So we’re good then, right, no need to do more, we solved our problem here in Minnesota with the Dayton tax hikes?
You got to do a lot of math to make one of these studies, but the base calculation is ostensibly all tax payments made by taxpayer as a percentage of income. So you get that, and break income levels into deciles, and from there you can compare average payments from the poor to the rich. In an environment where people pay sales taxes, state income taxes, and federal income taxes, you end up being able to observe somewhat ironically that with all that totaled the poor and poor-ish end up having a higher effective tax rate than the rich. Which is to say you can observe it because it’s true. And then you can also observe it with ironic concern because we’re very much societally trained to understand that we should have progressive taxation and this would say we’re failing.
In Minnesota, this stat set has for years been a favorite of the tax raisers. Loveland, MN2020. Now progressive taxation may be good, it may be bad…and as a recalcitrant conservative I have in these pages given Dayton / DFL some credit for reversing Pawlenty-ism, raising taxes they thought the state needed and getting the $ from people who had it…. But I still think this particular stat set focused in effective rate inequality is fraudulent as all get out. Mathematically fraudulent.
The core tax payment inequality observation between rich and poor here is not a function of tax policy failure. It’s a product of math, particularly income amounts and the sales tax, from which there is no value judgment on tax inequality that we should discern.
You got a guy / gal, who makes $25k a year…. Forget that say up to $50k, more…They spend all their income, do not save any. Which is to say, all that income is exposed to the sales tax.
You get higher income people, into the low six figures… They may, as a fact of demographics and modern economics, also spend all their income. But they spend a lot of it on stuff that isn’t exposed to the sales tax. Tuition, medical insurance premiums, etc. And they defer money, which isn’t taxed now in any way… 401Ks. Low income people do this to much less extent.
Low-mid six figures and higher, you got people who make money that they don’t spend at all. Tens of thousands or more a year, these monies in great amounts being tax deferred or not exposed to sales taxes.
It’s just to say, demographic / nominal qualities of these non-sales taxed activity / income amounts for middle and affluent classes are mathematically powerful in diminishing this holistic effective tax rate calculation. But I don’t think it’s proper this mathematical feature, the supposed effective rate inequality that is the product of this calculation, should ever be thought to speak to a tax rate inequality that anyone should do anything about. We ask different taxes to different things. The purpose of the sales tax has always been to raise a lot of revenue from a broad base, with minimal burden. To make this inequality observation based on the effective tax rates of all taxes combined is to argue the sales tax is ineffective in capturing revenues from after income-tax monies the middle class and rich don’t spend. Which is true, but very far removed from how we expect the sales tax to operate. A radical notion is one that seeks a fix for it, we have not thought about the sales tax in these terms.
Now, obviously you can re-arrange some facets here and say hey, we can respond practically to this sales tax incidence anomaly by raising income taxes on the affluent and rich… But I don’t think the mathematical features for the income deciles and their inequalities change so much unless you raise rates on the middle class and affluent a whole lot, in ways that as a practical matter are impossible. I mean, say that in Minnesota for the effective tax rate of the rich to be meaningfully progressive above the effective tax incidence of the poor, the top bracket has to move to 20%. That’s not something that ever happens, it’s politically untenable.
Which makes this stat set a nothing burger of dubious value. I mean look… we got a small top bracket income tax hike a couple years ago, and it served a purpose. It raised some revenue within the confines of what was politically possible. Did it move our effective tax rates at all over the various deciles? I doubt it moved them much, doubt it would have moved our ranking in that study.