Surprise! Your Tax Burden Is Lighter than You Think

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Tax refundWith all the talk about taxes and whether we should lower them, you'd think that the citizens and corporations of the United States face steep tax rates. You'd be wrong, though. When it comes to taxes, things are not as they appear.

There are many ways to evaluate tax rates, and most of them point to our tax burden being rather low. For example, look at our average -- or effective -- tax rate, which you can arrive at by dividing total federal tax revenue by our nation's gross domestic product. For 2011, the average tax rate in the U.S. is an estimated 14.8%, according to the Congressional Budget Office. That's the lowest rate since 1950.

Here's another comparison point: The folks at Citizens for Tax Justice -- an organization advocating for fair taxation of the lower and middle classes -- determined that our total federal, state, and local taxes in 2009 amounted to 22.6% of our GDP. Among the 28 member nations in the Organization for Economic Cooperation and Development, that puts us in 26th place, with only Chile and Mexico having lower overall taxes.

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Tax rates in America haven't always been this low. Per CTJ data, our top marginal income tax rate has fallen from 94% in 1945 to 35% in 2011.

On the corporate side, recent tax rates are also at a record low. According to the Office of Management and Budget, the average corporate tax rate paid was just 1.3% in 2011, down from 7.2% in 1945.

Such low rates, in turn, are reflected in the national budget. According to data from the OECD, corporate taxes contribute much less to national revenue in America than in most other nations. That rate is about 25% lower than the OECD average.

The Problem With Low Taxes

As good as it sounds on paper, a low-tax environment has significant drawbacks. Countries need to take in tax revenue in order to keep governments and societies running. Because we pay less in taxes than most developed nations, we get less in return. Plenty of high-tax-rate countries, for example, cover health care for all citizens.

What we do pay goes to support various government agencies. They pay for roads and courts and police forces and schools and parks -- and much more. Without our Federal Aviation Administration and its regulations and air traffic control system, our skies would be chaotic. Without the Food and Drug Administration, our foods and medications would be far less safe.

In fact, you may be surprised at how little you actually pay for various public services:

  • If you think we spend too much on education, know that it eats up only 4.8% of your tax bill.
  • Energy and the environment take up just 2.1%.
  • Immigration, law enforcement, and justice: 2%.
  • Natural disaster responses? Just 0.4%.
  • As you might suspect, the big-ticket items are defense (26.3%) and health care (24.3%).

Support Sensible Changes

It's clear that our tax system isn't perfect. In fact, there are lots of problems. Our tax code is far too complex, at nearly four million words. Various loopholes and tax breaks cost us $1 trillion each year. Tax cheats cost us close to $400 billion annually.

As I see it, those who think we pay too much might want to encourage those in power to close more loopholes and chase down cheats. Meanwhile, consider that even slightly higher taxes might -- just might -- mean extra revenue being put to good use, paying down debt, improving our nation's infrastructure, and serving Americans in countless other ways.

Longtime Motley Fool contributor Selena Maranjian holds no position in any company mentioned.

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