Leftist Tax Policy (part 1)

Kim writes:

No such thing as a free lunch, with "tax cuts." People spend money initially, since they have more, and boost the economy for a short period of time. But meanwhile, the budget deficit gets larger, education gets screwed over, and the state and local governments, which are left with less money, end up having to scramble or cut other things.

and she cites: "Shifty Tax Cuts" from UFE: United for a Fair Economy which is apparently:

a national, independent, nonpartisan, 501(c)(3) non-profit organization. UFE raises awareness that concentrated wealth and power undermine the economy, corrupt democracy, deepen the racial divide, and tear communities apart. We support and help build social movements for greater equality.

Well, they say they've a non-partisan, independant organization. I'll take them at their word, even though their mission statement there definitely has an agenda and a bias (not necessarily an unreasonable bias.)

This report identifies five key shifts in the tax burden, all of which are underway right now: From federal to state taxes; from progressive to regressive taxes; from taxes on wealth to taxes on work; from corporate taxes to taxes on individuals; and from current taxpayers to future generations.

Before I get into the meat and potatos, let me ask a question about the first "shift".

For the fiscal years 2002-2004,state governments closed approximately $200 billion in budget gaps by raising taxes and fees and by cutting services.7 The federal government has so far supplied only $20 billion in direct aid to the states to help them close their budget gaps.

What is the role of the Federal Government? Is there any reason (in law, in the Constitution, in moral philosophy) that the Federal Government should be generally subsidizing the States? Isn't the Fed's Constitutional role fairly limited?

"Key Findings:"

"The Bush Tax Cuts for Top 1% Could Have Bridged State Fiscal Gaps"
The first issue here is that this completely disregards the question of whether the Fed should cover (possibly) irresponsible spending by the States.

"Recent Tax Changes Are Tax Shifts, Not Tax Cuts"

The choice to send nearly $200 billion to the top 1% rather than to state governments highlights just one way in which the federal tax cuts of 2001 and 2003 are actually tax shifts, not tax cuts, for the vast majority of Americans.

Be that as it may, the "choice to phrase this as sending money to the people it comes from" ignores the fact that it's their money in the first place. It's not being 'sent' anywhere. It's being left alone. This may seem a minor quibble, but it is not. There is a huge difference between action and inaction.

"Most Americans Can Sense These Tax Shifts"

Only 19% of Americans said in a recent poll that their tax burden had actually been eased by the Bush administration’s economic policies.

Well, since only a portion of Americans actually pay much in Federal taxes anyway, I can't say I'm surprised. I don't even know that this statistic matters. 25.2 percent of the 129.4 million individual tax returns filed in 2000 (last year this data is available) showed no tax liability. They couldn't possibly have their "burden eased" as they had no burden. A large portion of the rest (according to this link (subscription required) doesn't have a clue where they stand economically or on taxes.

During the [2000] presidential election, a Time Magazine-CNN poll asked voters whether they were in the top one percent of income earners. Nineteen percent reported that they were, and another 20 percent said that they expected to be there one day.

The top 1% of taxpayers already pay 37.4% of the total tax collected. Let's put that into a concrete example: 100 people in a room must pay their combined taxes of one hundred dollars, how much should each pay? Well in this scenario, one guy pays $37.40, the next 4 people together pay $19.10 ($4.76 each), 20 people pay $2.03 each , 25 people pay $4 (or roughly $.16 each), and 25 people pay nothing (part of the tax burden is actually being given to these people as rebates on taxes they didn't pay in the first place). Of course, that is taking them as classes. The second and third person will actually be paying more than the 4th and 5th, etc. on down the line.

37.4% of Federal taxes, in a country of 300 million people, is paid by about 1.3 million individuals. This is not just Hollywood superstars and mega-corp CEO's. The threshold for 5 percenters is $120-something-thousand. For 1 percenters it's $320K-ish. A small business owner might find himself in those percentiles a couple times in his life. That certainly doesn't make him filthy rich.

From The Tax Foundation:

Proportionately, the top-earning 25 percent of taxpayers earned more than 65 percent of the nation's income and paid more than three out of every four dollars collected by the federal income tax (77%) in 2001. There were 32.2 million tax returns in the top 25 percent, all with adjusted gross incomes (AGI) over $56,085.

At the other end of the income spectrum, the bottom 50 percent of the nation's taxpayers (everyone whose adjusted gross income was under $28,528) earned more and paid less. Total income for this group rose from $834 billion to $861 billion. That was up from 13.0 percent of all income in 2000 to 13.8 percent in 2001. Despite income growth, the bottom 50 percent's average tax rate fell from 4.6 percent to 4.1.

"Tax Shift #1; From federal to State"
Why is it that a leftist policy wanker, (excuse me, I mean 'policy wonk', of course) will always complain about tax cuts but never about tax expenditures? Are they so sure that there is no waste, no fat to be eliminated from the pork barrel before raising taxes? Are they really that confident in the efficiency of the system? As I said above, is there really a valid point to complaining about shifting a tax burden from the Federal government (which has yet to be explained as being due to any action of the Fed, BTW. It's entirely possible, dare I say likely, that this increase in State tax as compared to Federal is entirely a function of increased State spending rather than a lessening of Federal subsidies- it's just easier to jump on the partisan bandwagon because the 'Bush tax cuts' were so high profile.) Anyway, Annenberg thinks that

For the vast majority any increases in state and local taxes have not offset the federal tax cuts enacted under Bush, even in the seven states selected by the DLC article.

In fact, according to the Tax Foundation, combined levels of federal, state and local taxes were significantly lower this year than in 2000, the year before Bush took office. In that year taxes at all levels averaged 33% of income, while this year the average is down to 30%. And contrary to the claim made by the Edwards staff and the DLC article, effective rates of state-local taxes have not increased at all. In fact, they have declined, if only by a tiny 0.2%, to 9.7% of income.

UFE goes on to say:

During the summer of 2003, millions of parents received $400-per-child checks from the IRS — an advance payment for the expanded federal child tax credit.

And then:

The federal government prioritized wealthy Americans over
states and ordinary Americans.

How does that follow? Are wealthy Americans the only ones with children? 40% of Americans pay no Federal tax. and 20% get more back than they paid in (at the expense of others, remember) due to the fact that they have kids.

the Bush tax cuts have pushed the second-lowest quintile into the negative range, meaning that when they file their tax returns, they don’t send a check, they receive a check (See also "Cautionary Notes for Comparing CBO’s Household Data to Standard Tax Data"). These “refund” checks return every dollar withheld during the year and more, mostly because of two tax provisions, one old and one new. The old one is the earned income tax credit, and the newer one is the child tax credit, first enacted in the late 1990s at $500 per child and now doubled by the Bush tax cut to $1,000 per child.

"Tax Shift #2; From Progressive to Regressive"
"Progressive" and "Regressive" are such loaded terms that they really slant the conversation about taxes. Regressive makes it sound dark ages, medieval. Progressive makes it sound forward-thinking and enlightened.

All progressive means in the context of taxes it that it's a sliding scale where the more you make, the higher the percentage you pay. So the most successful (rich) people are shouldering the majority of the tax burden (discounting corporate trickery for a moment).

Overall, the tax system is doing little to counteract growing income inequality. In 2000, the bottom 20% averaged $13,700 in after-tax income and the middle averaged $41,900 while the top 1% averaged $862,700

Seems like a strawman argument. The tax system can't (and shouldn't!) address "income inequality". Not directly anyway. We could give tax credits for education (I believe we already do) but when that bottom 20% is paying virtually zero in taxes anyway, the statement above about "after-tax income" being $13,700 is pretty empty. Oh, I grok their idea that the more-regressive State tax structure takes more out of the pockets of lower-income people, and that shifting the burden of taxes to the more "progressive" Federal tax structure would make a difference in post-tax income. But this "problem" of "unequal income" is such a communist idea that I shouldn't even have to address it.

Since low-income people tend to spend a larger share of their income on necessities such as food, clothing, gasoline and utilities, for example, state and local taxes on these items end up consuming a greater share of income for low-income people. And some states — such as Alabama, Tennessee, and Virginia — actually tax food purchases at a higher rate than income from investments.

However, are State taxes as 'Regressive' as UFE claims? Most States do NOT tax food purchases. Alaska, Delaware, Montana, New Hampshire, and Oregon have no state sales tax. Of the remaining 45 states, the three listed above tax food. They don't give analysis of how that interacts with the rest of the tax structure in those states. As there is a wide range of consumer items available in every category (unlike in socialist countries that run on communist ideas like the one above, one is forced to add) there is a range of taxes applied to consumer purchases. Will the average consumer make their choices based solely upon their tax burden? Of course not. Most people don't even balance their checkbooks, much less calculate tax on the fly in their heads. But they will comparison shop, and poor people buy cheaper goods, from clothes and cars, to other consumer goods like electronics. Luxury items and conspicuous consumption will still cause wealthier people to pay more taxes.

What about things everyone needs, you ask? After all, there must be some floor at which point one can't get any cheaper? Aren't there certain things that one cannot avoid buying and paying taxes on that would form a greater burden on the poor?

Well yes, of course. Nobody said life was going to be easy. However, I'm not concerned with fair- I'm more concerned with just.

Even so, let's address some of those concerns: Property taxes are 'regressive'. After all, you don't pay more in property tax just because you have more. Or do you?

If you live in a hovel, a modest home, or a palatial mansion, you pay the respective amount of property tax. A millionaire with a nice home pays more than a trailer park denizen. Renters may have property tax folded into their rent, but most renters do not pay as much in rent, as they would for a mortgage- the proportion of their monthly fees that go to paying their landlord's property tax comes out of his pocket, not theirs. The nicer the place, the higher the rent, but also the higher property tax that the renter does not directly pay. In a major off-set to property taxes, the interest on a mortgage is tax-deductible. The economic decision that the renter makes in not taking on the debt of a mortgage is an individual one that must take into account the transaction and opportunity cost, (even if not so formally expressed).

Utilities: As power, water and telecommunications are all to some degree fee-controlled and subsidized, I think we can mostly skip this with a quick acknowledgement that more affluent urban areas pay for less-developed rural areas to have affordable service through 'universal service/access fees'. Check your phone bill next month to see what I mean. The phone company makes it pretty explicit that it is not part of their pricing model, but imposed upon them by the government.

In short, lifestyle has nearly as much to do with state and local taxation as
anything.

On the matter of payroll taxes, I find myself mostly in agreement with the authors.

The payroll tax is anti-business and anti-worker. I'm not so sure that:

it is commonly agreed that employers compensate for their
payroll tax share with lower wages for employees so the employee effectively pays
the total tax

But it's possible. I do tend to think that's more the
case in big corporations than in small businesses.

More on this a little later- gotta catch up with school work...