Why are tax rates so high?

The federal government spends approximately 20% of GDP annually. Therefore, a tax rate of 20% on all personal and corporate income ought to cover all of our government's expenses. In fact, because of double taxation as well as other miscellaneous federal taxes, 18% should cover it. So why are tax rates so much higher than 18%?

Some will say "because poor workers pay lower taxes which means that everyone else has to make it up." People who say this are severely understimating the taxes paid by poor workers. FICA taxes of 7.65% are paid by the worker and an additional 7.65% tax is paid by the employer, and of course this is really just a hidden tax on the worker whose real salary is 7.65% higher than what it says on his paycheck. The effective tax on the worker's full salary is 14.2%, and this is paid on the very first dollar earned.

An additional flat tax of 3.8% on all workers making less than $94,200, and an additional 15.2% marginal tax on income higher than $94.200, along with an 18% tax on all other income not subject to FICA taxes and an 18% corporate income tax rate should cover all of the government's revenue needs.

So why are taxe rates so high? Maybe I don't understand "GDP" because I was slacking off in my college macroeconomics class. Or maybe the tax code is so riddled with loopholes that rich people and corporations are able avoid paying tax on approximately half their income.

Comments

[RogueLefty]

Man, this guy's good.

One thing a lot of Republicans might be interested in is that because the top 1% pays so little taxes, the burden falls on percentiles 90 through 99. That's you guys. Ever wonder why income taxes are so high but dividend and capital gains taxes are so low?

[The Superfluous Man]

I wonder about who distribution of the benefits of loopholes, as in say, 75% of the benefit to the rich taxpayer and the remainder to the tax lawyer/accountant.

A major problem with the corporate tax is that induces firms to pursue profits through the prism of tax regulations. So things that just aren't feasible or reasonable suddenly are, like drug insurance, as HS has mentioned before.

"An additional flat tax of 3.8% on all workers making less than $94,200, and an additional 15.2% marginal tax on income higher than $94.200,"
Suddenly no one's making 100 grand but 94 grand.

While HS is right, Roguelefty is wrong. The top 1% of taxpayers provide about a third of the government's funds, about double their share of the income. The headline of the article is Top 50% of Wage Earners Pay 96.03% of Income Taxes. http://www.rushlimbaugh.com/home/menu/top_50__of_wage_earners_pay_96_09__of_income_taxes.guest.html This data is from 2001.

[bbartlog]

Income tax is indeed quite progressive. However, the overall picture is more complicated; there are other taxes, such as the ones on gasoline, or the social security tax, that are more or less regressive.

As for the original question, I too am not enough of a macroeconomics guru to be confident in answering. However, it would seem to me that a company which has massive revenues but no profits for one reason or another must still contribute to GDP (and not just through the salaries its employees); in short, while you seem to be thinking in terms of (GDP = nationwide employee compensation + corporate profits + investment returns) it may be that this is not correct. Might do some more research later to learn more about it...

[Brandon Berg]

Part of the answer is that GDP includes consumption of fixed capital (depreciation), which is not taxable. I don't think that's enough to explain everything, though, especially since the more relevant figure is government receipts, not government outlays. Those two corrections roughly cancel each other out.