Free Markets, Free People

US average marginal effective tax rate about 40%?

So tell me again why the government can’t seem to get along with what it already gets?

Taking into account all taxes on earnings and consumer spending—including federal, state and local income taxes, Social Security and Medicare payroll taxes, excise taxes, and state and local sales taxes—Edward Prescott has shown (especially in the Quarterly Review of the Federal Reserve Bank of Minneapolis, 2004) that the U.S. average marginal effective tax rate is around 40%. This means that if the average worker earns $100 from additional output, he will be able to consume only an additional $60.

And yet the prevailing political attitude seems to be that of France’s “leadership”, i.e. government, has first claim on all your earnings and if you protest you’re “greedy”.

Who’s greedy?

Speaking of France, California seems bound to duplicate its latest tax scheme:

Consider California, which just enacted higher rates of income and sales tax. The top California income-tax rate will be 13.3%, and the top sales-tax rate in some areas may rise as high as 10%. Combine these state taxes with a top combined federal rate of 44%, plus federal excise taxes, and the combined marginal tax rate for the highest California earners is likely to be around 60%—as high as in France, Germany and Italy.

Yet they wonder why people are fleeing the state.

Impact and implications?

Higher labor-income and consumption taxes also have consequences for entrepreneurship and risk-taking. A key factor driving U.S. economic growth has been the remarkable impact of entrepreneurs such as Bill Gates of Microsoft, Steve Jobs of Apple, Fred Smith of FedEx and others who took substantial risk to implement new ideas, directly and indirectly creating new economic sectors and millions of new jobs.

Entrepreneurship is much lower in Europe, suggesting that high tax rates and poorly designed regulation discourage new business creation. The Economist reports that between 1976 and 2007 only one continental European startup, Norway’s Renewable Energy Corporation, achieved a level of success comparable to that of Microsoft, Apple and other U.S. giants making the Financial Times Index of the world’s 500 largest companies.

Yet we continue to try to recreate Europe’s debacle here.

The economy now faces two serious risks: the risk of higher marginal tax rates that will depress the number of hours of work, and the risk of continuing policies such as Dodd-Frank, bailouts, and subsidies to specific industries and technologies that depress productivity growth by protecting inefficient producers and restricting the flow of resources to the most productive users.

If these two risks are realized, the U.S. will face a much more serious problem than a 2013 recession. It will face a permanent and growing decline in relative living standards.

These risks loom as the level of U.S. economic activity gradually moves closer to that of the 1930s, when for a decade during the Great Depression output per working-age person declined by nearly 25% relative to trend. The last two quarters of GDP growth—1.3% and 2.7%—have been below trend, which means the U.S. economy is continuing to sink relative to its historical trend.

But your political and financial lords and masters know best, don’t they?  Just ask them.  They continue down this road despite the fact the destination is in plain sight in Europe and it isn’t pretty.

Occam’s Razor states “entities should not be multiplied unnecessarily.” Said another way, the simplest explanation is usually the most likely explanation. In this case the simplest explanation is incompetence.  But is it really incompetence?  With the European example staring them right in the face it’s hard to believe anyone is that incompetent.  The conclusion to their policies have already been proven to be a disaster.

So one has to being to consider other possibilities when those who are pushing the policies seem oblivious to the obvious.

You have to begin to wonder if it is a problem of hubris.  I.e. “the only reason it hasn’t worked before is we weren’t in charge”.  We’ve seen that in any number of instances throughout history where discredited or obviously illogical ideological ideas were tried and they again failed.

Or you have to consider the words “by design”.  But then you’re stuck with trying to come up with a valid reason “why”.  Recreating Europe’s debacle, or Japans’s or, for heaven sake, our’s in the ’30s would seem to be something smart politicians would attempt to avoid.

But here we are.

Economic growth requires new ideas and new businesses, which in turn require a large group of talented young workers who are willing to take on the considerable risk of starting a business. This requires undoing the impediments that stand in the way of creating new economic activity—and increasing the after-tax returns to succeeding.

And yet, we see a government bent on erecting even more impediments via increased taxation, costly new laws and onerous regulation.

Isn’t it about time we demanded to know “why?”  More importantly, maybe we should ask whose side they’re on.


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14 Responses to US average marginal effective tax rate about 40%?

  • Recreating Europe’s debacle, or Japans’s or, for heaven sake, our’s in the ’30s would seem to be something smart politicians would attempt to avoid.
    >> Why exactly? If the goal is to solidify your power blocs and expand your authority, this policy is working just fine really. Do you really think this administration and senate has anything other than that as a goal?

  • Nobody sane wants to believe that the Obamic Decline is intentional.
    But nobody capable of any analytical thought can escape the facts.
    And nobody can deny that Cloward and Piven…and their fellow Collectivist monsters…deliberately designed a catastrophic failure plan for the United States, and THEN pushed it.

  • Here’s something to do when you’ve read People magazine and aren’t interested in the first rounds of American Idol:
    Add up your federal income tax, state income tax (if you have one), Social Security and Medicare taxes (double each), property taxes, and state and local sales taxes if possible (I use the IRS’s estimate from my Schedule A).  Divide by your gross income.  What did you get?
    I’ve been doing this for years and average about 36%.  Note that my gross income is $110,000-%125,000 a year, and that I live in “low-tax” Texas.
    I add the FICA taxes twice because the amount of the employer “contribution” would be available as compensation if the government didn’t skim it off the top.  And I have no good estimate for state and federal gasoline taxes each year, but, at (I think) 38.9 cents per gallon, it’s probably several hundred additional dollars.

  • Now what do you  have against duplicating European models?  The US has ranked about 20th, or below, in the past decade, regarding education and health services and infrastructure quality.   It would seem that perhaps we have a lot to learn from them.  It seems that all conservatives only care about increased taxes these days—without realizing that it’s because of this concentration that is the reason for these deficiencies.

    • The US has ranked about 20th, or below, in the past decade, regarding education and health services and infrastructure quality.

      Seriously, where do you find this oikophobic bullshit…???

    • Gee, Tad, perhaps because the European model is failing. Have you been paying attention to what’s happening in Greece, Spain, France, Italy, etc? No, of course not, that would go against your narrative, wouldn’t it.

      And I’m curious, are you ever going to respond to any of our comments or are you just content with dropping a bomb, looking like a fool and then scurrying away like the cockroach you are?

      Hello, Tad? Hello…..crickets.

      • Think of him as the succinct version of Erb’s voluminous stupid leftist naivety.

        • I liked the Washing Machine Charlie analogy best.  He limps on here with his brain unsynchronized, drops his little poo bombs of Collectivist BS, and limps home not to be seen again until the next “mission”.

          • True, to follow through with the analogies then, Erb would be Air Marshall “Bomber” Harris.  He carpet bombs with his philosophies.

    • Sweden has school vouchers…is it okay to follow them?
      European pensions funds have to actually be funded, unlike California’s and can’t assume 8% growth rates. Can we follow them?
      France pays doctors much lower salaries than here. Can we follow them? And since your party wants to try, you should be honest about the only way to cut costs in medicine will be labor costs.
      Libs pick what they like from Europe and not what they don’t like.

      • In general the presume the unicorn ponies will show up and make it all good.  Everyone will live in nice houses, will have lots of food, good health, plenty of cash and jobs they all love.  No one will be angry, or sad, and wars and crime will all be gone forever.    And all that stops this is evil rich Republicans, who keep voting against it.

  • Before the federal government ask for one dime from tax payers it should combat the waste and fraud in government programs. Just go to your local grocery and stand in line and see how some  Americans abuse the Food Stamp program. Or how the overseas junkets, paid for by American tax payers, take advantage of government when the same thing could have been accomplished state side. The government “invest” in high tech by the billions every year. Accountability is something long lost by the  US Goverent. It’s not taxes, it’s spending!