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Benchmarking taxpayer expectations

December 13, 2011
By Tom Wallace

The substance of Mr. Bryjak's op-ed piece entitled "Killing the American Dream" and Mr. Hoffman's apparent belief that rich Americans are paying their share of the nation's tax burden prompts the following commentary.

First, the tax rate for the most wealthy Americans has declined from 91 percent during the nation's great prosperity of the 1950s and 1960 to 70 percent in the 1970s and to the current low rate of 35 percent. (footnote 1) Thus, the current and supposedly "job-killing tax rate" for the wealthiest Americans is 35 percent. However, due to one of many tax loopholes, the top 25 hedge-fund managers in 2007, who earned an average of $892 million, rather than paying the statutory rate of 35 percent paid a 15 percent rate. (2) Note that the average tax rate paid by all earners that year was 12.68 percent.

Second, continuing the current, irrational low tax rate for the most wealthy Americans denies the country about $3.8 trillion of tax revenue over 10 years, a nice potential dent in the public debt. (3)

Third, from 1979 to 2006, households of the nation's wealthiest 1 percent had an average 256 percent increase in taxable income, from about an average of $4 million to $24.3 million, compared to a 137 percent increase for the remaining 99 percent of taxpayers. Data were adjusted for public and private benefits. (2)

I hope that Mr. Bryjak is correct that "the public is finally starting to pay attention to the widening unequal distribution of income and wealth gap in this country" because its continuation will bring further devastation to the middle-class economy. However, I wish to use an alternative approach to Mr. Bryjak's topic, which also illustrates and documents the killing of the American dream and also the realities of the equally shared prosperity of the 1950s and 1960s economy.

The question: What benchmarks are available that would enable a quantitative determination of a reasonable, justifiable tax expectation? To begin with, the current national rhetoric of "job-killing taxes" and, "I earned my money and I want to keep it all," is embarrassingly absurd, inaccurate and blatantly destructive. Rather than using vague, mindless labels to describe U.S. taxation, worldwide data provide quantitative benchmarks to evaluate the level and effectiveness of America's taxation in an increasing globally, competitive environment. Gross domestic product (GDP) measures market value of goods and services a nation produces. The Organization for Economic Co-operation and Development collects such global standard-of-living data.

Based on OECD data for 2010, the U.S. had the second largest budget deficit as a percentage of GDP among the world's 24 richest nations. It also had the second lowest tax revenue as a percent of GDP and was last for public social spending as a percentage of GDP. Fifty years ago, the ratio of U.S total taxes to GDP was the same as European nations, but since 1965, the ratio for European nations has increased; the U.S. ratio has remained constant and is now the lowest among the richest 22 nations. Accordingly, from 1965 to 2009, 21 nations devoted a larger percentage of national productivity to taxes and to public social spending then the U.S. (4) But were these sound investments or wasted money?

Data from the richest nations provide insights. (5) The U.S. ranked second highest in income inequality and the worst in health and social problems. The index of income inequality is the ratio of income (after taxes and benefits) of the richest 20 percent of the population relative to the poorest 20 percent.

Specific U.S. rankings include:

-Fourth lowest UNICEF index for child well being

-Second lowest percent of national income spent on foreign aid

-Last in infant deaths per 1,000 live births

-Fourth lowest life expectancy

-Highest adult obesity

-Sixth worst math and literacy scores for 15-year-olds

-Highest births per 1,000 women aged 15 to 19 years

-Highest homicides per million population

-First in the number of prisoners per 100,000 of population.

Importantly, nations with greater income equality consistently had higher rankings of citizen well being, as measured by health and social problems, across their total populations and for a diversity of problem categories.

Thus, it appears that since 1965, based on improving the living standards of average people, 20 other nations have made larger and wiser investments than the U.S. The most impressive conclusion is the high degree of correlation between increasing income inequality and increasing health and social problems. Or, greater income equality makes societies stronger. Perhaps there is something of importance in those textbook ideals of democracy called "social justice" and the "common good."

Interestingly, Japan and three Scandinavian countries had the smallest income inequality among their citizens and also ranked among six countries having the lowest level of health and social problems. Conversely, the U.S. had the second largest income inequality and the worst index for health and social problems. Note: Japan and Sweden, despite embracing very dissimilar political philosophies and economic methodologies, both achieved the highest rankings for income equality, for public-sector social expenditures and for fewer health and social problems. Sweden's system relied on a more extensive public services system supported by higher taxes, whereas Japan had greater equality of its market incomes or earnings before taxes and benefits, requiring very low public services expenditures. Using the uniformed American political rhetoric of the day, this is an unimaginable outcome of a socialistic, democratic nation and a major capitalistic, democratic nation both providing the same and highest living standards in the world for their people. It would appear that their common elements of success are practicing ethics, values and democratic ideals rather than America's prevailing and uncompromising political ideologies and methodology, and a culture of greedy materialism.

In contrast to the U.S., Japan and the Scandinavian countries do not measure national success and "exceptionalism" simply by corporate profits and CEO compensation, average income, GDP per capita or paying a college football coach $4 million a year. Their primary goals are founded on altruistic values, civility, compassion for all citizens and achieving the most important ideals of democracy - i.e., a fair and just society.

For decades, America has been unable to sort through basic socio-economic variables and adopt a rational model founded on social justice. The U.S. cultural profile includes the lowest tax rates and greatest income inequities since pre-Great Depression days and deficient expenditures for education, infrastructure, science, energy, innovation and prevention of social problems, investments that produced the prosperity of the post World War II years until the 1970s. Based on quantitative national performances among the most developed, prosperous nations, this U.S. profile is incapable of creating long-term social and economic stability. How did we get to this place? Examine the last 30 years of Washington politics!


Tom Wallace lives in Loon Lake and Virginia Beach, Va.



1. Robert B. Reich, "Aftershock"

2. Jacob S. Hacker and Paul Pierson, "Winner-Take-All Politics"

3. Ross Douthat, "The Method to Their Madness," The New York Times, July 11, 2011

4. Jeffrey D. Sachs, "The Price of Civilization"

5. Richard Wilkinson and Kate Pickett, "The Spirit Level: Why Greater Equality Makes Societies Stronger"



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