Don't Tax The Rich To Benefit The Middle Class, Help The Poor Instead
Taxes and the rich
Looking at all the taxes
MY COLLEAGUE suggests that America’s wealthy already pay at least their fair share of the cost for the public goods they depend on to prosper. He notes that in recent years, the top 5% of earners have received 32% of the country’s adjusted gross income, but paid 59% of federal individual income taxes. “If that’s not giving something back, what is?”, he asks.
This is a case of cherry-picking the data. Yes, the federal income-tax system is progressive through most of the income distribution—although it becomes extremely regressive at the high end, because of the low rates applied to qualified dividends and long-term capital gains (as Mitt Romney can attest).
However, federal income taxes account for just 27% of total government revenue collected in America. And the remaining three-quarters of the tax pie is quite regressive. The middle class may not pay much federal income tax. But they sure pay the payroll tax for Social Security and Medicare, which the rich can mostly skip out on since it only applies to the first $110,000 of wage income. (The Medicare levy, unlike its bigger Social Security counterpart, is not capped). The masses also pay a much greater share of their income in sales and excise taxes than the rich do, because they cannot afford to save.
The fact of the matter is that the American tax code as a whole is almost perfectly flat. The bottom 20% of earners make 3% of the income and pay 2% of the taxes; the middle 20% make 11% and pay 10%; and the top 1% make 21% and pay 22%. Steve Forbes couldn’t have drawn it up any better.
A charitable interpretation of the position that the rich already pay enough taxes is that its advocates have simply made a good-faith oversight about all those other pesky levies that the vast majority of Americans get stuck with. If they really think that a world where people earning the top 32% of income pay 59% of the taxes is fair, then they should support radical reform to make that a reality.
To start, we’d have to eliminate the flat payroll tax and its $110,000 income ceiling, and replace those revenues with the progressive income tax. We’d also need to tax dividends and capital gains as ordinary income. Then we’d have to modify sales taxes—by, say, taxing things rich people buy, like yachts, at a higher rate than things poor people buy, like generic-brand groceries.
However, I am yet to see the Cato Institute or Tax Foundation beating the drums for such policies. That suggests a somewhat less sympathetic account: that they are trying to focus public attention on a narrow slice of data that justifies letting the rich pay as little as possible, while obscuring the full picture, which leads to precisely the opposite conclusion.
Addendum: A commenter reminds me that most states do indeed exempt food from sales tax, in a rare nod to progressivity outside the income-tax system. However, it’s worth noting that Mississippi, the poorest state in the union, is one of the few that still levy the full rate.
This post has been revised to reflect the distinction between the Social Security and Medicare portions of the payroll tax.
Big Tax Bills for the Poor, Tiny Ones for the Rich
By David Sirota
Middle-and low-income Americans are facing far higher state and local tax rates than the wealthy. In all, a comprehensive analysis by the nonpartisan Institute on Taxation and Economic Policy finds that the poorest 20 percent of households pay on average more than twice the effective state and local tax rate (10.9 percent) as the richest 1 percent of taxpayers (5.4 percent).
In These Times
American politics are dominated by those with money. As such, America's tax debate is dominated by voices that insist the rich are unduly persecuted by high taxes and that low-income folks are living the high life. Indeed, a new survey by the Pew Research Center recently found that the most financially secure Americans believe "poor people today have it easy."
The rich are certainly entitled to their own opinions -- but, as the old saying goes, nobody is entitled to their own facts. With that in mind, here's a set of tax facts that's worth considering: Middle-and low-income Americans are facing far higher state and local tax rates than the wealthy. In all, a comprehensive analysis by the nonpartisan Institute on Taxation and Economic Policy (ITEP) finds that the poorest 20 percent of households pay on average more than twice the effective state and local tax rate (10.9 percent) as the richest 1 percent of taxpayers (5.4 percent).
ITEP researchers say the incongruity derives from state and local governments' reliance on sales, excise and property taxes rather than on more progressively structured income taxes that increase rates on higher earnings. They argue that the tax disconnect is helping create the largest wealth gap between the rich and middle class in American history.
"In recent years, multiple studies have revealed the growing chasm between the wealthy and everyone else," Matt Gardner, executive director of ITEP, said. "Upside-down state tax systems didn't cause the growing income divide, but they certainly exacerbate the problem. State policymakers shouldn't wring their hands or ignore the problem. They should thoroughly explore and enact tax reform policies that will make their tax systems fairer."
The 10 states with the largest gap between tax rates on the rich and poor are a politically and geographically diverse group -- from traditional Republican bastions such as Texas and Arizona to Democratic strongholds such as Illinois and Washington.
The latter state, reports ITEP, is the most regressive of all. Four years after billionaire moguls such as Amazon's Jeff Bezos and Microsoft's Steve Ballmer funded a campaign to defeat an income tax ballot measure, Washington now makes low-income families pay seven times the effective tax rate that the rich pay. That's right, those in the poorest 20 percent of Washington households pay on average 16.8 percent of their income in state and local taxes, while Washington's 1-percenters pay just 2.4 percent of their income. Like many of the other regressive tax states, Washington imposes no personal income tax at all.
"The problem with our state tax systems is that we are asking far more of those who can afford the least," concludes ITEM's state director Wiehe.
By contrast, the states identified as having the smallest gap in effective tax rates are California, Delaware, Minnesota, Oregon and Vermont -- all Democratic strongholds and all relying more heavily on progressively structured income taxes. Montana is the only Republican-leaning state ITEP researchers identify among the states with the least regressive tax rates.
Of course, if you aren't poor, you may be reading this and thinking that these trends have no real-world impact on your life. But think again: In September, Standard & Poor's released a study showing that increasing economic inequality hurts economic growth and subsequently reduces public revenue. As important, the report found that the correlation between high inequality and low economic growth was highest in states that relied most heavily on regressive levies such as sales taxes.
In other words, regressive state and local tax policies don't just harm the poor -- they end up harming entire economies. So if altruism doesn't prompt you to care about unfair tax rates and economic inequality, then it seems self-interest should.
David Sirota is a full-time political journalist, best-selling author and nationally syndicated newspaper columnist living in Denver, Colorado. He blogs for Working Assets and the Denver Post's PoliticsWest website. He is a Senior Editor at In These Times magazine, which in 2006 received the Utne Independent Press Award for political coverage. His 2006 book, Hostile Takeover, was a New York Times bestseller, and is now out in paperback. He has been a guest on, among others, CNN, MSNBC, CNBC and NPR. His writing, which draws on his extensive experience as a progressive political strategist, has appeared in, among others, the New York Times, the Los Angeles Times, the San Francisco Chronicle, the Baltimore Sun, the Nation magazine, the Washington Monthly and the American Prospect. Sirota was a twice-a-week guest on the Al Franken Show. He currently serves in a volunteer capacity as the co-chairperson of the Progressive States Network - a 501c3 nonpartisan organization.
In the years before becoming a full-time writer, Sirota worked as the press secretary for Vermont Independent Congressman Bernard Sanders, the chief spokesman for Democrats on the U.S. House Appropriations Committee, the Director of Strategic Communications for the Center for American Progress, a campaign consultant for Montana Gov. Brian Schweitzer and a media strategist for Connecticut Senate candidate Ned Lamont. He also previously contributed writing to the website of the California Democratic Party. For more on Sirota, see these profiles of him in Newsweek or the Rocky Mountain News. Feel free to email him at lists [at] davidsirota.com Note: this online publication represents Sirota's personal views, and not the official views of the organizations he works with.
it is shameful that we intentionally structure taxes to make the poor more poor... absolutely shameful !
Poor People Taxed at 10.9 percent
Rich People Taxed at 5.4 percent
Poor Americans Pay Double The State, Local Tax Rates Of Top One Percent
The Huffington Post | By Bonnie Kavoussi
Republican presidential nominee Mitt Romney may be almost right in claiming that 47 percent of Americans "pay no income tax," but the poorest Americans pay a far higher state and local tax rate than those in the top 1 percent.
In fact, 46 percent of U.S. households paid no federal income tax last year, and it is misleading to focus on just the federal income tax, one of the few progressive parts of the U.S. tax system. Rather, a look at often regressive state and local tax rates throws cold water on the idea that the poor don't pay their fair share.
Nearly every U.S. state taxes the poor more than the rich, according to a 2009 report by the Institute on Taxation and Economic Policy. Overall, the poorest 20 percent of households paid an average 10.9 percent of their incomes in state and local taxes in 2007, while the top 1 percent on average paid just 5.2 percent of their incomes in state and local taxes, according to the study.
Most state and local tax systems are regressive, the study found: that is, tax rates become higher as income becomes lower. This regressiveness hits the middle class, too: The middle 20 percent of families paid a 9.4 percent state and local tax rate in 2007, according to the study.
State income taxes are the most progressive part of state and local tax systems, according to the study: that is, when it comes to state income taxes, richer people pay a higher tax rate than poor people. Sales and excise taxes, on the other hand, are very regressive, and property taxes are somewhat regressive. This combination forces poor people to pay a higher share of their income in state and local taxes than the rich.
Total U.S. taxes are barely progressive, as shown in this table and chart from Citizens for Tax Justice. The bottom 99 percent pays a 27.5 percent total tax rate on average, while the top 1 percent pays an average 29 percent tax rate, according to 2011 data from Citizens for Tax Justice.
(Hat tip: ThinkProgress.)
Poverty Is Rising, But State Tax Systems Burden The Poor, While Rich Get Off Easy
WASHINGTON -- Newly released U.S. Census data reveal that poverty levels have skyrocketed, but in most states, the tax systems disproportionally burden the poor. Most states also impose tax structures similar to what current Republican presidential candidates are advocating, and experts warn these should serve as cautionary tales against implementing them on a national level.
Contrary to the rhetoric from Republicans that half of Americans are not paying income taxes, at the state level the poor are paying more than twice as much of their income toward taxes than the super rich. At the same time poverty levels have risen to highs not seen since 1993, with 15.1 percent of Americans officially classified as poor.
But those in the bottom 20 percent pay closer to 12 or 13 percent of their income in state and local taxes on average. The top 1 percent of income earners only pay 7 to 8 percent, according to the Institute on Taxation & Economic Policy.
While the lowest 20 percent often pay 7 percent of their income in sales and excise taxes each year, the top 1 percent pay less than 1 percent of their income toward sales taxes.
The difference in shares of income put to property taxes is only slightly better.
Federal, state and local taxes combined are, on average, at their lowest level since the 1950s, according to the Tax Policy Center. But the distribution today is significantly less progressive. This trend hasn't changed much in recent decades either. Back in 1996, Citizens for Tax Justice found people with the lowest income were putting more of their income toward state and local taxes than the wealthy.
According to Matt Gardner, executive director at the Institute on Taxation and Economic Policy (ITEP), most state tax systems are regressive.
"The lack of fairness at the state level is really quite avoidable," Gardner said. "Every state could do something to make their income tax more progressive."
States largely rely on income, sales and excise taxes, and property taxes for their revenue. There's no real way for sales, excise or property taxes to not be regressive, so income is the one area where there's room for states to make their tax burdens more fair, Gardner said.
G. William Domhoff, research professor at University of California at Santa Cruz, found the rich have the least progressive state tax rates.
"If we break the top 20 percent down into smaller chunks," Domhoff writes, "we find that progressivity starts to slow down, then it stops, and then it slips backwards for the top 1 percent."
Yet, despite the strong public support for increasing taxes on the wealthiest Americans, lawmakers have often sought to keep rates down.
In the current debate among GOP presidential candidates, nearly all have advocated fewer tax brackets, lower rates, or imposing a national sales tax. Gov. Rick Perry (R-Texas), a presidential candidate, has boasted about his state having no income tax.
But states that do not collect income tax rely on the poor to make up a lion's share of the state's revenue, since they rely more on property, sales and excise taxes -- excise being those extra taxes on things like gasoline, cigarettes and alcohol. An analysis by ITEP concludes these excise taxes are 22 times harder on the poor than the rich, and 11 times harder on middle-income families than the rich.
Other candidates, like Herman Cain, are advocating imposing a flat income tax and a national sales tax. This would be a huge break for the top income-earners while bearing on down on lower- and middle-class workers with force. "From a fairness perspective, [using a flat tax rate] is the most damaging choice you can make," Gardner said.
But many states use a flat tax, Gardner said, and those that don't have tax brackets that are very close together. One example is Alabama, which puts the highest tax bracket at individuals making as little as $6,000 a year.
The left-leaning Citizens for Tax Justice argue that states can use their tax codes as weapons against poverty. Specifically, one method they advocate is using a state version of the Earned Income Tax Credit as a cheap way to give low-income families a break.
However, while poverty rose over the past year -- 20 states saw their poverty rate increase 20 percent or more -- some states raised taxes on the poor. Maine, Minnesota, Michigan and Wisconsin effectively raised taxes on the working poor by reducing targeted tax credits. Seven other states offer no anti-poverty tax credits at all.
Republican presidential candidate Jon Huntsman's tax plan would eliminate deductions, including those that help the working poor.
These measures are sought out of the idea closing these tax deductions would bring in more revenue for the state. While it would do just that, Gardner said it's also done at the expense of the lowest income earners.
"The fact remains that as the economy continues to stagnate, as poverty rates continue to go up, lawmakers are standing there with a shovel and have the opportunity to fill in some of that hole. But instead they're making it deeper," Gardner said.
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