WASHINGTON - Taxes too high?
Actually, 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 former President George W. Bush, thanks to a weak economy and a growing number of tax breaks for 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," says Sen. Kent Conrad, D-N.D., 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. State tax receipts are projected to increase in all but seven states this year, according to the National Council of State Legislatures.
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 pre-recession levels until next year, according to CBO projections.
In the current budget year, federal tax receipts will be equal to 14.8 percent of the Gross Domestic Product, or GDP, 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 increases in spending, means the federal government will 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.
Taxpayers at most income levels have seen their federal income taxes drop under President Obama. A comparison of tax bills for 2010, which must be filed this spring, with bills from 2008, the last full year of George W. Bush's presidency:
Taxpayers: A married couple with two young children and a combined income of $25,000.
• 2008 tax bill: No bill. Instead, a $6,700 payment from the government.
• 2010 tax bill: No bill. Instead, a $7,085 payment from the government.
• Change: Refund grew by $385.
• Why: The Earned Income Tax Credit was made more generous. The credit is refundable, meaning taxpayers can receive it in the form of a refund check even if they didn't pay any federal taxes.
Taxpayers: A married couple with two children, including one in college. Combined income: $50,000.
• 2008 tax bill: No bill. Instead, a $1,234 payment from the government.
• 2010 tax bill: No bill. Instead, a $734 payment from the government.
• Change: Refund shrank by $500.
• Why: In 2008, the family received a $1,500 economic-stimulus payment, which was larger than the $800 Making Work Pay credit they received for 2010. Other deductions were more generous in 2010, keeping the refund from shrinking further.
Taxpayer: A single person making $50,000 who paid $2,500 in interest on a student loan.
• 2008 tax bill: $5,388.
• 2010 tax bill: $5,325.
• Change: Tax bill reduced by $63.
• Why: The standard deduction and personal exemption increased. They increase most years, based on inflation.
Taxpayers: A married couple with two children, including one in college, with some modest investments and a combined income of $200,000.
• 2008 tax bill: $29,276.
• 2010 tax bill: $28,496.
• Change: Tax bill reduced by $780.
• Why: The family had $37,000 in itemized deductions for state and local income taxes, mortgage interest and charitable donations. Itemized deductions were limited for high-income families in 2008. The limits were phased out over the past decade and eliminated for 2010.
Taxpayers: A married couple with two children in college, larger investments and a combined income of $1 million.
• 2008 tax bill: $284,439.
• 2010 tax bill: $277,699.
• Change: Tax bill reduced by $6,740.
• Why: The family had $110,000 in itemized deductions for state and local income taxes, mortgage interest and charitable donations. Itemized deductions, as well as personal exemptions, were limited for wealthy families in 2008. The limits have been phased out. Also, the family was able to defer more income to retirement accounts in 2010.
Source: The Tax Institute at H&R Block