Despite the claims by many politicians that expenses such as housing and college loans are the greatest challenges that keep American families from building wealth, the data show that the real culprit is taxes.
That’s right. According to the tax policy research group The Tax Foundation, the average federal income tax bill was about 15% of household income in 2022. Add to that payroll, state and local taxes (including local property and local income taxes), and the figure balloons to $1 out of every $3 paid to one form of government or another, but paid directly out of income. For the middle quintile of households, this figure approaches 40% at the upper end of that bracket.
Said another way, a middle quintile family of four, making about $100,000 per year, will take a $33,000 to $40,000 haircut right off the top before they can even begin to prioritize where to spend their hard-earned money. That’s almost two years of 401(k) contributions paid to the government, instead of households’ own retirement or rainy day funds.
With numbers like these as our starting point, it’s no wonder that Americans are now being introduced to the concept of tariffs as an alternative means of generating tax revenue. To be fair, tariffs are no better or worse than any other method of raising taxes. That’s because all taxes destroy more wealth than they raise in revenue; hence the common phrase “a tax on society.” But when one form of taxation begins to outweigh another, such as the way income taxes today dominate consumption and user taxes, the imbalance distorts incentives even more than usual.
When we tax income at figures approaching and even exceeding 40%, we find that it disincentivizes households to work and earn and even to invest in themselves. But when we under-tax consumption relative to income, which we currently do with most Americans paying municipal sales taxes in the mid to high single digits, we encourage households to spend what they do make rather than to save it.
Combined, this imbalanced tax strategy leads to lower incentives to earn and grow income, and higher incentives to spend what households make, and that’s a recipe for escalating household debt. That’s what economic theory would predict, and in practice, Americans are now entering into their second massive debt bulge of the 21st century. Only this time, instead of households finding themselves suffocating under low-interest, tax-deductible mortgage debt, as they did two decades ago, they’re now burdened by high-interest credit card and auto debt that’s not tax deductible.
A more practical solution would be to balance income tax cuts with increased revenue from tariffs. This is clearly one of the secondary goals of the Trump administration’s tariff strategy; to shift more of the burden on funding the federal government away from middle-income households that want to save their income for the future and transfer this cost to households that want to consume today.
Clearly, in order for a strategy like this to be beneficial to both the taxpayer and the government, the ratio of income taxes and consumption taxes (in this case tariffs) needs to be set at the right level; if we overtax consumption and under-tax income, savings will be too high, and income itself will drop, negating any benefit of tariffs.
I make no argument today as to what the proper level of tariffs is. And even if we knew that level today, the proper level is dynamic and will likely change over time. Instead, what I argue is that increasing tariff rates today, in order to fund modest tax cuts for average American households, is one way to help Americans grow their savings, without adding to the federal government’s debt load.
This is a practical point to keep in mind the next time readers see a cadre of media “experts” fear mongering about the worst-case scenarios that tariffs could bring to American households.
Thomas Tzitzouris is managing director and head of fixed-income research at New York City-based Strategas Research Partners. He lives in Rhode Island.
This man is full of it. Tariffs are taxes. All this does is instead of you paying an income tax based on your income you pay a higher rate of taxes through tariffs. You’re shifting the tax burden to middle class and lower income households who spend a greater percentage of their income purchasing items than the rich whilst the richest among us pay less. This man is a shill for the wealthy. The best option is to decrease the income tax for lower and middle income brackets and dramatically increase the income tax on the rich and corporate taxes on companies. Does this man really think that the uber rich will be disincentivized to work and invest less if they have to pay more in taxes? Do they even work today?
If Providence Business “News” wishes to continue receiving my money, they may want to stop allowing misinformation within their pages.
Most people pay 30-50% of their income on housing costs alone, and for many, that is on rent, which contributes nothing to their wealth-building. So if 15% of income is going to taxes, then that is not, fact, the largest share of their expenses. Furthermore, a large part of a person’s tax burden goes to Social Security and Medicare, both of which are returned to that person later in life.
I could go on, but this piece is hardly worth a second glance, let alone fact-checking. I urge the editors to be more selective in the future.
The article is a great high level construct to compare societal effects of tariffs vs personal income tax. Simple and logical. As a tax payer making enough to pay a lot of taxes but not so much as to get Warren Buffet tax treatment (Warren is taxed at closer to capital gain rate vs. the highest tax bracket rate), a little tariff moat seem to be an appropriate tool in the tax tool box that acknowledges that freedom isn’t free. Thank you, Tom. I hope PBN continues to publish your thoughts.