Nearly 4 of 10 Americans Pay No Income Tax

Using data from a Tax Foundation report released last week, Mark Perry has graphed the percent of individual income tax returns with a zero or negative tax liability.

The report shows that of the 143 million individual tax returns filled in 2007, 46.6 million (almost 1/3 or 32.6 percent) had a zero or negative tax liability. This set a new record from the number of “non-payers.”

Click here to read Mark Perry’s analysis.

Where Do Your Tax Dollars Go?

This chart, from the Center for Budget and Policy Priorities (via Economix), illustrates where your (collective) tax dollars go:

The Cost of War

Bruce Bartlett, former Treasury Department economist and columnist for Forbes, reviews the high prices of war:

During World War II, federal revenues roughly tripled as a share of the gross domestic product (GDP) and the number of people paying income taxes expanded tenfold, from 3% of the population in 1939 to 30% by 1943. In 1940, a family of four needed close to $80,000 of income in today’s dollars before it paid any federal income taxes at all. By the war’s end, it saw its effective tax rate rise from 1.5% to 15.1%. (Today such a family only pays a federal income tax rate of about 6%.) But taxes weren’t the only way the war was paid for. Spending on nondefense programs was cut almost in half, from 8.1% of GDP in 1940 to 4.4% in 1945.

…In 1950 and 1951 Congress increased taxes by close to 4% of GDP to pay for the Korean War, even though the high World War II tax rates were still largely in effect. In 1968, a 10% surtax was imposed to pay for the Vietnam War, which raised revenue by about 1% of GDP. And there was conscription during both wars, which can be viewed as a kind of tax that was largely paid by the poor and middle class–young men from wealthy families largely escaped its effects through college deferments.

…According to the CRS, the marginal cost of continuing the Iraq and Afghanistan wars is about $11 billion per month, with no end in sight. Although there has been some decline in spending for the Iraq war, it has been more than offset by the rising cost of the war in Afghanistan. According to OMB director Peter Orszag, it costs about $1 million per year per soldier in the field, so adding 30,000 additional troops in Afghanistan, as President Obama is expected to do next week, will cost another $30 billion per year.

Anticipated Revenues From Marijuana Tax

CNN Money (HT: TaxProf Blog) has published a 50-state ranking of the potential tax revenues from legalizing and taxing marijuana. It is based on state-by-state marijuana consumption from Jeffrey Miron’s Budgetary Implications of Marijuana Prohibition:

Projected marijuana tax revenues*
State	Tax Revenue (in millions)
Alabama	8.9
Alaska	2.8
Arizona	13.0
Arkansas	6.7
California	105.4
Colorado	17.6
Connecticut	9.8
Delaware	2.4
District of Columbia	2.8
Florida	48.2
Georgia	19.3
Hawaii	4.0
Idaho	3.3
Illinois	31.6
Indiana	17.8
Iowa	6.2
Kansas	6.6
Kentucky	10.2
Louisiana	13.0
Maine	4.1
Maryland	13.9
Massachusetts	18.4
Michigan	32.4
Minnesota	14.3
Mississippi	6.6
Missouri	15.6
Montana	3.6
Nebraska	5.0
Nevada	7.9
New Hampshire	5.6
New Jersey	19.3
New Mexico	4.9
New York	65.5
North Carolina	20.6
North Dakota	1.6
Ohio	34.8
Oklahoma	8.3
Oregon	14.1
Pennsylvania	30.5
Rhode Island	4.6
South Carolina	9.1
South Dakota	2.0
Tennessee	12.2
Texas	46.6
Utah	4.7
Vermont	2.8
Virginia	20.9
Washington	22.0
West Virginia	4.1
Wisconsin	13.4
Wyoming	1.2
* Revenues based on state-by-state marijuana consumption, assuming pot were legalized. Source: Prof. Jeffrey Miron, “Budgetary Implications of Marijuana Prohibitions,” June 2005.

Miron concludes:

Revenue from taxation of marijuana sales would range from $2.4 billion per year if marijuana were taxed like ordinary consumer goods to $6.2 billion if it were taxed like alcohol or tobacco.

…Replacing marijuana prohibition with a system of legal regulation would save approximately $7.7 billion in government expenditures on prohibition enforcement — $2.4 billion at the federal level and $5.3 billion at the state and local levels.

A tax-induced brain drain

The Telegraph reports:

David Landau, 59, who made his fortune from the free advertising newspaper Loot, said he had left because Alistair Darling’s tax raid on non-domiciled individuals had “broken” their trust.

Mr Landau has returned to Italy because of the tax change, which came into force in April.

Under the new legislation, non-domiciles face a fixed annual levy of £30,000, regardless of income.

As news of Mr Landau’s departure came, a leading tax accountant provoked fresh fears of a tax-induced ‘brain drain’.

George Bull, head of tax at accountants Baker Tilly, warned that half of his US clients were considering leaving Britain because of the “double whammy” of the non-domicile levy and the new 50 per cent tax rate.

Mr Landau, who has served as a trustee of the National Gallery, a governor of the Courtauld Institute and on the board of the Art Fund since coming to Britain to be an Oxford don in 1983, said of the levy: “It really broke the trust of non-domiciles.

Trade-off: Environmentalism vs Homeownership

Edward L. Glaeser writes:

Environmentalists who are worried about global warming should pay attention to the congressional debate about extending the home buyers tax credit. Federal tax policies toward housing have long encouraged Americans to emit more carbon. President Obama could do the country, and the planet, a service by either refusing to sign the extension of the $8,000 credit or by insisting that it be accompanied by offsetting reductions in the home mortgage interest deduction.

According to the Residential Energy Consumption Survey, per person energy use in owner-occupied housing is 39 percent higher than in rental units. Energy use, per household member, is 49 percent higher in single-family detached houses than in apartments in buildings with more than five units. These differences reflect the strong connection between home size and energy use. The average four-bedroom house consumes 72 percent more electricity than the average two-bedroom house.

Yet the tax code encourages Americans to live in big, energy-guzzling homes, instead of thrifty apartments, and Congress seems intent on further unbalancing the federal budget to egg on home buyers. Congress appears ready to extend the home buyers tax credit, which is set to expire on Dec. 1, until the middle of 2010. A particularly bizarre feature of the proposed extension is that the credit would go not only to new home buyers, but also to current owners who decide to upgrade.

Click here to read the full article.

HT: Greg Mankiw

Russia: The consequence of taxing beer

From the Economist:

The average Russian already drinks 30 litres of hard liquor a year, six times the amount in the EU, while imbibing a modest 77 litres of beer, a little less than a typical European. Pushing up beer prices is far more likely to encourage drinkers to swallow even more vodka or dodgy but cheap home-made spirits than to convince them to give up booze altogether. Then again, it will give Russia’s huge—and largely locally owned—vodka industry reason to raise a glass.

So I pose the question: Is this an intended or unintended consequence? If they seek to curb alcohol consumption, Russia could tax all alcohol, not strictly beer. If they seek to curb substitutes to vodka, which is largely Russian-owned, then they have applied the correct policy.

How ‘temporary’ is fiscal stimulus?

Brill and Roden’s answer (via Greg Mankiw):

The “American Recovery and Reinvestment Act of 2009″ (ARRA), was rushed through Congress on the grounds that fast-acting and temporary measures were needed to counteract the recession….However, many of the provisions in the stimulus will not be temporary….All told, the Obama administration’s budget seeks to make at least 37% of ARRA’s spending and tax cuts permanent.

Like Milton Friedman said:

Nothing is so permanent as a temporary government program.

‘Why it is foolish to tax outsourced goods’

The Economic Logic blog looks into why it is foolish to tax outsourced goods:

Suppose the production of some good gets outsourced. Outraged, locals ask their government to retaliate, and one obvious policy is to impose a tax on the firms doing this outsourcing. Is this a good policy?

Subhayu Bandyopadhyay, Sugata Marjit and Vivekananda Mukherjee study the case in which this good is an input. Quite obviously, if the incriminated firms are particularly labor-intensive, this tax will actually hurt wages, which plays against the initial intentions. But they show this can hurt local wages even if the sector is capital-intensive if the outsourced good is an intermediate input. The reason is that the final good sector may be labor intensive and the higher costs of inputs hurts it.

Does this actually matter? I have a hard time coming up with a relevant example. One would need to find a country where a capital intensive intermediate good was outsourced and imported to be used in a labor-intensive sector. Usually, one outsources the production of labor-intensive goods, to import them for use in capital-intensive sectors, i.e., the exact opposite of what Bandyopahya, Marjit and Mukerjee have in mind. So why write this paper?

Where Do State and Local Governments Get Their Tax Revenue?

Pushing Possibilities has a new post on a graphic that shows where state and local governments get their tax revenue from (based on information compiled by The Tax Foundation):