U.S. Markets closed

Income taxes are lower than you think

Rick Newman
·Senior Columnist

You probably think your taxes are too damn high. Chances are, you’re wrong.

The nonpartisan Congressional Budget Office just published its annual analysis of Americans’ income and taxes, and guess what – American taxpayers continue to get a pretty good deal. The average household pays 19.3% of its income in federal taxes, CBO estimates. The middle 60% of families pay just 13%. Since temporary tax cuts expired in 2012 and taxes went up for most workers, those aren’t the lowest rates ever, but they’re close. Tax rates were about 6 percentage points higher in 1979 and relatively stable at those levels, until Congress began to cut them starting in the late 1990s.

This chart shows the changes over time, by income group:

Source: Congressional Budget Office
Source: Congressional Budget Office

This ought to be good news for consumers, except there are three problems that explain why Americans don’t feel cheery at all about the government they pay for.

First, while federal tax rates have fallen over time, incomes have stagnated. For middle-class earners, real income, adjusted for inflation, has risen just 16% since 1979, and it has actually fallen by a few percentage points since peaking in 2007. That means the typical middle-class family has experienced declining living standards during the last 7 years—which makes the sting of taxes much sharper.

This chart shows income trends since 1979, broken down by income group:

Source: Congressional Budget Office
Source: Congressional Budget Office

The only exception to this pernicious trend of flatlining incomes is among the top 1% of earners, whose incomes -- nobody will be surprised to hear -- have risen 174% since 1979. Tax increases that went into effect in 2013 actually impacted the wealthy more than everybody else, which is why even the 1% earn less than they did several years ago. But nobody needs to worry about America’s millionaires.

Second, while federal tax rates have stabilized at relatively low levels, state and local taxes have risen in many areas. Property taxes, often levied to fund schools, have become a particular burden, because education costs have outpaced inflation. 

The third reason Americans are glum about taxes is they don’t feel they’re getting their money’s worth from the government. The Republican sweep of Congress in this year’s midterm elections was an expression of frustration with the economic status quo and the Democrats most associated with it. Poll after poll shows satisfaction with government to be at or near record lows. In Gallup polls, nearly as many people say the government is the nation’s biggest problem as cite the economy. Most people would rather pay a little bit more for something that works well than pay rock-bottom prices for a lemon.

For all the drama tax policy generates, the United States remains one of the developed world’s more lightly taxed countries. In terms of all income taxes—state and local taxes and those levied to pay for Social Security and Medicare—the typical American worker pays about 31% of earnings in taxes. That’s below the average for 34 developed nations, which is about 36%.

When accounting for all taxes — including both income and sales tax — the U.S. has the fourth-lowest tax burden of 34 developed nations, according to the Organization for Economic Cooperation and Development. Denmark has the highest rate, at roughly 48%. Mexico is lowest, at about 22%.

The reason Washington can spend a lot of money with fairly low taxes is borrowing, which covers about 15% of all federal spending. But that's too high and can’t last forever. With the national debt at nearly $18 trillion — more than 100% of GDP — policymakers face a looming decision over whether to raise taxes or cut spending, or both, in order to lower the amount of U.S. debt to more manageable levels.

It’s a good bet tax increases of some kind are coming. For all the dissatisfaction today with underperforming government and the price we pay for it, these could seem like the glory days once tax rates go back up to the more sustainable levels of the past.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

Get the Latest Market Data and News with the Yahoo Finance App