Boston University economists Lawrence J. Kotlikoff and David Rapson have a study for The National Bureau of Economic Research that asserts that our average marginal tax rate, when all taxes are included, is about 40 percent.
Regardless of income!
Dallas Morning News business columnist Scott Burns points out that’s not the average tax rate, but the average marginal rate (i.e., on each additional dollar earned).
And so Burns says, “What we have is a bumpy flat tax.”
To prove his point, he uses the example of a self-employed person with annual income above $31,850 because that person has to pay both the 15.3 Social Security and Medicare payroll tax and a 25 percent federal income tax, for a total of 40.3 percent. And that doesn’t include sales taxes, state income taxes, property taxes and a host of other taxes.
But Burns could have just as easily used an employed worker rather than a self-employed one, because that worker pays the same taxes—even if he doesn’t know it, and most don’t.
When an employer decides to take on a new worker, he has to include the cost of half of the payroll tax in his calculations. While the government makes the employer write the check for the taxes, economists believe that money really comes from the employee—just as it comes from the self-employed worker.
Burns concludes, based on the Kotlikoff-Rapson study, “The average marginal tax rate on incomes between $20,000 and $50,000 is 40.3 percent, the median tax rate is 41.8 percent, and the standard deviation of all those rates is 5.3 percentage points. . . . We have a de facto flat tax, with bumps and potholes.”
It’s an interesting argument, though we’re not entirely convinced that what we have is a “bumpy flat tax.” But we are convinced that both taxpayers and the economy would be a lot better off if we had a real flat tax (or one with two levels, as Rep. Paul Ryan, Wisconsin Republican, recently proposed).
It would make taxpayers’ lives a lot easier. And it would end politicians’ ability to manipulate the tax code to curry favor with certain voters.
Oh, come to think of it, maybe that’s the reason why we don’t have a flat tax.