A Taxing Challenge

Monday, December 14, 2009 at 4:13 pm
Former President George W. Bush (Gamma/Eyedea/ZUMA Press)

Former President George W. Bush (Gamma/Eyedea/ZUMA Press)

A decade’s worth of cuts in federal aid combined with states moving to copy Bush administration tax cuts have led to states filling revenue shortfalls with regressive tax policies that disproportionately affect the poorest Americans. According to “Who Pays?” a report issued in November by the Institute on Taxation & Economic Policy, the poorest 20 percent of Americans pay nearly 11 percent of their income in state and local taxes, the majority of which is in the form of sales and excise taxes. Those in the top 1 percent, by contrast, pay just over 5 percent of their income in state and local taxes, and the majority of that is income tax.

[Economy1] “To the extent that states rely on sales tax, they’re going to be regressive,” said Howard Abrams, professor at Emory University School of Law, pointing out that the most regressive states in the ITEP report depend on sales and excise tax revenues to a great degree. Since poor individuals spend rather than save more — or all — of their income, sales tax as well as excise taxes on goods like gasoline and cigarettes impact them to a greater degree. Their wealthier counterparts, by contrast, tend to save and invest, which means every dollar they make isn’t going towards taxable purchases. A graduated income tax is designed to balance this burden by taxing wealthier occupants at a higher rate, but some states have such low thresholds for their top rates, or their rate spread is in such a narrow range, that any benefit to lower-income residents is lost.

The poorest Americans are also burdened by regressive property taxes, said Philip Harvey, professor at Rutgers School of Law. Two factors contribute to this: One, they may live in less-wealthy municipalities that have to tax at a higher rate to provide services. Secondly, many lower-income individuals rent rather than own property. “Economists generally know property taxes tend to be regressive because rent includes taxes indirectly,” Harvey said. Since lower-income people statistically spend a higher percentage of their income on housing, this translates to yet another higher tax burden.

In theory, federal income tax balances out this disparity to an extent because it relies on a graduated formula, but critics of the status quo say the country’s poorest citizens are still suffering from the effects of the Bush tax cuts. “Unambiguously, federal taxes have become less progressive over the last 10 years,” said Kim Rueben, public finance economist at the Urban Institute-Brookings Institution Tax Policy Center.

“One of the big changes during the Bush administration was a substantial reduction on capital gains and dividends,” said Emory’s Howard Abrams. “The only people that got the benefit were the extraordinarily wealthy.” Not only does this rob federal coffers of funds, but it also sets a precedent for states, several of which followed suit with tax cuts of their own.

States’ tendency to mimic federal actions does have a silver lining in that 23 states and Washington, D.C., offer earned-income tax credits modeled after the federal credit. Matthew Gardner, executive director of the ITEP, said credits like these, especially when they are refundable, go a long way towards leveling the playing field for low-income people. These credits aren’t enough, though. “The credits that were introduced under Bush for the poor families were dwarfed by declining tax rates at the top,” said the Tax Policy Institute’s Rueben.

Bush-era cutbacks on federal monies sent to states are equally harmful to poor residents. “There isn’t a lot of redistribution being done at the state and local level,” said Alan Viard, resident scholar at the American Enterprise Institute. “You expect that and want it to be done at the federal level.” Problems crop up when the federal government scales back this involvement. With less aid coming from Washington, states must rely solely on their own residents for funding, which nearly always leads to an increased reliance on regressive tax policies.

The ITEP’s Gardner says he is hopeful that the recession-prompted emergency aid to states will become the new status quo. If the federal government becomes involved to a greater degree in redistributing the tax dollars it takes in, states would have the breathing room to roll back some of their sales and excise tax increases.

Progressive groups are hopeful that the Obama administration will reverse some of these disparities by allowing provisions that cut taxes for the wealthiest Americans to expire next year and in 2011. While this wouldn’t directly change states’ tax structures, these changes to the federal tax code would create a healthier balance for poor as well as middle-class citizens.

According to a report published by the Tax Policy Center, Obama administration proposals would lower the federal tax rates for all but the wealthiest 20 percent of citizens. The net tax rates for all Americans would be the same under Obama’s plan as under an alternate model that assumes the extension of the provisions implemented by Bush; however, the costs in the former case would be shouldered to a much greater degree by the wealthiest citizens. With a federal program like that in place, the inherently regressive nature of most state and local taxes would be less of a burden on those who have already borne an outsized share of this recession’s pain.



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truth > spin
Comment posted December 16, 2009 @ 12:00 am

When Bush was elected in 2000, the bottom 25% of earners in the US had zero federal tax obligation. By 2008, the number who don't kick a dime into the general treasury had risen to over 47%. In contrast, in 2001, the top 1% of earners paid 25% of the freight. And that rose to more than 40% by 2007.

So although the top earners aren't hurting, they are paying a hugely disproportionate share of the federal taxes. In fact, the share of the tax burden borne by the top 1% now exceeds the share paid by the bottom 95 percent of taxpayers combined.

To put this in perspective, the top 1 percent is comprised of just 1.4 million taxpayers and they pay a larger share of the income tax burden now than the bottom 134 million taxpayers combined.

Comment posted December 19, 2009 @ 3:18 pm

Can you please cite the source of this information? Thanks.

Comment posted December 23, 2009 @ 4:15 am

Actually it is wrong…the top 1% of the population has the same wealth as the bottom 95% of the nation…thats what they have confused.
The tax load should not ever be even or ever level as the Rep's want to make happen. The new healthcare screwing we are getting will add .9% tax to the 200K and above class (250K for couples).
To fix the system which is run by Insurance industry for profit we need universal healthcare for everyone…like every other industrialized nation on earth. The savings in less paperwork alone would cover the costs and the saved time for the doctors office personnel would enable them to cut their costs. The Nurses and most nongreedy dr's all want this system.

The answer to this Tx system screwing for the nation would be to enact the “FairTax.org” Check that out if you want to level the playing field and increase the funds going to the government immediately.

Comment posted December 24, 2009 @ 10:24 am

Since the source of your statistics remains unidentified and their context a mystery, their value is zero. They contain no truth, only an interpretation to persuade public opinion. I have read other opinions you have posted and we usually have common ground, but this is spin.

Comment posted January 5, 2010 @ 2:55 pm

Under Eisenhower the top tax rate was 94 percent. You didn't see a lot of financial innovation that bankrupted nations then, did you? Rich people need to be taxed at a higher rate for the simple fact that that is where the money is. Further, you don't pull a train with a Volkswagen, or even a hundred of them. You use a big motor to pull big things. The rich benefit disproportionately from the benefits of being born in America, therefore they owe a greater user fee for the blessings they receive. Just like the salad bar at the cafeteria-if you get more good stuff (chicken, shrimp) you pay more because the good stuff is heavier on the scale. It's not that hard to go back to when this country was successful and government worked for the people's financial interests a little better.

Comment posted January 12, 2010 @ 2:36 pm

I think everyone would like some tax cuts, maybe they can donate to a local charity to help some people in their local community; or buy food with the extra money.

Comment posted January 12, 2010 @ 8:31 pm

problem with the fair tax is that it is like what is mentioned here a consumption tax and since consumption taxes tend to affect lower income families more then we'd see in increase in poverty in this nation. As it was said in this article Sales taxes are naturally regressive. it wouldn't level the playing field since a wealthy person can buy goods from overseas with much greater frequency than a poor person and even now when a criminal buys something he is paying a sales tax and from my knowledge criminals aren't known for investing so they spend a lot so even in the current system they are contributing. Even the wall Street Journal doesn't like the fair tax and they hate the income tax. largely because its like the value added tax which europe has been struggling with for a while now.

Comment posted January 12, 2010 @ 9:08 pm

Obviously you have not read the Fairtax proposal or you would understand how the poor would be exempted from the tax (as would everyone) with a prebate to cover the amount levied on the first purchases made each period(monthly or quarterly). Sales taxes are the best way to collect at the source of the need. The article is about how states are compensating for less federal taxation and that's best. I want to pay zero federal tax and pay ONLY local taxes and keep them all at home.
The purchases that are taxed would only be NEW items and most poor people don't always buy new items. Purchases from overseas would also be taxable but that's a method of tariffs or through customs declarations that we use today. Criminals do pay local / sales taxes but the Fairtax would be an additional “federal tax” and they currently don't pay THAT tax …so your just wrong on that as well.
The wall street journal is not the sole voice of the financial sector of the USA and many finacial investors do like the Fair Tax..it is almost completely backed at present by the Republicans. Mostly due to Unions not backing it and the IRS being a Union shop well they are a big lobby. Democrats are backed bigtime by unions and, well, even you can see the connection..
Look go read the http://www.FairTax.org and see what the bill is actually about (its a simple and easy read) and stop getting second hand info from me and the pundits on FOX or other “anti” everything networks. You should be informed by your own education not editorializations.

Comment posted January 14, 2010 @ 11:50 am

Wish we could ask directly the wealthy to write a check for $200K to each poor family, poor American, any low income person and forget hoping the government tax the wealthy, it never works. The wealthy would be Michael Moore,Oprah,Madonna,Al Gore,Tom Hanks,Stephen Spielberg,John Edwards,Beyonce,Marc Anthony,George Lopez, Glorida Estefan,Rosie O'Donnell,Adam Sandler,Joan Rivers,Bon Jovi,Will Smith,Katie Couric,David Letterman, Jamie Foxx, Ron Howard,Sheryl Crow,Jack Nicholson,Will Ferrell,Kelly Ripa,Cindy McCain, Jay Leno, Justin Timberlake,Cameron Diaz,Whoopi Goldberg,Chris Matthews,Soledad O'Brien,Tyra Banks,Steve Martin, etc.. These rich people can put all their millions together and write checks to all in need, is not like the rich couldn't easily live on 1 million a year.

Comment posted January 15, 2010 @ 8:45 am

If we put aside the poor math and reasoning skills, it is possible to solve our problems.

A major obstacle is a Republican replay of a Democratic error committed in the 1960s. We fought the Vietnam War without raising the necessary funds through taxes or cutting other budget items. Those of you that have taken Econ 101 will remember the 'guns and butter' analogy. This led directly to the period of stagflation of the 1970s. Reagan's tax cuts got us out of the rut, at the expense of monumental deficits.

Since we are at the bottom of both tax cuts and deficit spending, what optionsd are there?

truth > spin
Comment posted January 16, 2010 @ 7:34 pm

Hey Irish, I am sorry I didn't respond sooner. I missed the notice that someone replied to my comments, so please forgive the delay.

Sure, I'd be happy to provide cites, so long as I can find them.

This is the link for the lowest 95% vs top 1% obligation: http://www.taxfoundation.org/taxdata/show/24955…. As you can see, the two lines cross each other since Bush was in office and as a result of his tax cuts of 2003.

Here is a chart for the number of people with ZERO tax obligation: http://www.taxfoundation.org/research/show/1410…. As you can see, its gone up from 18% to 36% on this chart and the data then adds in this plus up: “During 2006, Tax Foundation economists estimate that roughly 43.4 million tax returns, representing 91 million individuals, will face a zero or negative tax liability. That's out of a total of 136 million federal tax returns that will be filed. Adding to this figure the 15 million households and individuals who file no tax return at all, roughly 121 million Americans—or 41 percent of the U.S. population—will be completely outside the federal income tax system in 2006.”

I could not quickly find the 2008 data where I saw the 47%. But if you track the growth, you can see that this data point at 41 in 2005 easily approaches 50%.

Here is a general AP story about the shift of taxation toward top income people: http://www.papillonsartpalace.com/taBx.htm

Again, sorry it took so long to respond. I wish I saw this sooner because I know almost no one but you will see it now. :)

Thanks for writing!

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Comment posted January 27, 2010 @ 11:37 am

I think everyone would like some tax cuts, maybe they can donate to a local charity to help some people

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Comment posted January 27, 2010 @ 12:09 pm

Since it at the bottom of both tax cuts and deficit spending, what options are there?

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Comment posted December 2, 2010 @ 3:33 am

Since we are at the bottom of both tax cuts and deficit spending, what options are there?

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