When President Reagan took office promising to reduce both government and taxes, he was appealing to one of the deepest and most enduring public sentiments.
As long as they have been collected, taxes have been considered a burden. Whatever the absolute weight of that burden, and whatever the public services received in return, taxpayers usually think that their taxes are too high.
Taxes involve sacrifices of one's private income and wealth and of the satisfaction that would come from spending or saving it. Emotions stirred by taxes have led to wars and revolutions. Their collection can involve deep intrusions into the lives of persons otherwise free to hold the forces of government at bay.
As Englishman Edmund Burke wrote, while contemplating the growing rebellion in the American colonies: "To tax and to please, no more than to love and to be wise, is not given to men."
In his Program for Economic Recovery announced two years ago, Reagan proclaimed: "The goal of this administration is to nurture the strength and vitality of the American people by reducing the burdensome, intrusive role of the federal government, by lowering tax rates and cutting spending and by providing incentives for individuals to work, to save and to invest."
The huge, multi-year tax cuts pushed through Congress in 1981 are shaping the president's economic policy and, almost certainly, the political verdict on that policy. Yet, two years later, the basic questions remain:
Are taxes too high? Have high and rising tax burdens sapped the vitality of the U.S. economy?
Compared with taxpayers in most other nations, those in the United States are not asked to pay an inordinate share of their incomes in taxes. One comparison, done by the Tax Foundation before the Reagan round of tax cuts, ranked the United States in 1978--with taxes equal to 30.2 percent of its gross domestic product--17th among 23 such nations. (Gross domestic product, unlike gross national product, does not include the value of goods produced by U.S. firms' operations abroad.)
Tax burdens ranged from 53.5 percent of GDP in Sweden to 22.5 percent in Turkey. Of the major industrial nations, only Japan had a lower tax burden than the United States, 24.1 percent. Percentages in West Germany and France were in the upper 30s, and the United Kingdom was at 34.5 percent.
In the most fundamental sense, it is difficult to say that U.S. tax burdens were too high in the late 1970s, because revenues they produced barely covered the cost of government.
That is the reference point for most public-finance economists when they assess the nation's complex system of income, payroll, excise, sales and other taxes. The basic purpose of taxes is to provide revenue, the necessary amount of which is determined by spending.
The Reagan administration, for all of its efforts to cut non-defense spending and shrink government, has gradually come to agree with this view of how high total taxes must be. In the fiscal 1984 budget, the president proposed a series of tax increases, in addition to those passed last year with his backing, to bring federal revenues more closely in line with spending when the economy has recovered from the recession.
Initially, Reagan sought to cut personal and corporate income taxes both to provide incentives to work, save and invest and to put pressure on Congress to reduce federal spending. Many conservatives believe that the only way to control spending is to hold down taxes and that the only way to reduce spending is to cut taxes.
But when the president faced a choice last year in preparing the 1983 budget, he opted for some small tax increases and higher budget deficits rather than reductions in planned defense spending increases. In the 1984 budget, which is based on a far less rosy view of the economic future, Reagan wants to reduce deficits by a combination of spending cuts and much larger tax increases.
The president's new goal is to have the federal government take in revenues equal to about 21 1/2 percent of the gross national product--still too little to balance the budget even when unemployment is low. But administration officials hint that more spending cuts, and probably more taxes, will be proposed later.
So far in the 1980s, federal receipts have averaged 20.7 percent of GNP, up only 4.3 percentage points from the level that prevailed in the 1940s.
While far more attention and comment is focused on federal taxes, state and local tax burdens have nearly doubled, and compared with GNP, the 5.2 percentage point increase is larger than that at the federal level. In the 1940s, state and local receipts, excluding federal grants, averaged 6.2 percent of GNP. In the 1980s, they have been 11.4 percent.
Total government receipts have risen steadily over four decades from 20.6 percent of GNP in 1942 to 31.7 percent in 1982.
To decide whether the tax burden involved in that increase is "too high," one needs to look at what remains for the private sector after the government has taken its bite. The figures are impressive.
Subtracting taxes from personal incomes leaves what economists call disposable personal income--what people have left to spend as they wish. Adjusting those figures for inflation and for population growth allows a comparison over time of changes in a measure called real disposable personal income per capita.
Back in the 1940s, real disposable personal income averaged $4,709 per person in terms of 1982 dollars. The average for the first three years of this decade was $9,363, a virtual doubling. (To be sure, a portion of the increase is due to the fact that a larger share of the population works now.)
In other words, while government at all levels was taking an additional 9.4 percent of GNP either to spend directly for goods and services or to rechannel to other individuals in the form of transfer payments, the portion of national income people had to spend or save was doubling.
Yet another way of assessing tax burdens is by studying their impact on the efficiency of the nation's economy. Every tax probably affects private choices to some degree and therefore has the potential to make the economy work less well than if the tax were not imposed at all. That is why many economists stress that taxes should, insofar as possible, be designed to have a "neutral" effect on private decisions, particularly investment decisions.
A number of economists--foremost among them Martin S. Feldstein, chairman of the president's Council of Economic Advisers--have done studies showing how the U.S. tax system has interacted with inflation to distort investment decisions, and in some cases, to impose tax burdens on profits that, in real terms, were actually losses.
The bulk of recent work on taxes, in fact, has been directed toward the issue of the economic efficiency of the tax code, rather than the issues of fairness and equity that dominated much of the work in earlier years. Partly as a result of such studies, there are now a number of proposals that have been made by economists and politicians to eliminate taxation of the income from capital.
Certainly, taxing the flow of income from investments reduces the incentive to save and invest. But cutting those taxes--whether by exempting 60 percent of all capital gains from tax, or by increasing tax write-offs for business investments in plants and equipment as was done in 1981--may leave problems, too, when they reduce government revenues.
Feldstein, as concerned as he is about investment incentives, also argues that large budget deficits increase the level of interest rates relative to inflation. Since those so-called real interest rates are one of the key determinants of business investment, cutting taxes to stimulate saving and investment may produce an off-setting effect if the budget deficit and interest rates go up as a result.
Also, the rush to lower business taxes in a fashion tied directly to new investment led to adoption of a method that benefited some industries far more than others. After some of the tax breaks were rolled back last year, some companies actually found themselves with higher tax burdens.
The administration, of course, initially maintained that the most important tax change needed was a lowering of marginal personal income tax rates. The supply-side economists in the administration said that many of the nation's economic problems were due to sagging savings rates and the disincentives to work, save and invest associated with high marginal tax rates.
Last year the top marginal rate was lowered to 50 percent from 70 percent, and other marginal rates are being lowered by nearly one-fourth, a process that will be complete in 1984. But few U.S. taxpayers paid such high rates, and the average tax paid has been far smaller than the level of the marginal rates seem to imply.
In 1980, for instance, Americans who filed tax returns on which some tax was due owed taxes equal to only 16 percent of their adjusted gross income. The actual income tax burden was even lower than that because some income--such as the 60 percent of capital gains excluded from tax, a portion of corporate dividends, and interest from tax-free state and municipal government securities--are not included in adjusted gross income.
Given all the attention the administration paid to the marginal rate question, there is a remarkable admission in the 1984 budget. In support of the claim that a major cause of the current imbalance between spending and receipts has been the rapid growth of various income support programs, such as Social Security, food stamps and the like, the budget notes, "The growth of payroll taxes to finance the social contract between 1963 and 1981 accounted for the entire increase in the federal tax burden over the past two decades."
As the public's total tax burden has grown over the last several decades, some types of taxes have grown more than others, with the Social Security payroll tax growing most of all at the federal level. Yet, because of the earmarked use of that tax, there have been few complaints that it is too high. For a great many taxpayers, it is now more of a burden than is the income tax.
That, in a sense, brings the question of whether taxes are too high full circle. Taxes are not too high if taxpayers are in favor of what the tax revenue buys. If they are not, then any tax is too high.
In economic terms, international comparisons do not suggest that the U.S. tax burden is so high as to be debilitating.
A tax system, public finance experts say, must balance fairness, simplicity and efficiency. And every one of them would agree that major improvements could be made in the U.S. tax structure. But in the end, whether taxes are too high will always be a matter of how much revenue the public and its representatives have decided the government must have to spend.