Retirement and Social Security Reform
Are Americans Overtaxed?
Yes. The return on our investment is too
low, and the cost to the economy is too high.
The Ripon Forum
April 18, 2007
By Ernest S. Christian
Are Americans overtaxed?
Yes we are, if the right measurement is used. It is solely
a matter of comparing the cost of taxes to the benefits derived
from government spending.
If the marginal benefit from an additional dollar of government
spending is not at least equal to the marginal cost to the
economy of providing the government with an additional dollar
of tax, we are overtaxed.
Other measures, such as whether most Americans have the financial
capacity to pay higher taxes or whether Americans are less
overtaxed than people in some other countries, are irrelevant
from the perspective of those of us who value a bigger economy
more than a bigger government.
In France, for example, total taxes are nearly 45 percent
of Gross Domestic Product (GDP), compared to 27 percent in
the United States. Americans have the financial capacity to
pay higher taxes too - but why would we want to be overtaxed
as much as the people in France? Their per capita GDP growth
rate is low (only about half as much as ours) and their unemployment
rate is astronomical.
If Americans were not already overtaxed, our GDP growth rates
and living standards would be much higher. The overtaxing
of Americans starts with the fact that each additional $1
of tax costs the private economy more than $1, whereas the
public benefit of an additional $1 of public spending is only
sometimes greater than $1 - and is often less than $1 or is
Recent works by Gregory Mankiw and Martin Feldstein at Harvard
lead ineluctably to the conclusion that the total cost to
the economy of an additional $1 of tax for the government
to spend can be as high as $5 and is almost always at least
$2. First, there is the $1 in tax paid, and then there is
an additional $1 or more in lost income and jobs that the
economy would have produced but - because of the tax - does
The most costly per dollar of revenue raised is a tax concentrated
solely on the income from capital. (In addition to the tax,
the deadweight economic loss is about $4.) The next most costly
is an across-the-board rate increase on the income from both
labor and capital. (In addition to the tax, the deadweight
economic loss is about $1.) But no matter whether the nominal
tax is primarily on capital income or on labor income, and
without regard to who files the tax return and pays the tax,
the real burden of the resulting deadweight economic loss
falls primarily on low and middle-income wage earners. Thus,
not only is the real level of taxation in America about twice
the amount reported in the budget, its overall impact tends
to be flat or regressive.
There is no universal formula for measuring exactly the public
benefit of each government activity and expenditure, but it
defies credulity even to suggest that each $1 of federal spending
buys enough "good" for enough people to justify
its $2 to $5 cost. According to Citizens Against Government
Waste, obvious pork barrel spending was at least $198 billion
over the last decade. In 2006 alone, the basket of suspect
spending earmarks was $29 billion. And a new evaluation study
at the Office of Management and Budget has concluded that
25 percent of all federal programs are "underperforming".
Sunshine is the key to controlling low-value spending and,
therefore, to limiting overtaxation. If each one of the three
trillion dollars in the federal budget were treated as the
last dollar spent (and the true costs of paying for it were
publicly acknowledged to be at least $2), it is certain that
a large amount of federal spending would be eliminated by
popular demand. On the discretionary side of the budget, when
$1 of government spending costs $2 or more, and when government
typically spends $3 to do a $1 job, the price tag for pork
and other low-value projects becomes ridiculous.
Entitlement spending includes vast amounts of high-cost, low-value
subsidies for the middle class and wealthy. This portion of
the budget is already on track to force future tax increases
of such unprecedented magnitude that - on a two-for-one basis
- the associated damage to the economy and living standards
will be catastrophic.
Thus, not only are Americans already overtaxed, mostly in
the form of highly predictable "collateral damage"
to the economy, the amount of that overtaxing is soon going
to be drastically increased.
Ernie Christian is a Washington tax lawyer who also served
in the Treasury Department. He is now the Executive Director
of the Center For Strategic Tax Reform and an Adjunct Fellow
at the Heritage Foundation.