Some people believe that government spends more when it has an affluent population to pay for it. In a recent NY Times column, David Leonhardt presents a slightly different perspective. Instead, he says that because we are a more affluent society, we want government to spend more. As he expresses it, “A tax increase is…a result of a society becoming richer.” As economic growth accelerates, so too does what people want from government. We want additional services; we want a transport infrastructure; we want medical care.
So far, how have we funded these wants?
- On the revenue side, federal taxes have totaled close to 18% of GDP.
- The individual income tax is our largest source of revenue.
- The second largest source is social insurance taxes (social security and Medicare) while corporate taxes are a distant third.
- During the 1950s and 1960s, the top marginal tax rate was actually 91%.
Where do we go from here? More tomorrow…
The Economic Lesson
There are three basic tax approaches: 1) Progressive taxation: the affluent pay a higher percent of their income than those who have less. 2) Regressive taxation: those who have less pay a higher percent of their income than those who have more. 3) Proportional taxation: everyone pays the same percent of their income. Our individual income tax system is progressive, sales taxes are regressive, and the Medicare tax is an example of a proportional tax.