SO WHAT IS THE CURRENT US TAX RATE?
President Donald Trump has continuously claimed that the US is the “highest taxed” nation in the world. But this doesn’t square with the facts. The US is actually on the lower end among economically advanced countries when it comes to tax rates. We pay an average of around 26 percent of GDP in taxes, while Europeans pay about 10 points more — and some of them, including the Nordics, pay about twice that. By this measure, the US has the fourth lowest tax burden of any economically advanced country, with only South Korea, Chile, and Mexico ranking lower.
The US personal income tax rate for a single person at the average wage with no children is 16th among industrialized countries, at 26%. If a couple has two children, that drops to 25th. Even for the highest-income earners, the US ranks in the middle of the pack, with the 18th-highest marginal statutory rate.
The US does have an extraordinarily high top corporate-tax rate…on paper. The statutory top corporate rate is among the highest in the world at 35%. But according to a report from the nonpartisan Congressional Budget Office, when taking out various deductions and tax breaks for corporations, the US ranked fourth among G-20 countries in effective corporate tax rates, amounting to about 14% of the pretax net income that they reported in their financial statements.
But according to the US Government Accountability Office, the government agency that provides auditing, evaluation, and investigative services for the United States Congress, in each year from 2006 to 2012, at least two-thirds of all active corporations had no federal income tax liability. Larger corporations were more likely to owe tax. Among large corporations (generally those with at least $10 million in assets) less than half—42.3% paid no federal income tax in 2012. Of those large corporations whose financial statements reported a profit, 19.5% paid no federal income tax that year. Reasons why even profitable corporations may have paid no federal tax in a given year include the use of tax deductions for losses carried forward from prior years and tax incentives, such as depreciation allowances that are more generous in the federal tax code than those allowed for financial accounting purposes.
TAX WAS ORIGINALLY LEVIED TO PAY FOR WAR
The origin of the income tax is generally cited as the passage of the 16th Amendment, passed by Congress on July 2, 1909, and ratified February 3, 1913. However it has earlier historical roots.
During the Civil War Congress passed the Revenue Act of 1861 which included a tax on personal incomes to help pay war expenses. It levied a 3% tax on incomes between $600 and $10,000 and a 5% tax on incomes of more than $10,000.
In 1867, heeding public opposition to the income tax, Congress cut the tax rate. In 1872 the income tax was repealed. From 1868 until 1913, 90% of all revenue came from taxes on liquor, beer, wine and tobacco.
However, in 1894 Congress enacted a flat rate Federal income tax, which was ruled unconstitutional the following year by the U.S. Supreme Court because it was a direct tax not apportioned according to the population of each state.
The 16th amendment, ratified in 1913 as WWI loomed, allowed the Federal government to tax the income of individuals without regard to the population of each State. That same year, the first Form 1040 appeared after Congress levied a 1% tax on net personal incomes above $3,000 with a 6% surtax on incomes of more than $500,000.
The Revenue Act of 1918 raised even greater sums for the WWI effort. It codified all existing tax laws and imposed a progressive income-tax rate structure of up to 77%. Taxes dropped sharply in the post-war years, down to 24% in 1929, and rose again during the Depression.
During World War II the Revenue Act of 1942 was hailed by President Roosevelt as “the greatest tax bill in American history.” It increased taxes and the number of Americans subject to the income tax. It also created deductions for medical and investment expenses. Congress passed the Current Tax Payment Act in 1943, which required employers to withhold taxes from employees’ wages and remit them quarterly.
WHEN TAX NO LONGER PAID FOR WAR
During the Vietnam War, the Revenue Act of 1964, also known as the Tax Reduction Act, was signed by President Lyndon Johnson. Individual income tax rates were cut across the board by approximately 20%. In addition to individual income tax cuts, the act slightly reduced corporate tax rates and introduced a minimum standard deduction.
Considering that taxes had originally been implemented in 1861 to pay for war, the reduction of taxes in the midst of the Vietnam War seems counter-productive to that goal. But by the mid-century, taxes were generally accepted to be used for much more than war expenses. In 1861 the top tax rate was 7%; by 1964 it was 77%.
Since 1964 the tax rates have been steadily decreasing to today’s top rate of 39.6%, in spite of the nine full-blown wars we have participated in since Vietnam.
SO HOW DO WE PAY FOR WAR NOW?
We don’t. We just keep increasing our debt.
During Ronald Reagan’s presidency in the 1980’s, there were four major tax cuts. The national debt nearly tripled, and the U.S. went from being the world’s largest creditor nation to the world’s largest debtor nation in under eight years.
In 1964 when we stopped paying for war, the US Federal debt was $47.7 million, which equaled 38.7% of GDP. By the end of 2016, the debt was $106.1 million, which equaled 77% of GDP.
THE GOP TAX OVERHAUL
The Republican led House and Senate have approved a massive plan to overhaul the tax code. It has cleared the bill’s final hurdle in Congress and been sent to President Trump to be signed into law. The measure passed the House 224 to 201 with unanimous Democratic opposition and ‘no’ votes from 12 GOP members. The House vote comes after the Senate approved an identical measure with all Democrats opposed and all Republicans present in support.
According to the Congressional Budget Office, enacting the GOP tax overhaul plan will add $1.7 trillion to the national debt over the next decade and increase the country’s debt-to-GDP ratio by 5.9 percentage points.
Sources:
“Brief History of IRS.” IRS. (Last Updated: Updated: 08/06/2017) https://www.irs.gov/about-irs/brief-history-of-irs
“Corporate Income Tax” GAO. Mar 17, 2016. http://www.gao.gov/products/GAO-16-363
“Cost Estimate for the Conference Agreement on H.R. 1.” Congressional Budget Office. https://www.cbo.gov/publication/53415
“Historical Highlights of the IRS.” IRS. Last Updated: 07/06/2016 https://www.irs.gov/newsroom/historical-highlights-of-the-irs
“History of the US Income Tax. ” Library of Congress. Business Reference Services. Compiled by Ellen Terrell. (February 2004 Last Updated: 07/07/2017) https://www.loc.gov/rr/business/hottopic/irs_history.html
“Table 7.1—Federal Debt at the End of Year: 1940–2022.” Historical Tables. Office of Management and Budget. https://www.whitehouse.gov/omb/historical-tables/
“Trump keeps making a misleading claim that the US is the ‘highest taxed nation in the world'” Business Insider. Oct. 10, 2017 http://www.businessinsider.com/is-us-highest-taxed-country-like-trump-claims-2017-9
