Fiscal illusion is a economic term for when the public has systematic misconceptions about the size of government, because of information costs. The error can go both ways, Anthony Downs believed it would lead voters to underestimate the benefits of government, whereas Amilcare Puviani predicted that taxes would be hidden and the burden of taxation underestimated.
For Sweden, more than half of all taxes are hidden (payroll taxes, VAT), and a study I conducted with Björn Wallace showed on a sample of about 1000 people that Swedes underestimate the tax burden on a typical worker by about 1 third (they believed 40% whereas at the time it was about 63%).
FrumForum conducted a survey of 57 tea party protesters, and asked them about the tax burden.
I would have guessed they would strongly over-estimate taxes, given their ideological bias. In fact the tea party people have a pretty good handle on taxes.
1. They were asked:
"What Does the Typical Family Earning $50KPay In Taxes?"
The mean answer was $12.710., or 25.4%.
Fromfurom and former conservative Bruce Bartlett wrongly claim that this figure is incorrect. In fact it is very close to the likely truth.
Fromforum absurdly claims that a typical family earning $50.000 only pays 15% in taxes, because they are in the 15% federal tax bracket. This claim is wrong on several levels. First of all, the questions asks about how much you pay, the average tax ("how much do you typically pay"), not the marginal tax ("how much of your income increase would you pay in taxes"). Second, they ask generally about all taxes, not just the federal income tax.
We are at a point where the biggest tax burden on low and middle income American's are payroll taxes, no longer the federal income tax. This is particularly if you include, and of course you must include, the half of the payroll tax that is nominally "paid" by the firm, but whose burden is on the worker. Lastly Fromforum may be interested to learn that there is such a thing called state and local taxes.
According to the IRS, the average amount of taxes ultimately paid by households earning 40-50.000 was 6.7% of adjusted gross income, and for households earning 50-75.000 8.1%. Let us say 7%. (Bartlett claims it is 1.7%, which I find too low).
In addition to this, someone earning 50.000 will directly pay 7.65% in Social Security and Medicare taxes, and indirectly another 7.65% in Social Security and Medicare taxes "paid" by the employer. It is unclear if Bartlett takes into account the payroll taxes nominally on the employer whose incidence is on the worker. He should.
Lastly we have state and local taxes, which Bartlett completely ignores, even though the question was on "taxes", not "federal taxes".
It is very hard to know what a "typical" American pays in state and local taxes. According to the Census Bureau. in 2008 state and local individual income and sales taxes were $636 billion dollars. Since these are mostly flat, and since pre-tax labor income in 2008 was about 10 trillion dollars, these taxes amount to another 6% on someone making 50.000.
The total taxes are (3500+3830+3830+3000)/(50000+3830)=26.3%
This is very close to the estimate made by Tea Party protesters, Bruce Bartlett is wrong is saying that the Tea Partiers don't know how much taxes they pay. It is he, the intellectual, who underestimates taxes and underestimates the Tea Partiers.
The public is generally not very good at estimating statistics. For example according to Slemrod and Bakijas 2004 textbook while 2% of millionaires do not pay any taxes, the American public had estimated this at 45%. On issues close to them however, the Tea Partiers have a surprisingly good gauge.
That is presumably why they know approximately what the tax burden on someone earning 50.000 and Bartlett doesn't: Many of them actually earn around this, whereas it is just an intellectual game for Bartlett.
It would be very interesting to see the same poll on the general public.
2. FromForum and Bruce Bartlett are also petty in pretending that the Tea Party people are way off on two other questions, taxes as a share of GDP and whether Obama wants to raise taxes.
An extremely important fact about interpreting polls, an insight made by Paul Grice, is that people do not answer what you literary said, they answer what they think you are asking, their best guess of what your question really implies.
So when you ask a Tea Protester if Obama raised taxes, he will not interpret you literary (so far not), but think about the most salient truth: Obama has promised to repeal large parts of the Bush tax cuts, raise indirect taxes on carbon emissions, and is currently in the process of raising taxes through his health care bill.
3. Also the question about "federal taxes as a share of GDP" is very dishonest. Most economist I know would think of total revenue as a share of GDP, not just the federal part, unless you remind them explicitly that you ONLY (why?) want part of the state.
What do we expect of the public, who may only have a vague idea of what even GDP means, let alone taxes as a share of GDP? They will probably just tell you how large they think the government it.
Also, are we to expect the public to take into account that tax revenue as a share of GDP collapses during recessions, even when tax rates stay constant? The prediction from economic science is that the correct burden of government is the tax *rates*, not the tax *revenue*.
Lastly, should they include non-tax government revenue or not? Are we for example suppose to pretend that a future cap-and trade and similar current sources of revenue are not taxes?
The last year before the crisis U.S tax revenue as a share of GDP was 28.3%. As a share of national income, it was 32% (basically you remove destroyed capital from GDP to get national income). Government spending in 2010 is 44.5% of GDP and about 50% of national income.
Milton Friedman usually advocated including deficits as a tax (on the future), and using national income, rather than GDP (excluding depreciations). (To his credit Bartlet mentions the point about the future, although in a snide way). That is why Milton Friedman in 2003 said that government was 40% of the economy.
Who do you think had thought more deeply about the burden of government, Milton Friedman or Bruce Bartlett?
Was Milton Friedman also a know-nothing crazed populist who merely imagined that government was too large, because he was fooled by Fox news?
This is why people reject intellectuals like Bruce Bartlett: the quality of the thinking of the current bunch of intellectuals America has is sometimes simply too low relative to their pretensions (and incidentally relative to the instincts of the public).
I am convinced it is not intellectualism itself the market has rejected, but the actual lazy and left leaning intellectuals America has to offer.
Grice, P., 1975. Logic and conversation. In: Cole, P., Morgan, J. (Eds.), Syntax and Semantics: Speech Acts, vol. 3. Academic Press, New York, pp. 41–58.
Update:
See comments. I missed that in the appendix it is specified that it is the federal government that they refer to. Excluding state and local taxes someone earning 50.000 pays about 21%, if payroll taxes are included.
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