Tax Analysts Blog

Trump, Tax Burdens, and Public Perceptions

Posted on Jul 10, 2017

A recent survey conducted by the National Dairy Council reveals that an alarming number of Americans think chocolate milk comes from brown cows. That has nothing, yet everything, to do with the coming tax reform effort on Capitol Hill.

The typical U.S. citizen is rightfully concerned about how much tax they pay, but their interest in the details of the tax code extends only so far. Broach the intricacies of transfer pricing and most people’s eyes immediately glaze over.  This presents a challenge to proponents of tax reform legislation.

Here’s another obstacle: Many of us have heard that the U.S. statutory corporate tax rate (35 percent) is the highest in the industrialized world. That statement is factually accurate. Yet it often fails to fuel enthusiasm for a corporate rate cut. Even those with a cursory knowledge of our tax system understand that a company’s effective rate often bears scant resemblance to the statutory rate. What’s a tax reformer to do?

One means of rallying support is to spin a fable of woe. If the masses can be convinced that they’re grossly overtaxed relative to everyone else in the world, the case for tax reform becomes easier – or at least the case for tax cuts. An example of this happened last month when President Trump spoke in Cedar Rapids, Iowa. As part of his pitch for tax reform, Trump claimed the United States was the highest-taxed country in the world.

The relevant excerpt appears below. A video of the full speech is available here. The discussion of taxes occurs near the 18-minute mark.

We are working really hard on massive tax cuts. It would be, if I get it the way I want it, the largest tax cut in the history of the United States of America. Because right now we are one of the highest-taxed nations in the world. Really, on a large-scale basis, we are the highest-taxed nation in the world. And we are going to get it down really low. OK, I don’t say the lowest, because there are a couple that are really down there, but that doesn’t mean you want to be there. But we’re going to have one of the lowest taxes from the highest tax. And we’re working hard on it, and I think it’s going to happen. [Emphasis added.]

Before I explain why Trump’s statement is erroneous, I should emphasize two points. First, this is a nonpartisan blog. We cover tax policy, not politics. I respond to Trump’s comments only when they’re relevant to taxation — for example, when he claimed that countries with value-added taxes are engaging in unfair trade practices.  

Second, I agree that tax reform can be a positive influence on our economy. There’s a rational case to be made for revenue-neutral tax reform. The guiding principle is to broaden the tax base while lowering marginal tax rates. And yes, that extends to lowering the statutory rate for corporations. This view is shared by many Democrats and Republicans. Even President Obama was onboard with a corporate rate cut. On several occasions he proposed reducing the corporate rate to 28 percent, with steeper discounts for the manufacturing sector and foreign profits.

You get the idea. The congressional debate should be less about whether to cut the corporate rate, and more about how far to lower it – and also how to safeguard against profit shifting. That said, the effort should not be premised on the false pretense that Americans are the highest-taxed people in the world. A nation’s statutory corporate rate should never be conflated with its overall tax burden. The former is no gauge of the latter.

There are recognized methods to quantify how heavily a nation is taxed. The most common is the ratio of tax to gross domestic product. It examines a country’s total tax revenue in relative proportion to the size of its economy. So, how heavily taxed are we? There’s a handy chart that answers this question. It’s based on OECD data as compiled by the Urban-Brookings Tax Policy Center. The revenue data includes individual income taxes, corporate income taxes, payroll taxes, and consumption taxes – such as retail sales taxes imposed at the state and local level. The chart lists the OECD countries in descending order, from higher tax burdens (Denmark) to lower (Mexico). In reality, the United States is among the least-taxed nations within the OECD.

Prefer a different yardstick? We can do that. An alternate measurement would examine taxes paid per capita. Economist Greg Mankiw attempted that a few years ago. His conclusions are slightly different, suggesting that the United States should be ranked closer to the middle of the pack among peer nations. You can read Mankiw’s commentary here.  Just to be clear, middle of the pack is still a long way from the top of the list.

Trump is not the first politician to say America is the highest-taxed nation in the world. I doubt he’ll be the last, for the simple reason that he’s saying what many people want to hear. Collectively, there’s something strangely comforting about being informed of one’s own mistreatment. Veracity is apparently beside the point.

True, tax reform should be guided by objective considerations. Subjective perceptions should have nothing to do with the process or the substance, except that would be a naïve outlook. We’re talking here about an inherently political calculus. If you’re an elected official trying to cobble together a viable tax bill in the House or the Senate, then voters’ perceptions – however imprecise – likely speak louder than the best OECD statistics. And along those same lines, if you’re a merchant trying to sell your inventory of chocolate milk, you probably don’t care one bit where the public thinks it comes from.


Read Comments (8)

Mike55Jul 10, 2017

Trump's statement is factually accurate, albeit highly misleading. Note that Trump did not claim the U.S. suffers high taxes relative to other DEVELOPED countries. Less developed countries are more numerous than you might expect, and tend to have low tax burdens.

This is a classic example of Trump taking rhetoric to the next level. Factually accurate statements within misleading context has always been a favored tool of politicians. But before there was usually at least some level of shame... Republicans were careful to squeeze the word "rate" somewhere into their high tax claims, and Democrats avoided making any comparative statements when railing against "tax loopholes for billionaires." But Trump doesn't care about any of that: so long as the statement is not literally false, he'll roll with it if it sounds good.

In a way this is probably what we all deserve. After years of willfully ignoring the various dirty tricks our favored politicians use to attract the less informed voters required to win any election, someone like Trump was bound to come along.

Edmund DantesJul 10, 2017

Wait, chocolate milk *doesn't* come from brown cows? Then where does it come from? Boy, the things you can learn in Tax Notes!

To be clear, the "alarming number" who chose brown cows was only 7%. We don't have the survey question, and so don't know what the other choices were. It's entirely plausible that some portion of 7% felt the chocolate milk question was so stupid that they marked the brown cow box as a joke.

Anyway. We may divide Americans into the 47% who pay zero income taxes and the 53% who do pay. Certainly those who pay nothing will not feel that they are overtaxed. But those who must pay for both themselves and the nonpayers may be forgiven for feeling that they are among the highest taxed people in the world. Certainly I pay more in taxes than I do for housing, for food, for transportation, for vacations, or for anything. Taxes are by far my number one expenditure every year. If others in the world are paying more than I do as a share of their income, I pity them. Hard to imagine.

Your total tax burden chart does not mention taxes on real property. Is that just an oversight? Or were property taxes really not included in the calculation? Because if they were not, the chart is meaningless to me. I pay more in real estate taxes than in income taxes in some years (my income can be variable).

Trump's claims about the American tax burden may have some defects, but it is far from the worst example of fake news today. It rings true to middle and upper middle class taxpayers. You know, the bright ones who do know where chocolate milk comes from. It is smart politics.

Travis RechJul 11, 2017

the 47% canard, eh?

I guess you forget that of the people who aren't paying income taxes because they are too poor many only pay nothing due to the EITC. I suppose, also you forget that they pay employment taxes, sales taxes, and gasoline taxes. If you add those together their tax burden is quite high relative to their meager income.

I don't mean to end your self-pity party, and I certainly wouldn't want to make light of your personal tax burden, but when you suggest that Americans who are too poor to pay income tax are moochers or freeloaders I feel compelled to correct this misinformation. But I also know you're a smart guy, and you are well aware of everything I said. So either you're doing some light trolling, or you are so subsumed by rhetoric that you are in a state of actual cognitive dissonance.

Edmund DantesJul 11, 2017

Yes, yes, of course the 47% are paying all sorts of taxes. I'd like know exactly how much of the total share of net taxes collected come from the 47%, a number that I have never seen. Perhaps you know it. But I do recognize that it's important, especially the FICA taxes.

Here's the thing--the article was about the perception that we are overtaxed, and the argument was made by the author that the perception was wrong. Like the belief that chocolate milk comes from brown cows. Just plain silly. I was suggesting that, for a large part of the population, the perception is not wrong, and not silly.

When I get my paycheck, I don't "feel" like I've paid taxes, even though I obviously have. When I buy stuff, I know I've paid a tax but it doesn't register emotionally, because it is relatively minor in the moment. Even if it adds up substantially in the course of a year.

I "feel" like I'm paying taxes when I file my Form 1040 and see just how big the government take is. Someone who is not paying income taxes won't be sharing that perception. I also feel like I'm paying taxes when I write those property tax checks for my home. That's when my perception of being overtaxed comes into play.

That's why I felt the 47-53 dichotomy was a valid point. I don't think this is cognitive dissonance.

Mike55Jul 12, 2017

A few important facts: ALL income levels (rich and poor alike) in the U.S. have a low tax burden relative to other developed countries; the U.S. tax system is the most progressive of any developed country; and the U.S. has high income inequality for a developed country.

And no, there is no way to change these facts (e.g., building in property taxes or locals sales tax or whatever doesn't change the answer). Pundits who tell you otherwise are being dishonest: do not fall into the trap of thinking brown cows make chocolate milk, even if someone "serious" like Paul Krugman or Larry Kudlow assures you it must be so.

Those on the left side of the political spectrum need to own their opinion that reducing inequality justifies soaking the rich. Pretending the rich do not pay their "fair share" due to "loopholes" is counter-productive. Those on the right need to own their opinion that economic growth generated by low taxes outweighs the inequality created by those same low taxes. Pretending taxes are not low, or that inequality is not high, is counter-productive. I think this would lead to better tax policy debate.

Edmund DantesJul 15, 2017

You are saying that, objectively speaking, we have a lower overall tax burden than other countries. Fine. But being "below average" does not mean our taxes are low. There's an implicit assumption there that "average" is "optimum," so anything below that average is low.

Subjectively speaking, I am not buying that. Most people have no idea what the taxes are in other countries, that is not how they are evaluating the suitability of their taxes. The fact that everyone in Denmark pays more than I do does not make me happier about my tax rates, even if I know the numbers. The article was about perception, and I continue to believe that a perception of being highly taxed in the USA is appropriate for a substantial portion of the taxpaying population.

Low taxes are not the source of inequality in the USA. The economy is. We are increasingly a nation of a few winners and lots of losers, as the best companies rise to the top. Tax policy has nothing directly to do with that. Technology does. Technology and taxes are only loosely related.

Most people would agree that the emergence of Microsoft and the creation of standards for PCs was a good thing for the economy. The fact that Microsoft minted so many millionaires in the process is a feature, not a bug, of capitalism. Using tax policy to try to alter this outcome (soaking the "rich") is a bad idea that wouldn't work anyway.

Mike55Jul 18, 2017

"Low" and "high" are relative terms, so a point of comparison is required. Trump, Bob, and the prior posts were using other countries as the comparison point, so that's what I was reacting to. You're arguing a different point of comparison would be more appropriate; I happen to agree, but that's a whole different debate.

Edmund DantesJul 22, 2017

Mike, you are absolutely right, I re-read the Trump quote and see that I veered a bit off the track.

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