How We Solve the Taxing the Rich Problem

Top Tax Rate was 15% in 1973.

Minnesota’s Governor, Mark Dayton, would like to raise additional state revenue with a marginal income tax rate.  Right now the number looks like an increase for annual incomes over %150,000 for individuals and an increase for straight married couples earning over $250,000, roughly the state’s top 2% of income earners.

A couple things to note here.  First, it is a marginal rate.  Minnesota’s top income tax rate is 7.85%.  Dayton proposes an increase to 9.85%.  In Minnesota, marginal rate only applies to earnings within the applicable tax bracket.  Therefore, that extra 2% is added to dollars earned over $150,000 for individuals or $250,000 for straight couples.  So if you’re earn $10,000 more than the threshold, your extra tax is $200 above what it is today.

Is that a lot?  I would argue that it is a sustainable tax rate and worthy investment.  We can debate that.  But it doesn’t seem like the facts behind the figures ever get discussed.  Why?  Because it gets lost in this almost belittling “tax the rich” rhetoric.

Politicians and reporters almost chortle…”Ho, ho, ho!  Tax the rich!  $150,000 a year?  Do you think that’s rich?”  Of course everyone shakes his head…

Is $150,000 a year rich?  Again, this is something we can debate and frankly the idea of what is or is not rich is entirely subjective.  To someone making $20,000 a year, $150,000 might not be the wealth of fantasy, but it is still a hell of a lot more than $20,000.  To a very fortunate person earning ten times as much, %150,000 might not seem like much at all.  My point is, why talk about taxing the “rich” at all when the meaning  of “rich” is so arbitrary?

I always like to point out that 35% of Americans think they are in the top 10% of income earners to shed light on how little we really understand about income tiers in the first place.  The tax the rich arguments simply distract people from the facts in the matter.

Even the arguments that these two-percenters in Minnesota are small business owners is merely a distraction.  First off, it isn’t any more true that a business owner is among the 2% than he is mixed in with more “middle class” incomes.  The fact is the majority of business owners are not in this tier.  But even if they were…so what?

In reality, we are taxing incomes, not people.  Whether you think $150,000 per individual (or $250,000 for straight married couples) is rich or not is hardly the point.  It is an income enjoyed by minority of people in the state who also are more likely to pay a lower effective overall tax rate anyway.  Again, we can debate who benefits more from a strong economy, the well-to-do or the poor, but it would seem obvious that the higher incomes have more means to pay.

A more philosophically honest and morally direct criticism of marginal tax rates is to say that all people should pay the same rate — a flat tax — regardless of  income status, but we are nowhere near that.  Conservatives in this country openly defend lower taxes for the wealthiest even as they cry foul about taxes generally.  It is hard to see how you can make any fairness or moral argument if in the first place your policies create different tax liabilities and subsidies.  (So screw them.)

But once again, in defending existing unfair tax policies, conservative politicians hide behind the seemingly uncool and unpatriotic position that you cannot tax the rich.  The argument works because we really don’t know what rich is, but more importantly it works because it takes focus away from facts and puts it on misunderstood abstractions about wealth, fairness, and demographics.

So the solution:  Stop talking about taxing “millionaires and billionaires” and start talking about what the tax is, what the marginal rates are, and why these necessary taxes are good for all of us, rich and poor alike.

Related articles

• Video: What are Income Tax Rates? (turbotax.intuit.com)
• House Progressives have the best answer to Paul Ryan (washingtonpost.com)
• Dayton’s new plan includes higher taxes on cigarettes, wealthy (minnesota.publicradio.org)

Sales Tax as a Moral Issue

National Public Radio reported on the trend among Republican governors to cut income taxes, often by proposing a broader sales tax.  Even in once-progressive Minnesota, Democratic governor Mark Dayton is proposing a scheme to increase sales tax by increasing the goods and services subjected to the tax.

In an era when the wealthiest enjoy a lower real tax rate than the poorest, it seems immoral to increase the tax burden on the poorest.  Furthermore, we have a depressed economy and that hurts the poor and the middle class the most.  Meanwhile, the very wealthiest, those already paying the lowest tax rates, have realized strong economic gains.

Forget the phony arguments about supporting job creators and business owners — an argument you’ll hear in NPR’s story — isn’t this really a moral question when we choose to increase taxes on those least able to pay them while those who have the resources to pay them get by with lower real rates?  There’s something almost criminal about that.

Let’s look at an example.

Let’s use after-tax disposable income and say that Family A has $50,000 after taxes and Family B has $500,000.  In this hypothetical example the sales tax rate is 5%.  Suppose family A spends only $40,000 of their income on taxed items at 5%.  That’s a tax of $2000.   Family B spends $200,000.  That’s a tax of $10,000.  So Family B is doing more to support our government, right?

Well, yes…in dollars.  But Family B has $300,000 in savings, a valuable asset that Family A does not have.  We could talk about the material benefit of having five times as much goods and services to enjoy, too, but cranks will complain that this is a subjective criticism akin to resentment.

The real issue is in the rate of tax.  We can look at the rate of tax as a factor of overall disposable income to make a comparison.  Family A pays an effective rate of 4%.  Family B, however, pays an effective rate of 2%, half as much.  Now I think we CAN look at the discrepancy of material benefit in items and services bought and savings gained.  Family B is much better off in the end while Family A pays a disproportionately higher amount in taxes.

In the age of inequality — with all the harm that that it creates — why would we foster further inequality?  On what sensible argument can you justify further depressing the wealth and power of those who are already behind?

Keep in mind, too, that the very poorest among us cannot escape sales taxes.  The mean-spirited argument that some people pay no taxes at all is demonstrably false.  Those “tax free” people actually pay.

Finally, as taxes expand to cover essentials like food and services like legal representation, the poorest are hit again.  We should protect the basic necessities of life, like food, clothing, and shelter.  And in a society where the quality of legal representation matters in issues of justice, freedom itself can depend on the ability to pay for legal services.  Taxing these services only tips the balance away from serving the poor and working classes.

In the age of inequality, sales taxes are not just a bad idea, they are an unjust solution that point to moral problems in our society.

Related articles

• Wealthiest Americans Pay Half the Effective Tax Rate That Poorest Pay in State and Local Taxes (yubanet.com)
• Budget 101:  A graphic primer to Dayton’s budget proposal (minnpost.com)
• The New Republican Tax War:  State Tax Hikes on the Poor to Fund Tax Cuts for the Rich (politicususa.com)
• Poor Americans Pay Double the State, Local Tax Rates of Top 1 Percent (huffingtonpost.com)

Minnesota Politics: Taxes and Health Care Show GOP Priorities

This is short so maybe even people who haven’t had time to sort out what’s happening with our state’s priorities will have time to understand a simple example.

Take a look at proposals for the state’s Health and Human Services budget.  Passage of the HHS omnibus bill which reduces the budget by $1.6 billion dollars would result in lost health care benefits for approximately 138,000 of Minnesota’s most needy citizens, including many children.  The GOP contends it must do this to balance the state’s budget.

Governor Mark Dayton’s plan would raise nearly $2.9 billion in overall state revenues by increasing tax rates on the top 5% of Minnesota’s income earners.  This is part of Dayton’s plan to balance the state’s budget and it doesn’t involve cutting essential services to our neediest citizens.

Conservatives and the misguided self-righteous will argue that the problems of the unfortunate should not be solved at the cost of the fortunate.  Ok, whatever…keep moral questions out of this.  Look at facts.

Right now in Minnesota the top 5% of income earners pay a smaller percentage of their overall income in taxes than the rest of Minnesota’s tax payers.  Minnesota has an increasingly regressive tax system as the effective tax rate for top earners continues to decrease.  These are really rather simple numbers to understand, but it seems that no one is taking time to think it through.

Summaries of our tax situation can be found at the Institute on Taxation and Policy  and here is a handy summary in a chart from two years ago.  A more thorough and recent report is here at Minnesota 2020.

In essence, the less-fortunate are paying a larger percentage of their income in taxes, shouldn’t they expect more from it?  That’s one way to look at it.  But why would you support a tax policy that gives a break to the wealthiest when you must cut essential services for the neediest to do so?

The GOP keeps telling us we need to live within our means.  Very clearly and plainly they are telling us that tax cuts for the wealthy are more important to them than the welfare of the neediest.  Is that the kind of priority that we value in our society?  As long as the GOP thinks unsustainable tax cuts are “within our means” they are showing exactly what priorities Republicans value.

All Mark Dayton is proposing is tax fairness.  He is trying to eliminate only some of the regressive qualities of our tax system and get the wealthiest to pay the same proportion of their income in taxes that the poorest pay.  What is wrong with that?

(NB  These numbers will move around some if the GOP ever agrees to negotiate, something they have so far refused to do.  The priorities matter and are clearly illustrated by this comparison.)