Yeah, another reason to raise taxes on the rich

Via Meteor Blades at Daily Kos is Sam Pizzigati explaining that the top 1 percent of income earners have a ridiculously low state and local tax burden relative to their low and middle-income fellow citizens:

America’s most affluent 1 percent now pay, on average, just 6.4 percent of their incomes in state and local taxes. But they actually pay even less than that, since they can deduct their state and local taxes from their federal tax bill. The state and local tax burden on America’s rich, after taking this offset into account, drops to 5.2 percent.

Middle-income families — to be precise, those families who make up the middle fifth of America’s income distribution — pay, after the federal offset, 9.4 percent of their incomes in total state and local taxes.

America’s poorest families pay even more. Tax collectors take 10.9 percent of the incomes of households in the nation’s bottom 20 percent, more than double the share they take from the incomes of the nation’s top 1 percent.

The Institute on Taxation and Economic Policy paper, Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, covers non-elderly households. Incredibly, the study details, some states “ask their poorest residents — those in the bottom 20 percent of the income scale — to pay up to six times as much of their income in taxes as they ask the wealthy to pay.”

Surely we can all agree that it is absurd for low and middle-income Americans to have a state and local tax burden nearly twice that of the very-wealthiest Americans.  Not only is this patently unfair as a matter of justice — the low tax-burden on the wealthy has more to do with their over-representation in the political system than it does with any virtue/productivity on their part — but it’s also bad policy.  According to the CBPP, 35 states are facing budget shortfalls for the 2010 fiscal year, and while I don’t know the details in each state, I’m confident that a modest tax increase on the wealthiest residents of those states would go a long way in fixing the shortfalls without cutting needed services to poor and marginalized Americans in those states.

That said, I can also see why state-based tax increases would be a terrible idea; raising taxes is a surefire way of driving your most lucrative tax base to another, low-tax state.  Better would be for the federal government to either raise taxes on the wealthiest Americans (which I discussed here) or repeal the Bush tax cuts, which have been responsible for more than $2 trillion in loss revenue since their implementation.  Repealing the cuts (thus upping the tax burden for the wealthiest Americans to something a bit more reasonable), and using the revenue gains to fund direct aid for states makes a lot more sense and is a lot more appealing — as a matter of policy — than having the states shoot themselves in the foot by raising taxes.

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15 thoughts on “Yeah, another reason to raise taxes on the rich

  1. “Surely we can all agree that it is absurd for low and middle-income Americans to have a state and local tax burden nearly twice that of the very-wealthiest Americans.”

    Surely we can all agree that it is absurd to allow government to confiscate any of our property. You want fairness? Repeal the 16th Amendment.

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    • Actually, Mike, only the “taxes are theft” extremists can agree on that. The rest of us agree that A) Most tax dollars actually pay for things and B) if left to our own devices, none of us would pay taxes.

      I know, I know…you don’t want to be coerced. Fine. How much are you going to pay voluntarily then?

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      • Not that I don’t agree that most people would pay nothing, but I am continually surprised by the number of people (and the amount given) who donate money to retire the national debt.

        Admittedly no where near revenue requirements for well anything, but if you were presuming zero, the $1 million plus/year is quite a bit, for FY09 $3mil plus. #funfact

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  2. “the low tax-burden on the wealthy has more to do with their over-representation in the political system than it does with any virtue/productivity on their part.”

    This is probably true at the federal level (at the very high end) and with respect to corporate taxes. But state and local revenues largely come from naturally regressive taxes on consumption: either sales or property taxes. The ITEP paper mentions homestead exemptions, for example, as a way to make property taxes less regressive, but it’s worth noting the regressive bias inherent to the form of the tax. Beyond which, states would have more room to subsidize their consumption taxes into progressiveness if the federal income tax were somewhat less progressive. When considering effective rates only, it might be worthwhile to consider all sources of taxation.

    Not that ITEP’s numbers make me happy, or anything.

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  3. The philosophically interesting thing here is that steeply progressive income tax structures don’t just ideally soak the rich they also make government more dependent on the rich and on the rich making obscene amounts of money.

    So while the obscene anger-inducing payouts to say studio execs in California or bankers in the tri-state areas lead to railing against the unenviable state of modern income inequality, it’s no exaggeration to say the state budgets for California, Connecticut, New Jersey, and New York were counting on those bonuses and multi-million dollar payouts as much as the super-wealthy were/are.

    Not to mention it makes government revenues almost as volatile as the stock market, which isn’t good enough for either Social Security or the funding source for Social Security, strange that it would be for funding everything. I would think it prudent that government should seek stable revenues not volatile ones.

    It just seems a little schizo, if you ask me.

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  4. Why not a flat tax? Why tax the rich more, as they don’t get anymore from the gov’t than others do? Everyone only one gets one vote so why should they pay more in taxes?

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    • Why tax the rich more, as they don’t get anymore from the gov’t than others do?

      Well … do they? About the only thing that rich people do not get from the government that poor people do is means-tested transfers (TANF, food stamps, Section 8), and those don’t add up to much. The rich do benefit directly from nonrefundable tax credits (such as mortgage deductions), more than the poor, because their taxable income/property tends to be more valuable. Meanwhile, government investment in things like education, infrastructure, the legal system, etc., greatly raises the marginal productivity of capital in this country. That disproportionately rewards those who own and profit from capital. In other words, the rich.

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        • More national defense? Maybe not, but a rich person is much less likely to serve or have family serving in the armed forces. National parks? Well, unless you live on the outskirts of one, you have to have disposable income to visit. The FAA? Again, gotta have disposable income to fly, and I’m sure air travel is positively correlated with income.

          Add to that various tax breaks (e.g., most income tax deductions) and the externality effects of government programs, particularly with respect to the productivity of capital, and you’ve got a bundle of government services that predominantly benefits the wealthy.

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          • What does whether or not a rich person or their family serves in the military have to do with the subject? Does a rich person get anymore service from the DOE, DOJ, FDA or CSPC? No, there is no means test for fed gov services so why should some people have to pay more? As far as mortgage deduction, I’m not aware of a means test for the deduction, so anyone can get it if you can get a mortgage.

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            • Rawlsian arguments exist that suggest richer people are generally better off when the lowest utility in society is maximized because of the various positive externalities generated with the higher utility from mitigating the worst case risk aversion of people in general.

              I suppose if you want to take an extreme argument (which I realize would not satisfy a microeconomics course), yes, a rich person does benefit from more national defense relative to a poor one. Why? Because the state’s the only thing protecting his property rights (and arguable the only thing that creates his right to property), and the state’s military is therefore more proportionately being used to defend him over the people with less money.

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            • A rich person gets more value out of the existence of the DOE. Remember that bit about increasing the productivity of capital? As for the DOJ, a rich person actually does get better service from this and other law enforcement agencies, in the sense that being rich helps them navigate the system and typically receive more lenient treatment. With the FDA, again, being rich equals benefiting more directly since one has to have money to buy the products this agency regulates. I’m not sure what CSPC is, so I can’t speak to that.

              The point isn’t that there’s some secret means test that makes these and other government programs disproportionately benefit the rich. The point is that these “equal” programs are structured in a way that does disproportionately benefit the rich, without stating so outright. Good example: the mortgage deduction. Is it means-tested? Absolutely not. Could anyone, in theory, be eligible for it? Yep. But let’s look at the specific structure of this program:

              1. It’s a nonrefundable tax credit. “Nonrefundable” means that you only get as much of a credit as you are slated to pay in income tax. If you are poor and don’t owe much income tax to begin with, a nonrefundable credit won’t be of much help.

              2. The credit is scaled with the size of one’s mortgage. Bigger mortgages correspond to better credit. Bigger mortgages also correspond to more expensive homes. Guess who is more likely to have expensive homes and good credit? That’s right, rich people.

              To sum up, then, nowhere on the books does it say that, for example, “the mortgage deduction is for rich people only.” But the way it is designed, this and many other programs end up serving the rich much more than they serve the poor.

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  5. “How much are you going to pay voluntarily then?”

    I already pay voluntarily — to charity. Also, you’re assuming a direct tax is the only way to raise revenues. With a limited government, not much would need to be raised, and it could be done indirectly. Taking private property is theft. The income tax leads to statism — now it’s led to unsustainable debt.

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