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Commentary: Why Income Tax Cuts Won't Lessen The Tax Bite

Government: COMMENTARY


`Tell me if you're undertaxed," Republican Vice-Presidential candidate Jack Kemp thunders at nearly every campaign stop. "If you are undertaxed, you should not vote for Bob Dole and Jack Kemp."

Of course, people always think they're paying too much. And given voter rage this year, the Internal Revenue Service is a tempting target for ambitious pols. That's why GOP hopefuls Dole and Kemp have made a $548 billion tax cut the centerpiece of their campaign. And it's why President Clinton is proposing a $100 billion income tax reduction of his own.

But are taxes really taking a bigger bite out of Americans' incomes than a generation ago? The answer is yes: All federal, state, and local taxes have risen from 25% of total economic output in 1965 to 31% today. But neither Dole nor Clinton is focusing on the real reasons why--and neither is taking on the big spending programs that would allow substantial tax relief.

TWO CULPRITS. Both candidates are dwelling on cuts in the personal income tax. Yet, the overall income tax burden has held remarkably steady since the Eisenhower Administration. Year after year, Washington has collected roughly 8% of the nation's economic output in the form of federal income taxes. The top tax rate has bounced around--dropping from 92% in Ike's day to 28% in 1988 and back to 39.6% today. But the federal income tax burden has barely budged. Even John F. Kennedy's and Ronald Reagan's tax cuts--canonized by supply-siders--hardly mattered. Receipts just bounced back up within a couple of years.

So what's behind the growing tax bite? Two culprits: the share of gross domestic product gobbled up by state and local taxes is up 30% since the 1960s, and payroll taxes--which fund Social Security and Medicare--have more than doubled as a share of the economy. Yet the candidates are mum about these politically sensitive levies. "We just debate federal income taxes because that's what we have always debated," says Urban Institute economist C. Eugene Steurele. "They're the most visible."

But the problem lies elsewhere. Thirty years ago, state and local taxes accounted for about 8.5% of GDP. Today, their share is nearly 11% and rising. One reason: the explosion in state and local government payrolls--up from 11.3 million in 1965 to 14 million today. By contrast, federal civilian employment is down nearly one-third over the same period.

Washington can't directly change, say, sales taxes in Baltimore. But with the feds looking to slash programs to balance their budget, there's little chance that the state and local tax burden will be eased. If anything, these taxes will continue to rise as local governments pick up services that both Clinton and Dole would have Washington jettison.

Yet it's the payroll tax that is--as Ross Perot might say--the giant sucking sound of the federal tax system. Washington now collects about as much from the payroll tax as it does from the personal income tax--30 years ago it collected half as much. In 1966, workers and employers shelled out $25 billion in payroll taxes. This year, they will pay more than $500 billion. For two-thirds of all workers, payroll taxes will exceed federal income taxes.

PROBLEMATIC VOWS. But Dole and Clinton don't dare mention the payroll tax. If they discuss Social Security and Medicare at all, it's to brag about how they're trying to save both from financial collapse. Paring the taxes that support them without slashing benefits or radically restructuring the programs would only hasten their demise. "They can't talk about cutting payroll taxes without talking about the integrity of the system," says University of Michigan economist Joel B. Slemrod.

And that's the problem with election-year vows to slash taxes. Without dramatic cuts in the kinds of services polls show voters still want from Washington, the federal income tax bite won't change much--as it hasn't for 30 years. Moreover, less federal spending portends hikes in state and local responsibilities--and taxes--while public resistance to reductions in Social Security means there won't be payroll tax cuts, either. Federal income tax reshuffling? Maybe. A more efficient government that gives taxpayers a feeling they are getting more for their money? Possibly. But more take-home pay? Not any time soon.By Howard GleckmanReturn to top

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