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By one measure, federal taxes lowest since 1950

Poor economy and changes in tax code cited

By Stephen Ohlemacher
Associated Press / February 8, 2011

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WASHINGTON — As a share of the nation’s economy, Uncle Sam’s take this year will be the lowest since 1950, when the Korean War was just getting under way.

And for the third straight year, American families and businesses will pay less in federal taxes than they did under President George W. Bush, because of a weak economy and a growing number of tax breaks for the wealthy and poor alike.

Income tax payments this year will be nearly 13 percent lower than they were in 2008, the last full year of the Bush presidency. Corporate taxes will be lower by a third, according to projections by the nonpartisan Congressional Budget Office.

The poor economy is largely to blame, with corporate profits down and unemployment up. But so is a tax code that grows each year with new deductions, credits, and exemptions. The result is that families making as much as $50,000 can avoid paying federal income taxes, if they have at least two dependent children. Low-income families can actually make a profit from the income tax, and the wealthy can significantly cut their payments.

“The current state of the tax code is simply indefensible,’’ said Senator Kent Conrad, Democrat of North Dakota, chairman of the Senate Budget Committee. “It is hemorrhaging revenue.’’

In the next few years, many can expect to pay more in taxes. Some increases were enacted as part of President Obama’s health care overhaul. And many states have raised taxes because — unlike the federal government — they have to balance their budgets each year.

But in the third year of Obama’s presidency, federal taxes are at historic lows. Tax receipts dropped sharply in 2009 as the economy sank into recession. They have since stabilized and are expected to grow by 3 percent this year. But federal tax revenues won’t rebound to prerecession levels until next year, according to Budget Office projections.

In the current budget year, federal tax receipts will be equal to 14.8 percent of the gross domestic product the lowest level since Harry Truman was president. In Bush’s last year in office, tax receipts were 17.5 percent of GDP, just below their 40-year average.

The lack of revenue, combined with big increases in spending, means the federal government will have to borrow 40 cents for every dollar it spends this year. The annual federal budget deficit is projected to reach a record $1.5 trillion.

Lawmakers from both political parties vow to tackle the nation’s financial problems. Republicans in Congress promise big spending cuts, and Obama says he wants to reshape corporate taxes, closing loopholes to pay for lower overall rates. Few in Washington, however, are calling for big tax increases, at least in the short term.

“America’s tax system is clearly broken,’’ Donald Marron, a former economic adviser to Bush, told the Senate Budget Committee at a recent hearing. “It fails at its most basic task, which, lest we forget, is raising enough money to pay for the federal government.’’

At the request of the Associated Press, the Tax Institute at H&R Block compared 2008 and 2010 tax bills for families at various income levels, showing how their taxes have changed since Obama took office. Taxpayers are filing their 2010 tax returns this spring, while 2008 was the last full year that Bush was president. The scenarios assume that each family had the same income, filing status, and number of dependent children in both years.

Income tax rates remain unchanged. But many taxpayers are seeing their bills drop under Obama because of more generous tax credits for college students, working families, homebuyers, and the working poor. Many of the changes were enacted as part of the big economic stimulus package passed in 2009.

Congress also extended Bush-era tax cuts through 2012. Lawmakers let Obama’s Making Work Pay tax credit expire at the end of 2010, but they replaced it with a one-year cut in Social Security payroll taxes that is already showing up in workers’ paychecks.