Saturday, August 20, 2005

The Tax Base under the Current System

One of the important things to understand when comparing the FairTax to the current system, is how narrow the tax base for the current system is. The 'Tax Base' is the money over which we apply taxes. When your tax base is a small percentage of your GDP, that means that very little of the money in your economy is being taxed at all.

The IRS provides us with a good summary of the tax base for personal income and corporate income taxes for 2003 (the most recent year for which the data is available).

The Social Security administration provides us with data about the social security and medicare tax base in 2002 (the most recent data currently available). Since 2002 Social Insurance revenues according to the CBO where $700.8 billion, which makes the $713 billion revenues for Social Insurance about 1.7% higher, and since the Social Insurance revenue is almost entirely Social Security and Medicare payroll tax, and since the Social Security and Medicare tax rates have not shifted, I will scale up their 2002 numbers by 1.7% for a 2003 estimate.

Tax Base 2003 (billions of dollars)
SourceTaxable Income
Personal$4,200
Corporate$261.4
FICA$4271.4
Medicare$5186.7


So to put it simply, the tax base for our current system is around $4.5 trillion dollars ($4.2 trillion personal income and FICA + $0.261 trillion corporate net income).

By way of comparison the US GDP in 2003 was $10,971.2 billion. So the tax base in our economy is relatively narrow. $4.5 trillion is only about 41% of our GDP. So about 41% of our GDP is currently subject to taxation by federal income, corporate income, and payroll taxes.

1 Comments:

At 6:11 PM, Blogger Ian said...

Gov. Huckabee's advocacy of the FairTax is the single most important policy position in this election. Research findings explain why:

The FairTax rate of 23 percent on a total taxable consumption base of $11.244 trillion will generate $2.586 trillion dollars – $358 billion more than the taxes it replaces [BHKPT].

The FairTax has the broadest base and the lowest rate of any single-rate tax reform plan [THBP].

Real wages are 10.3 percent, 9.5 percent, and 9.2 percent higher in years 1, 10, and 25, respectively than would otherwise be the case [THBNP].

The economy as measured by GDP is 2.4 percent higher in the first year and 11.3 percent higher by the 10th year than it would otherwise be [ALM].

Consumption benefits [ALM]:

• Disposable personal income is higher than if the current tax system remains in place: 1.7 percent in year 1, 8.7 percent in year 5, and 11.8 percent in year 10.

• Consumption increases by 2.4 percent more in the first year, which grows to 11.7 percent more by the tenth year than it would be if the current system were to remain in place.

• The increase in consumption is fueled by the 1.7 percent increase in disposable (after-tax) personal income that accompanies the rise in incomes from capital and labor once the FairTax is enacted.

• By the 10th year, consumption increases by 11.7 percent over what it would be if the current tax system remained in place, and disposable income is up by 11.8 percent.

Over time, the FairTax benefits all income groups. Of 42 household types (classified by income, marital status, age), all have lower average remaining lifetime tax rates under the FairTax than they would experience under the current tax system [KR].

Implementing the FairTax at a 23 percent rate gives the poorest members of the generation born in 1990 a 13.5 percent improvement in economic well-being; their middle class and rich contemporaries experience a 5 percent and 2 percent improvement, respectively [JK].

Based on standard measures of tax burden, the FairTax is more progressive than the individual income tax, payroll tax, and the corporate income tax [THBPN].

Charitable giving increases by $2.1 billion (about 1 percent) in the first year over what it would be if the current system remained in place, by 2.4 percent in year 10, and by 5 percent in year 20 [THPDB].

On average, states could cut their sales tax rates by more than half, or 3.2 percentage points from 5.4 to 2.2 percent, if they conformed their state sales tax bases to the FairTax base [TBJ].

The FairTax provides the equivalent of a supercharged mortgage interest deduction, reducing the true cost of buying a home by 19 percent [WM].

ALERT: Kotlikoff refutes Bruce Bartlett's shabby critiques of the FairTax.

 

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