Home > upward income redistribution > Tax games and redistributing income upward

Tax games and redistributing income upward

from Dean Baker

The corporate profit share of national income is near a post-World War II high. The share of income of going to the richest one percent is almost at its pre-Depression peak.

These would seem like impressive accomplishments but the process of upward redistribution, from Joe Sixpack to Joe Six Houses, is a never-ending struggle. Toward this end, Louisiana Governor and Republican wunderkind Bobby Jindal has just proposed replacing the state’s income tax with a sales tax.

Sales taxes will generally be more regressive than income taxes for the simple reason that low- and moderate-income people will spend a larger share of their income than upper-income people. That means that the portion of income that wealthy Louisianans save will escape taxation, imposing a larger burden on low- and middle-income families in any revenue neutral shift.

However saving is only part of the story in this picture. Wealthy Louisianans are likely to spend more time and money outside of the state than less affluent residents. Insofar as wealthy Louisianans spend money at out-of-state vacation homes or Parisian shopping trips, they will be creating a tax gap for the less affluent and less well-traveled to fill.

In fact, fans of economics will likely point to the problem of Louisianans stepping over the border (less than an hour away from the state’s major cities) to escape the sales tax on purchases of big ticket items such as televisions and refrigerators. This will leave an even larger burden for the sales tax to cover, which will fall especially hard on those who may not have access to a car or for other reasons might not find it as easy to take advantage of such tax-evading tourism.

So this shift from an income tax to sales tax looks like a big step forward in the process of upward redistribution. It’s easy to see why Jindal is considered a leading contender for the 2016 Republican nomination.

Needless to say, the wealthy dislike state income taxes every bit as much as they dislike federal ones. Insofar as they gain complete control of state governments, they will take the opportunity to shift the tax burden lower down the income ladder.

They may get help in this process from one of the widely talked about tax reforms at the federal level: limiting the total amount of tax deductions that can be taken. While this may sound like a progressive measure — requiring that everyone pay their fair share of taxes — this limit could put pressure on state governments to reduce taxes on the wealthy.

With the restoration of the Clinton-era tax rates, the highest-income taxpayers are facing a marginal tax rate of almost 40 percent. This means that almost 40 percent of the state income tax paid by the wealthiest taxpayers is in effect paid by the federal government, since it comes directly off their taxes.

However, if there was a cap on deductions that most of the wealthiest taxpayers actually hit, then the burden of state income taxes would fall fully on the wealthy people in the state. Needless to say, the wealthy in New York, California and other relatively high tax states will raise much more objection to state income taxes when they are paying 100 cents on every dollar rather than 60 cents of every dollar of the tax. A likely outcome will be lower state taxes on the wealthy, and higher taxes and/or reduced services for everyone else.

The picture looks even less appealing when we consider that contributions to charity are likely to be excluded from the cap. This means that if a wealthy person feels bad about homelessness so that she contributes $100,000 to a charity to shelter the homeless, the federal government will pick up $40,000 of this tab. However if she and others in the state consider sheltering the homeless to be an obligation of government that should not depend on the kindness of the wealthy, the taxes to cover the cost will be fully born out of their own pocket.

It’s hard to see the rationale for this asymmetry, but wait, it gets worse. Suppose our rich person gives $100,000 to an opera that he and his rich friends patronize. The federal government will pick up $40k of that contribution, but zero for the state government’s efforts to shelter the homeless. Suppose that our rich person decides that his friend should get a $1 million dollar annual salary to run the opera. Well, the feds are on the hook for 40 percent of his friend’s salary, but still not contributing to the state’s efforts to shelter the homeless.

The point here should be clear. The effort to cap deductions is not actually about making the rich pay higher taxes; it is about putting pressure on state governments to cut back their services. President Obama proposed limiting deductions to a 28 percent rate regardless of individuals’ tax rate. This policy makes sense as a way of getting more tax revenue from those who can most afford to pay it. Capping the deduction does not. There is a reason that Republicans support it.

See article on original website

  1. February 10, 2013 at 4:20 pm

    For reasons of equity as well as economic efficiency, government ought to be raising most of its revenue by the public collection of rents (i.e., rents of land in its widest defined forms). Earned income flows and assets we produce (buildings, plant, equipment, etc.) should not be burdened by taxation. Absent tax law that directly captures the rent of land, a simplified but progressive income tax structure will capture a sizable portion of rent-derived income. Advocates of tax reform ought to seek a system that combines simplification with real progressivity. We could exempt all individual incomes up to the national median (or state median for state taxation). All other exemptions and deductions would be removed. Above the individual median level increasing rates of taxation would be imposed on higher ranges of income. The rates and ranges would be established based on the amount of revenue needed to balance the government budget, including revenue required to service and repay government debt (which can be accomplished in a generation by the issuance of fully amortizing bonds to replace maturing government debt). What we know if that at the highest levels of income most is derived from financial transactions, passive investment and speculation and thus essentially unearned and imposing dead weight losses on economic growth.

  2. henry1941
    February 10, 2013 at 5:50 pm

    This needs to be seen for what it really is. The upward flow of wealth is an illustration of Ricardo’s Law of Rent in operation. Where all land is enclosed, real wages drop to the minimum a worker will accept, whilst the return to capital tends to stablise at a level. Thus all additional surplus product ends up as land rent, usually wrapped up in the form of bond dividends or what are described as interest charges but are in economic terms rent of land.

    If this is regarded as a problem, the solution is to shift from the taxation of incomes, profits and sales taxes to a tax on the rental value of land. Otherwise, the process will continue with increasing intensity.

  3. February 10, 2013 at 8:43 pm

    Why not have a fair and equitable tax? One that would raise more revenue, “to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity,…”
    Please, read:
    Read what Steve Keen has to say about “credit expansion, von Mises as to what the result of credit expansion could be, William Black has to say about banks and Michael Hudson about compound interest (excerpts are in the article). An explanation of where we went wrong with a solution to how we can fix it.
    Challenge it. Improve it. ” ***** “Believe nothing merely because you have been told it…But whatsoever, after due examination and analysis,you find to be kind, conducive to the good, the benefit,the welfare of all beings – that doctrine believe and cling to,and take it as your guide.”- Buddha[Gautama Siddharta] (563 – 483 BC), Hindu Prince, founder of Buddhism. ****The Way To Eliminate Poverty and Secure Prosperity For All. by justaluckyfool
    Summary To lower taxes,you must raise revenue somewhere.
    Why would you not want prosperity for yourselves and your children.
    Read: http://bit.ly/MlQWNs
    How Obama can place his name in history as one of the greatest not only as president, but also a leader for the betterment of mankind. As Einstein said, “Keep it simple .”
    As president Obama said, “(as stated on ” 60 minutes” (12/11/11)”You can’t raise revenues by lowering taxes unless you get the money from somewhere else.”

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