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November 23, 2011 / jeremycarr

US Government Deficit- Part 2

In part 1, we identified the US government needs to collect more, spend less, and figure out how to handle the recession. In part 2, we will explore the tax receipts side of the equation.

To recap, in 2010 the US government took in $2.2tn, around 15% of GDP. We’ll first take a look at historical trends:

Corporate contributions have plummeted, payroll taxes have taken an increasing roll, and income tax has stayed relatively constant.

40% Individual Income Tax ($900bn)
Overall income tax contributions have remained relatively stable; increasing income disparity results in top income groups paying the lions share of income taxes.

Details: US total personal income was ~$10tn in 2010 (including capital gains), yielding an effective tax collection rate of ~10%.  Who’s paying income taxes?

The overall shift from 1980 compared to 2008 is obvious; top income groups are paying a great share of income taxes.

– Bottom 50% of earners-> 7% in 1980 compared to 3% in 2008
– Bottom 75% of earners-> 27% in 1980 compared to 14% in 2008

– Top 1% of earners-> 19% in 1980 compared to 38% in 2008
– Top 10% of earners-> 50% in 1980 70% in 2008

The key underlying driver here is of course the increasing income disparity in the US.  A future article will address income disparity; the useful question for our current context is: if the wealthiest americans are making more money, are they paying more taxes?


People in the top 20% income group are making ~45% of income and paying ~70% of income taxes.  For the adventurous, more data can be found here and here.

A word on capital gains-> Capital gains are currently a tiny 2.5% of income taxes. Short term capital gains mirror your income tax rate (up to 35%) while long term capital gains are 15%.  It could be argued that actual receipts on capital gains are too low, but we must keep in mind they are a tiny proportion of income taxes. Economists typically argue that low capital gains tax is good because it encourages investment, which promotes growth (Details: 72% of returns were for households with income below $100k, while 87% of overall gains went to filers above $100k. Confirming that capital gains largely go to top income brackets.  Though it’s important to note that capital gains rates are incredibly relevant to elderly as well since a larger portion of their income comes from investments rather than income).

40% Payroll Taxes ($850bn)
Payroll taxes have grown significantly over time.  The basics:
– As an employee, you see 5.6% of your wages allocated here for Social Security, Medicare and Medicaid.
– Behind the scenes, Americans pay a tax of 10.4% (paid by 4.2% employee and 6.2% employer) of wages up to an annual wage maximum of ~$100k for social security, plus a tax of 2.9% (half employee, half employer) for Medicare.

It’s impossible to consider social security, medicare, and medicaid without understanding both the cost and spend side of the equation; we will explore these programs more in depth in a later article.

10% Corporate Income ($200bn)

With historical context, corporations are paying the lowest amount of taxes in the past 70 years.  On paper, federal corporate taxes are listed at 35%. In practice, the effective tax rate is ~17% (with many corporations paying 0%).  How does this happen?

The reality on the ground is that accounting techniques are quite flexible in today’s global economy. The high US statutory rate drives APPARENT profits offshore, if not ACTUAL profits; ie lose money on US operations while making profits overseas.  82 of 275 (30%) fortune 500 companies that made a profit 2001-2003 paid 0 taxes or received a rebate. Some examples:

– 2009 BofA made $4.4bn in profits, and received a $1.8bn in tax refund.
– 2009 ExxonMobil made $19bn in profits, and paid no income tax.
– Over the past 5 yrs, GE made $26bn in profits, and received $4.1bn in tax refunds.
– Google saved more than $3bn from 2007-2009 using offshore subsidiaries.http://www.atr.org/u-s-corporate-taxes-low-a6208

There’s a lot of room for improvement here; if effective corporate taxes reached 5% GDP, the US government would collect ~$700bn.

10% Other ($200bn)
There’s a litany of other tax revenue sources to the government.
Excise– $67b. Gas, cigarettes, etc.  (A glimpse into history-> Excise tax on now legal alcoholic beverages paid about one-third of all federal taxes during the Great Depression.)
Customs/Tariffs– $25b. Import tax on foreign made goods.
Gift tax– first $1m is free, 35% above.
Estate tax– first $5m is free, 35% above. Only 2% of estates are subject to estate tax. Surviving spouses don’t pay federal estate tax.  Net estate taxes are in the $10’s of bns.

State Taxes
Other taxes you pay are more than likely state taxes. Sales tax, property tax, and state income tax all fund state government.

Lessons Learned
– Overall- US taxes are historically too low.
– Income Tax- Material increases in government income tax revenue would necessarily come from the top 25%. Conversely, raising taxes on the bottom 75% of earners would have a negligible effect on total tax receipts.
– Corporate Tax- Corporations are paying lower effective taxes than ever before.

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9 Comments

Leave a Comment
  1. Ghyrn / Nov 30 2011 11:44 pm

    Nice charts Jeremy, especially the third one. The growth in payroll taxes is interesting. Have the payroll tax rates gone up? or are people earning more money below $100k?

  2. Ted Durant / Mar 27 2012 6:58 pm

    It would help to spend some time explicitly contemplating the difference between marginal tax rates and effective rates. Also, the chart showing the percentage of revenue from the various sources is interesting, but it is important also to look at the absolute levels. You seem to have missed one of the biggest reasons for low effective corporate rates, which is the NOL carry forward. It might be a while before BAC pays any income tax. Finally, “taxes are historically too low” is a subjective statement of opinion. Even if they are low relative to where they’ve been over the last 60 years, your conclusion requires evidence that they have not been too high over that period.

    • jeremycarr / Apr 6 2012 4:32 am

      – Marginal vs effective tax rate-> Yes this distinction is a HUGE deal, and arguably effective taxes are all that really matter.
      – NOL carry forward-> Thanks for pointing this out; will look into the magnitude of its effect in the future. I suspect that offshore profit/transferring losses to the US (due to high marginal tax rate) is still the underlying driver.
      – A more accurate statement would be “the effective tax rate is much lower relative to gov spending, resulting in deficit”. Just a comment that tax rate must equal spending if we are to have a balanced budget, not prescriptive about whether that’s at an absolute level of 5% GDP or 20% GDP; historic guideline only indicates something of an equilibrium in the past.

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