Harvard economist Greg Mankiw offered a unique observation following the release of the findings of a CBO study on the effective marginal tax rates that many Americans really pay on their incomes, after taking into account any government assistance they might receive and the income levels at which their welfare benefits phase out:
The Congressional Budget Office has a new study of effective federal marginal tax rates for low and moderate income workers (those below 450 percent of the poverty line). The study looks at the effects of income taxes, payroll taxes, and SNAP (the program formerly known as Food Stamps). The bottom line is that the average household now faces an effective marginal tax rate of 30 percent. In 2014, after various temporary tax provisions have expired and the newly passed health insurance subsidies go into effect, the average effective marginal tax rate will rise to 35 percent.
Here's a chart from the CBO's report illustrating Mankiw's observation for the effective marginal tax rates that applied in 2012:
Click to enlarge
In 2012, the federal government's poverty guidelines would put the federal poverty level (FPL) at $11,170 for a single person household, at $15,130 for a two-person household, $19,090 for a three person household and at $23,050 for a four-person household. These values would correspond to 100% of the federal poverty level indicated in the CBO's chart above.
But what can we do with Mankiw's observation? Mankiw offered the following idea:
What struck me is how close these marginal tax rates are to the marginal tax rates at the top of the income distribution. This means that we could repeal all these taxes and transfer programs, replace them with a flat tax along with a universal lump-sum grant, and achieve approximately the same overall degree of progressivity.
So what if we did just that? How might you fare under that kind of tax code? And how much money would the U.S. government collect if we adopted a flat income tax like the one that would seem to be in effect in practice, if not in law?
Let's find out! In our tool below, enter the flat tax income tax rate that you might like to see as well as the amount of a universal lump sum grant that might apply per person. Then enter the unique data that might apply for your household and we'll do the rest, calculating what the data you input would mean for you and for the U.S. Treasury's coffers, outputting the data in the tables below!...
|Flat Tax Data|
|Flat Income Tax Rate [%]|
|Value of One Individual Tax Credit [$]|
|Your Household's Tax Data|
|Your Household's Total Money Income|
|Number of Individuals Covered on Your Tax Return|
|How Well Would You Do With Your Flat Tax?|
|Your Basic Income Tax, Before Tax Credits|
|Your Tax Credits|
|Do You Owe, Or Will You Get a Refund?|
|Amount of Taxes You Owe, Or...|
|Amount of Your Refund|
|Your Effective Income Tax Rate and After Tax Income|
|Your Effective Income Tax Rate (After Tax Credits)|
|Your After Tax Income|
|How Well Would the Federal Government Do With Your Flat Tax?|
|Aggregate Total Money Income|
|Aggregate Income Taxes, Before Tax Credits|
|Aggregate Total Tax Credits|
|How Much Money Would the Government Collect?|
|Estimated Results||With Your Flat Tax in 2010||Actual Income Tax in 2010|
|Aggregate Income Taxes, After All Tax Credits|
|... as a Percent of 2010 GDP|
For estimating how much money the U.S. federal government would collect in income taxes, we based our calculations upon the distribution of income for U.S. households in 2010. As such, the amount of tax collections estimated in our tool represents how much income taxes that the federal government might collect following a deep recession in the United States.
Our default data of a 30% flat income tax rate and a universal lump sum grant (or tax credit) of $4,300 per person works out to nearly match the U.S. federal government's actual total tax collections in 2010, which represented about 6.2% of the nation's Gross Domestic Product (GDP) for that year.
To achieve the same results as 2010 with a 35% flat income tax rate, the amount of the individual tax credit must be increased to $5,500.
Putting those results into statistical context, since the end of World War 2, the federal government's tax collections from personal income taxes has steadily averaged 8.0% of GDP, with a standard deviation of 0.8% of GDP. Personal income tax collections of just 6.2% of GDP as were collected in 2010 fall more than two standard deviations below the federal government's average level of income tax collections, which is something we would only expect to have happened in just under 2 of the 65+ years since 1945.
What that means is that the the U.S. federal government's current income tax rates are more than capable of collecting higher amounts of taxes in a healthier economy. That many in the federal government are so actively pursuing higher effective marginal income tax rates today is really an indication that they don't believe the economy is going to be getting healthier any time soon!
Congressional Budget Office. Effective Marginal Tax Rates for Low- and Moderate-Income Workers. [PDF document]. November 2012.