Some Things I Know About Taxes, I Think

Some things I know about taxes, I think:

• In the USA, we paid 27.5 percent of GDP in taxes (including social security as a “tax”) in 2005, of which about two thirds (18 percent of GDP) was federal, the rest state and local. That is lower than any other comparable “first-world” country except Japan. The OECD average was 35.9 percent; Sweden was 50.4 percent. The federal tax number has hovered with remarkable stability around 18 percent of GDP for more than half a century.

• By some non-crazy Office of Management and Budget estimates, social security plus Medicare and Medicaid are due to eat up about 17.8 percent of GDP by 2040 (mostly medical; social security alone is not a huge problem). Interest on federal debt would grab another 12.1 percent. The OMB numbers project total government spending for 2040 at 39.5 percent—still well below Sweden, but enough (at current tax rates) to imply a deficit equal to 21.7 percent of GDP. A train wreck.
  

• As a percentage of cash income, the average taxpayer pays 21.3 percent of cash income in federal taxes—again, including social security. Contrary to widely held belief, the richest actually do pay most—the top one percent of earners pays at a rate of 30.8 percent (but that one percent also got 10.3 percent of all the Bush II tax cuts). The lowest earners actually receive money via the income tax, thanks to the earned income tax credit, but they pay taxes when you add in social security.


• It’s an axiom of economics that people respond to incentives. In fact, the modern history of taxation provides at best weak evidence for this proposition. People do seem to respond to highly publicized, high-saliency changes in the tax laws—quite a bit of money shuffled around as investors tried to avoid the impact of the Tax Reform Act of 1986. But in a great many cases, the incentive effect is non-existent, or so swamped by other effects as to be imperceptible. The supply-side mantra that we can tax-cut our way to wealth—appears on the all the evidence to be a fantasy.
  
  
• On tax evasion: reported net income as a percentage of true net income—for wages 99 percent, pensions 98 percent. Non-farm proprietors, 43 percent, farm proprietors, 28 percent. As a wage-earner and pensioner, I can get pretty steamed about these numbers. On the other hand, I have the police to collect my salary; they have to hustle for theirs.

--Source: Joel Slemrod and John Bakija, Taxing Ourselves (4th ed. 2008)

Fn.: In the same vein, see this but I do my best never to wear socks.