Low taxes, high health costs make US choices tough
Posted: Jul 27, 2011 4:41 AM PDT Updated: Jul 27, 2011 7:51 AM PDT
AP Economics Writer
WASHINGTON (AP) - Wealthy countries all over the world are dealing with debts and strained budgets as they mop up after the Great Recession and brace for the budget-busting retirement of the baby boomer generation.
But the United States is in a bigger fix than almost anyone else.
The U.S. federal debt was equal to 95 percent of the overall economy in the first three months of 2011, the fifth-highest on the Associated Press Global Economy Tracker, an analysis of economic and financial data from 30 of the biggest economies.
Every year that the U.S. government spends more than it collects in taxes, it records an annual budget deficit. The $14.3 trillion debt is the sum of all annual deficits and surpluses.
As U.S. policymakers argue over raising the federal borrowing limit and slashing debts, America is hobbled in ways the others are not. Tax collections are low by historical and international standards. Health care costs are astronomical - and still rising. The political system is gridlocked.
Those problems suggest the current impasse over raising the U.S. government's borrowing limit and cutting the deficit is a prelude to even more intense political combat.
"We as a society will either have to pay more for our government, accept less in government services and benefits, or both," says Douglas Elmendorf, director of the nonpartisan Congressional Budget Office. "For many people, none of those choices is appealing - but they cannot be avoided for very long."
This year's federal tax revenues are forecast to equal 14.4 percent of gross domestic product, a broad measure of economic output, according to the Office of Management and Budget.
That's the lowest share since 1950, long before Congress approved expensive programs such as Medicare. Tax collections have been reduced by the recession and by tax cuts enacted in 2001 and 2003. Among 29 countries ranked by the Organization for Economic Development and Cooperation, only Japan and Spain take in less tax revenue than the U.S. as a percentage of GDP.
When it comes to health care, the U.S. spends the equivalent of 17.4 percent of its GDP - by far the highest percentage among wealthy nations. The next highest is the Netherlands, where health care spending equals 12 percent of GDP. Among the 34 wealthy countries that belong to the OECD, health care spending averages less than 9.5 percent of GDP.
Political gridlock magnifies America's debt woes. Among the five biggest countries with a top AAA rating from the credit rating agency Moody's, the U.S. is the only one that hasn't come up with a serious plan to control government debt, says Moody's sovereign debt analyst, Steven Hess.
The U.S. is also the only one of the five that doesn't have a parliamentary system, which allows the ruling party or coalition to pass its agenda undeterred by the opposition. After taking control last year in Britain, for instance, a coalition led by the Conservative Party enacted an austerity program of tax hikes and spending cuts.
The U.S. has a divided government - Democrats control the White House and Republicans control half of Congress. The effort to narrow annual budget deficits and reduce the debt has bogged down in partisan wrangling.
The AP Global Economy Tracker found most of the wealthy nations of the world struggling with high debt:
- Japan, which is aging rapidly and has endured more than a decade of economic stagnation, had the heaviest debt burden at the end of the first quarter: 244 percent of GDP. Economists Kenneth Rogoff of Harvard University and Carmen Reinhart of the Peterson Institute for International Economics say anything above 90 percent starts to weigh down economic growth partly by pushing up interest rates. Greece's debt was at 161 percent, Italy's 113 percent, Thailand's 111 percent and the United States' 95 percent.
- Energy-producing Canada and Norway had some of the lowest debt burdens among wealthy nations at 32 and 31 percent, respectively. The Norwegian government's finances are so strong that it issues debt mainly to ensure it has a functioning debt market and turns a profit by investing the money it borrows, says Nikola Swann, an analyst at credit rating agency Standard & Poor's.
- Fast-growing developing countries have a big advantage over rich countries when it comes to containing debts. They have younger populations and aren't facing a baby boomer retirement crunch. Brazil (28 percent) and Mexico (27 percent) had light debt burdens relative to GDP.
The U.S. does have a couple of advantages over other rich countries that help it hang onto its top credit rating even as its debts rise and political squabbling over the federal borrowing limit raises the risk of default.
Thanks to a relatively high birth rate and an even higher rate of immigration, the U.S. is aging more slowly than other rich countries. It will have a higher percentage of people working over the next few decades than Europe and Japan. Those workers will pay taxes to finance health care and pension benefits for baby boomers.
Last year, the U.S. had four active workers for every retiree; by 2050, with baby boomers out of the labor force, it will have only two, according to an S&P report on the fiscal impact of aging populations on rich countries. But the countries that are aging fastest - Japan and Italy - will have it much worse. An even split between workers and retirees will put enormous strains on their pensions and health care budgets.
Another U.S. advantage: The federal government's debts are all in U.S. dollars, giving America control of its destiny compared with countries that have to pay back debts in another country's currency. The U.S., for instance, can print dollars, driving down the value of the currency. That would make it cheaper to pay back its debts. It would also boost the economy and tax revenue by making American products cheaper around the world and luring foreign investors who build plants and buy real estate.
Cash-strapped Greece, by contrast, is tethered to a common European currency, the euro, and can't take advantage of a weaker currency. It's even worse for countries that owe money in another currency. Their debt payments go up if a currency they have borrowed in rises in value against their own.
Foreigners also like to own dollars, especially in times of crisis. That allows the U.S. Treasury to issue debt at low interest rates.
The U.S. debt burden isn't quite as heavy as it looks at first, either. The federal debt - $14.3 trillion - includes money the government has borrowed from itself, mostly revenue from Social Security. Take out the borrowing between government agencies and Uncle Sam's net debt drops to $9.8 trillion, or about 64 percent of GDP.
Some debt analysts consider Australia a model for the way it has controlled its budget and prepared to pay for an aging society. Over the last two decades, Australia cut government spending, imposed a 10 percent tax on most goods and services and sold off state assets including airports and railways. It also prepared to cope with an aging society by requiring employers to contribute toward a pension fund.
As a result, the Australian government's debts were equal to 14 percent at the end of the first quarter, lowest on AP's Global Economy Tracker.
Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
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This fact may not sit well: Americans are under-taxed
Kevin G. Hall | McClatchy Newspapers
last updated: July 12, 2011 06:46:19 AM
WASHINGTON — Here's a dirty little secret that most Americans don't want to hear: We're under-taxed.
That may sound like heresy; nobody wants to pay more taxes. But by historical standards, what we pay in federal taxes — rich, poor and everyone in between — has gone down.
At a time when Washington is wrestling with how to end federal budget deficits and trim the national debt — huge questions that are expected to dominate the nation's politics through the 2012 elections — the fact that Americans are under-taxed compared with U.S. historic norms is central to the discussion.
This fact is separate from the politically charged questions of whether government spends too much, the fairness of who pays how much and what we value or don't in government spending. It's simply that our tax burden is low in the long view of U.S. history, and there are many ways to measure that central truth.
One way is to look at the trend of total federal revenues, 81 percent of which come from income and payroll taxes, 9 percent from corporate taxes, 3.5 percent from excise taxes and 6.5 percent from other sources, according to the Office of Management and Budget.
The post-World War II historic average is that federal revenues equal about 18 percent of the U.S. gross domestic product, the broadest measure of annual economic production. In the year 2000, after the longest economic expansion in U.S. history, federal revenues equaled almost 21 percent of the economy. As a result, Washington cut taxes in 2001 and 2003.
Revenues plunged to around 15 percent of the economy in 2009 and 2010 amid the deep financial crisis, and dipped even further this year, to 14.4 percent, the lowest level since 1950.
Meanwhile, federal spending soared this year to 25.3 percent of the GDP, the highest since 1945, the last year of World War II.
The difference between spending and revenue yielded the federal budget deficit: $1.6 trillion this year, the highest ever.
Don't like that tax measure? Here's another:
Americans across all income classes paid lower effective tax rates in 2007, the last year of complete Internal Revenue Service data, than they did in 2000. The effective tax rate is what people pay after all exemptions and deductions. This is according to the most recent comprehensive look at taxes by the nonpartisan Congressional Budget Office.
The highest 20 percent of tax filers saw their total average federal effective tax rate fall from 28 percent in 2000 to 25.1 percent in 2007, according to the CBO. That's considerably lower than the current top marginal tax rate of 35 percent, and lower than the 27.5 percent effective rate in 1979, the first year that CBO data are available.
For the wealthiest 1 percent of filers, the effective tax rate fell from 33 percent in 2000 to 29.5 percent in 2007. The poorest 20 percent of filers saw their effective rate fall from 6.4 percent to 4 percent.
That's not to say the wealthy don't pay taxes — the top 1 percent paid 39.5 percent of all U.S. income taxes in 2007 — but taxes take a smaller share of their wealth today than historic post-World War II norms.
"They've been coming down for everybody, but we're taking more income at the top. Even if their rates are lower than they used to be, you are applying those lower rates to much larger income," said Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center who spent 22 years as a CBO tax and income analyst. "The share of revenue being paid at the top end rises as their income rises too. But looking at the trend in effective rates, the rate has come down" for all income groups.
The CBO data are instructive because 2007 was the last year before the U.S. economy slipped into recession and nearly crashed. Comparing with 2000 is equally instructive because it's the final full year before the Bush-era tax cuts. They became the Obama tax cuts last December when he agreed to extend them until Dec. 31, 2012.
"It's hard to argue that we're overtaxed, and we're low by world standards," said David Wyss, the chief economist for the New York ratings agency Standard & Poor's.
Joseph Thorndike, a tax historian and visiting professor at the University of Virginia, concurred that Americans are "under-taxed relative to historical averages." However, he cautioned that what Americans pay in taxes can't be seen in isolation from what their government is spending.
"I think it's half of the discussion," he said. In his view, the high level of today's deficits and debt dictates two responses: Federal spending must fall and taxes must rise.
"The hard reality that people should be alerted to is these taxes are going up. They have fallen for most of us to varying degrees, but it is hard to imagine a scenario where they don't all go up."
Still doubtful?
There's yet another way to gauge the tax burden, using data from the Commerce Department's Bureau of Economic Analysis that go back to 1929. The bureau's data on personal income make it possible to guess roughly what portion of income goes to the taxman.
Under this calculation Americans on average saw 17.3 percent of their income go to federal taxes in 2009 and 2010. The last time the percentage was this low was 1975, and during the late 1960s.
If you exclude social insurance taxes on wages — for Medicare and Social Security — the share of taxes as a percentage of income drops to 9.4 percent in 2009 and 9.3 percent in 2010, the lowest since 1950.
The overall tax burden rose sharply in the late 1960s, as Americans began paying for Medicare, which was created in 1965. The burden rose again in 1983 with an increase in tax for Social Security. And tax revenue reached record levels in the late 1990s because the economy was booming and people moved up the tax ladder as they grew wealthier.
Whatever the facts, however, Americans think they're overtaxed, and polls show that they've thought that to be true for more than 50 years.
The American Enterprise Institute, a conservative research center, in April updated its report on "Public Opinion on Taxes: 1937 to Today."
Never have more than 3 percent of Americans thought their taxes were too low, the institute's poll research shows. And never have more than half of Americans considered their taxes "about right," although in 2003 that was the answer for exactly 50 percent of respondents to a Gallup poll.
For most of the period between 1980 and 2000, more than 60 percent of poll respondents thought their taxes were too high. This number dropped sharply beginning in 2003 — perhaps partly because tax rates also declined — falling to less than half of respondents for most years since then. It was 48 percent in a Gallup poll in April 2010.
Why do so many people think their taxes are too high, in good times and bad?
"I think people see a real disconnect between what they pay in and what they get out. We pay a lot for defense, yet we don't have a tangible sense of what we actually spend in Afghanistan or Iraq. Almost half of unemployment insurance recipients say they've never benefited from a government program," said Andrew Fieldhouse, an economist with the liberal Economic Policy Institute.
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Low taxes, high health costs make US choices tough
WASHINGTON (AP) — Wealthy countries all over the world are dealing with debts and strained budgets as they mop up after the Great Recession and brace for the budget-busting retirement of the baby boomer generation.
But the United States is in a bigger fix than almost anyone else.
The U.S. federal debt was equal to 95 percent of the overall economy in the first three months of 2011, the fifth-highest on the Associated Press Global Economy Tracker, an analysis of economic and financial data from 30 of the biggest economies.
Every year that the U.S. government spends more than it collects in taxes, it records an annual budget deficit. The $14.3 trillion debt is the sum of all annual deficits and surpluses.
As U.S. policymakers argue over raising the federal borrowing limit and slashing debts, America is hobbled in ways the others are not. Tax collections are low by historical and international standards. Health care costs are astronomical — and still rising. The political system is gridlocked.
Those problems suggest the current impasse over raising the U.S. government's borrowing limit and cutting the deficit is a prelude to even more intense political combat.
"We as a society will either have to pay more for our government, accept less in government services and benefits, or both," says Douglas Elmendorf, director of the nonpartisan Congressional Budget Office. "For many people, none of those choices is appealing — but they cannot be avoided for very long."
This year's federal tax revenues are forecast to equal 14.4 percent of gross domestic product, a broad measure of economic output, according to the Office of Management and Budget.
That's the lowest share since 1950, long before Congress approved expensive programs such as Medicare. Tax collections have been reduced by the recession and by tax cuts enacted in 2001 and 2003. Among 29 countries ranked by the Organization for Economic Development and Cooperation, only Japan and Spain take in less tax revenue than the U.S. as a percentage of GDP.
When it comes to health care, the U.S. spends the equivalent of 17.4 percent of its GDP — by far the highest percentage among wealthy nations. The next highest is the Netherlands, where health care spending equals 12 percent of GDP. Among the 34 wealthy countries that belong to the OECD, health care spending averages less than 9.5 percent of GDP.
Political gridlock magnifies America's debt woes. Among the five biggest countries with a top AAA rating from the credit rating agency Moody's, the U.S. is the only one that hasn't come up with a serious plan to control government debt, says Moody's sovereign debt analyst, Steven Hess.
The U.S. is also the only one of the five that doesn't have a parliamentary system, which allows the ruling party or coalition to pass its agenda undeterred by the opposition. After taking control last year in Britain, for instance, a coalition led by the Conservative Party enacted an austerity program of tax hikes and spending cuts.
The U.S. has a divided government — Democrats control the White House and Republicans control half of Congress. The effort to narrow annual budget deficits and reduce the debt has bogged down in partisan wrangling.
The AP Global Economy Tracker found most of the wealthy nations of the world struggling with high debt:
— Japan, which is aging rapidly and has endured more than a decade of economic stagnation, had the heaviest debt burden at the end of the first quarter: 244 percent of GDP. Economists Kenneth Rogoff of Harvard University and Carmen Reinhart of the Peterson Institute for International Economics say anything above 90 percent starts to weigh down economic growth partly by pushing up interest rates. Greece's debt was at 161 percent, Italy's 113 percent, Thailand's 111 percent and the United States' 95 percent.
— Energy-producing Canada and Norway had some of the lowest debt burdens among wealthy nations at 32 and 31 percent, respectively. The Norwegian government's finances are so strong that it issues debt mainly to ensure it has a functioning debt market and turns a profit by investing the money it borrows, says Nikola Swann, an analyst at credit rating agency Standard & Poor's.
— Fast-growing developing countries have a big advantage over rich countries when it comes to containing debts. They have younger populations and aren't facing a baby boomer retirement crunch. Brazil (28 percent) and Mexico (27 percent) had light debt burdens relative to GDP.
The U.S. does have a couple of advantages over other rich countries that help it hang onto its top credit rating even as its debts rise and political squabbling over the federal borrowing limit raises the risk of default.
Thanks to a relatively high birth rate and an even higher rate of immigration, the U.S. is aging more slowly than other rich countries. It will have a higher percentage of people working over the next few decades than Europe and Japan. Those workers will pay taxes to finance health care and pension benefits for baby boomers.
Last year, the U.S. had four active workers for every retiree; by 2050, with baby boomers out of the labor force, it will have only two, according to an S&P report on the fiscal impact of aging populations on rich countries. But the countries that are aging fastest — Japan and Italy — will have it much worse. An even split between workers and retirees will put enormous strains on their pensions and health care budgets.
Another U.S. advantage: The federal government's debts are all in U.S. dollars, giving America control of its destiny compared with countries that have to pay back debts in another country's currency. The U.S., for instance, can print dollars, driving down the value of the currency. That would make it cheaper to pay back its debts. It would also boost the economy and tax revenue by making American products cheaper around the world and luring foreign investors who build plants and buy real estate.
Cash-strapped Greece, by contrast, is tethered to a common European currency, the euro, and can't take advantage of a weaker currency. It's even worse for countries that owe money in another currency. Their debt payments go up if a currency they have borrowed in rises in value against their own.
Foreigners also like to own dollars, especially in times of crisis. That allows the U.S. Treasury to issue debt at low interest rates.
The U.S. debt burden isn't quite as heavy as it looks at first, either. The federal debt — $14.3 trillion — includes money the government has borrowed from itself, mostly revenue from Social Security. Take out the borrowing between government agencies and Uncle Sam's net debt drops to $9.8 trillion, or about 64 percent of GDP.
Some debt analysts consider Australia a model for the way it has controlled its budget and prepared to pay for an aging society. Over the last two decades, Australia cut government spending, imposed a 10 percent tax on most goods and services and sold off state assets including airports and railways. It also prepared to cope with an aging society by requiring employers to contribute toward a pension fund.
As a result, the Australian government's debts were equal to 14 percent at the end of the first quarter, lowest on AP's Global Economy Tracker.
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