Lock Box Strategery

To the bemoaners of “tax cuts for the rich,” a new Congressional Budget Office report shatters some popular perceptions on which income groups have benefited the most from federal tax reform (see Table 1A).

The report finds that the average effective federal tax rate (this rate includes all federal taxes, not just income taxes) in 2005 was 20.5 percent of income, compared to the 1979-2005 average of 21.6 percent. Although all Americans are paying lower taxes today than they have historically, what’s really interesting is that the tax reduction for lower income quintiles is significantly greater than that of higher income quintiles. The numbers below (the computation idea was stolen from Greg Mankiw’s blog) demonstrate this fact. The first number is the 2005 effective tax rate. Numbers in parentheses are average tax rates from 1979-2005.

All households: 20.5 (21.6)

Lowest quintile: 4.3 (7.2)
Second quintile: 9.9 (13.2)
Middle quintile: 14.2 (17.1)
Fourth quintile: 17.4 (20.1)
Highest quintile: 25.5 (26.1)

Top 10 percent: 27.4 (27.6)
Top 5 percent: 28.9 (29.0)
Top 1 percent: 31.2 (31.7)

Amazing how that works out, isn’t it? The lowest income quintile has seen their federal income tax burden drop from 7.2 percent of their earnings to 4.3 percent, while the highest income quintile’s income tax burden has only dropped from 26.1 percent to 25.5 percent.

To me, the most important thing these numbers highlight is how effectively governments can hide tax burdens. So much emphasis is put on the income tax because it’s the only tax for which we have to spend hours filling out forms in order to comply with it each year. But what we forget about are the umpteen taxes on the things we use every day (our utilities, our gasoline, our food, our clothes, etc.), which we don’t even think about.

Too bad these are probably the lowest taxes Americans will see for a LONG time. Makes that whole "Roth IRA" thing sound like a good idea. …