If you could buy a Toyota Camry or an Apple iPad for 20 percent off the regular price, you'd probably consider it a great deal. Savvy buyers haggle for much smaller discounts on quality merchandise.
Few consumers have noticed, but the federal government has essentially been on sale, with taxpayers paying about 20 percent less than they used to for what Washington does. Yet unlike satisfied customers, taxpayers are increasingly fed up with the government they finance. This could make them downright surly when the price of government goes back up, which is a near certainty over the next few years.
The price we pay for government, of course, is taxes, and despite what inflammatory political rhetoric might suggest, they are at modern lows. A new report published by the Congressional Budget Office shows that the average household paid 17.4 percent of its income to the federal government in the form of taxes in 2009, the latest data available. Today's rate is probably comparable.
That's the lowest tax burden on record. It's about 20 percent lower than the federal tax burden in 1979, when the CBO's data series began. It's lower than the tax burden all throughout the 1980s, when Ronald Reagan was president. The federal tax bite drifted even higher in the 1990s (when the economy, notably, was booming), then plunged in the 2000s following across-the-board income-tax cuts in 2001 and 2003 and more targeted cuts meant to ease the sting of the recession, starting in 2008.
Government services, instead of falling in proportion to the amount of revenue Washington takes in, have instead expanded. The military budget ballooned after the 2001 terror attacks, and is still far higher, in real terms, that it was during the Cold War. During the recession, Washington spent more on jobs programs and aid for the unemployed. Spending on Medicare and Social Security has been rising consistently.
Over the last few years, in fact, taxpayers have been getting the best deal in modern times, in terms of what they get from the government, and what they pay for it. Critics of government tend to focus on swelling regulatory bureaucracies or wayward projects like the loans that went to bankrupt energy company Solyndra, but the vast majority of federal spending goes toward defense or subsidies for the elderly, poor, or disabled. Even if taxpayers who fund those programs don't benefit directly from them, somebody in their family probably does.
The CBO report and others like it provide lots of fodder for activists all along the political spectrum. The wealthiest earners have enjoyed the biggest gains in income, for instance, which might fuel calls for higher taxes on the wealthy. Yet the wealthy also pay a disproportionately larger share of all taxes, while some low-income families pay no taxes at all. That might justify broadening the tax base, so everybody at least pays something.
The bigger point, however, is that the federal tax burden has been falling at every income level. This matters now because within a few months, we will embark on a huge battle over the future of tax and spending policy in Washington. Something dramatic will have to change. The mismatch between falling tax revenue and ballooning spending has been financed by borrowed money, which means that 20 percent discount on government services needs to be paid back somehow.
Pushing federal taxes back up to historical averages seems unlikely, since we've gotten rather used to lower taxes, plus it's an economically vulnerable time and many families couldn't absorb such a tax hike. Yet Washington can't keep spending money it doesn't have, and cutbacks will come out of somebody's pocket. For as much as we dislike government today, it's been quite a bargain. That's going to seem more and more evident as the cost goes back up.
Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.
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