The average rate for such taxes is 9.7 percent, varying widely from state to state.

Compared with the rest of the developed world, Americans are lightly taxed. Japan is the only high-income country with a lower average tax rate than the United States. Taxpayers in Denmark and Sweden are at the top of the list, forking over just under half of their total incomes to their governments.

So should we celebrate or mourn on tax day? We should celebrate the fact that our tax burdens are fairly low by world standards. However, that does not mean that all is well with the U.S. tax system. Our tax system is inefficient and overly complex. Whether we think the average tax burden should be lowered, raised, or left the same, the tax system calls out for reform. Proposed reforms will be the subject of future posts.

To download a free set of PowerPoint slides on the distribution of the U.S. tax burden, follow this link. If you find the slides useful in your economics courses, please post a comment and become a follower of this blog.