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Reforming the tax system

By MARTIN WALKER, UPI Editor Emeritus   |   Aug. 5, 2013 at 12:14 AM   |   Comments

EDINBURGH, Scotland, Aug. 5 (UPI) -- Any suggestion that the United States is a heavily taxed country flies in face of the historical evidence.

Federal income and corporate taxes are lower than at any time since 1945. And federal revenues from social insurance payments are lower, as a proportion of gross domestic product, than at any time since 1950.

The Fiscal Year 2012 budget published by the Office for Management and Budget includes Historical Tables that date back to 1945 (Tables 2-3) that are very informative.

In 1952, corporate taxes took 6 percent of GDP. Today they take 2 percent. In 1952, individual income tax took 14 percent of GDP. Today it takes 8 percent. Social insurance payments in 1952 were 16 percent of GDP and today 14 percent.

So the federal tax take in 1952 from these three main areas of revenue were 35 percent of GDP. Today they amount to 24 percent.

Bring the comparisons forward to 1998. In that year, corporate taxes were 2.5 percent of GDP, income taxes were 12 percent and social insurance revenues were 19 percent. That made a total of 33.5 percent of GDP, nearly half as much again as today.

These comparisons are important because tax reform is again under discussion in Washington, with U.S. President Barack Obama proposing to cut the nominal rate of corporate tax. The broad principle is to do so by closing loopholes in a way that would make the reform revenue-neutral while also making it easier for U.S. corporations to bring back profits held from operations overseas.

There are two important cautions to note when assessing OMB data on tax revenues as a share of GDP. The first is that the Great Recession that began in 2007 started to reduce overall GDP, provoking lots of bankruptcies and biting sharply into federal revenues. The banks were making no profits and the big auto firms like General Motors were taking losses so they weren't contributing to the federal tax take.

The second cautionary factor is that the way GDP is measured is subject to change. Last week, the Bureau of Economic Analysis, which calculates the GDP, released new figures that showed the overall U.S. economy to be about 3 percent larger than it had officially been a few weeks ago.

How did this happen? They changed the way they measure GDP.

Essentially, they decided that much more of the time and effort and resources spent in research and development should be counted as investment, particularly in areas like the arts. So the money spent in developing a Hollywood movie, or the effort that an artist puts into writing and orchestrating a song, or that a novelist puts into writing a manuscript, should be measured as investment.

"A lot of this is about intangibles and intellectual property becoming a much more important component of GDP, our trade, our competiveness. And it's essential we get a better handle on it," says BEA Director Steve Landefeld.

In the past, research and development by business was treated as intermediate expenditure. Now it will be treated as investment. And research and development by non-profits and non-governmental organizations and by government were treated as consumption. Now they, too, will be treated as investment.

In an information economy, such research and development is becoming more and more important and so these new definitions can have a striking effect on calculations of overall GDP.

They can also, therefore, have an impact on tax revenues, depending how much of a tax deduction is allowed for such research. Since the investment will in the future pay off in terms of revenues when the books, movies, songs or computer programs are sold, it makes sense to tax the revenues then and to sallow tax breaks to encourage that researches that lead to innovation and new products.

But here is the core to the problem. The BEA is trying to reflect in GDP figures the way the economy now operates, with more and more services, more and more information and information technology, and more and more intellectual property. But the tax system is still essentially designed to raise revenues from the way the old industrial economy used to be, when products were goods that could be dropped on your foot. These days, valuable products can exist in cyberspace.

The BEA comes up with these revisions to the way it measures the economy every five years. Fifteen years ago they tried to capture the effect of computers that were becoming cheaper even as they became far more powerful in a way that also increased the statistical value of GDP. Many economists, particularly in Europe, were critical of this new "holistic" system as a kind of statistical sleight of hand.

Since the structure of our modern economy is changing so fundamentally with the Internet and globalization, self-publishing and digital distribution, it is logical to find ways to capture these changes in the way we measure the economy.

It would also be logical to reform the tax system in a way that reflects these changes, particularly a tax system as complex and convoluted as that in the United States. The Internal Revenue Service's own Taxpayer Advocate estimates that Americans spend 6 billion hours filing their tax returns at a total cost of $168 billion.

And that brings us back to the figures at the start of this column, and the share of GDP taken by the federal government for income and corporate taxes and social insurance.

Bottom line: The take is a lot less than it used to be.

Topics: Barack Obama
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