Why Do Lifetime Net Tax Rates Seem So High?
The lifetime net tax rates shown in Table 1 may seem high when compared with the more familiar “current net tax rates” (current net taxes as a percentage of current market income). For example, the lifetime net tax rate of current newborns is 37 percent, whereas net taxes of the nation now stand at only 24 percent of national income. But current net tax rates do not directly compare all generations on the same basis because such rates vary widely with age. The young and middle-aged typically earn most of market income and pay most of total taxes. And the old typically receive more in transfers than they pay in taxes. Given that pattern, three factors explain why estimated lifetime net tax rates are as high as they are. First, present value gives more weight to taxes paid earlier than to transfers received later. Second, people do not all live to old age. Therefore, the accounts give more weight to prospective taxes than to prospective transfers because people are more likely to pay the
