One of the big debates concerns who pays more in taxes—the wealthy or the poor? This feeds into a larger conversation about the appropriate level of taxation for different income levels and how to achieve that. We’ll see rhetoric on the wealthy versus the poor heat up this year again as progressive use it to claim that redistributionist policies are needed to correct what they perceive as an imbalance. But does one really exist?
New analysis supports the claims that the poor pay more because they have a higher overall effective state and local tax rate. However, previous analysis points to higher federal taxes paid by the wealthy. The problem is no one has painted a full picture of the aggregate tax burdens that Americans face and even further, that impact on their discretionary incomes, wealth, and daily lives.
The progressive Institute on Taxation and Economic Policy (ITEP) might be expected to paint a picture of poorer Americans bearing a greater share than the wealthy, findings that would fit in with its philosophy. No surprise then, the ITEP’s new report on the “fairness” of state and local taxes, virtually every state tax system does just that, finding that the tax system is “fundamentally unfair” to Americans with lower incomes. According to the ITEP, taxing authorities take a greater share of income from low- and middle-income families than from wealthy families. Combining all state and local income, property, sales and excise taxes that Americans pay, the nationwide average effective state and local tax rates by income group are 10.9 percent for the poorest 20 percent of individuals and families, 9.4 percent for the middle 20 percent and 5.4 percent for the top 1 percent.
ITEP points to the regressive tax structure of states and local taxes. It even compiles what it calls “the Terrible 10” list of states where the bottom 20 percent pay up to seven times as much of their income in taxes as their wealthy counterparts: Washington, Florida, Texas, South Dakota, Illinois, Pennsylvania, Tennessee, Arizona, Kansas, and Indiana. Reliance on sales and excise taxes are characteristics of the most regressive state tax systems as six of the 10 most regressive states derive roughly half to two-thirds of their tax revenue from sales and excise taxes, compared to a national average of roughly one-third.
And while personal income taxes are more progressive, sales and excise taxes are the most regressive forcing poor families to pay more -almost eight times more- of their income in these taxes than wealthy families. According to the ITEP report, middle income families pay five times more. Even if the ITEP report on state taxes is accurate, however, it would not allow them to truthfully claim that poor or middle class people bear more of the burden than the rich. Federal taxes, moreover, are where the real bite to our incomes is.
As the conservative Tax Foundation contends, Americans pay far more in federal taxes (two-thirds of the overall taxes we pay) and the wealthy pay a higher share of those federal taxes in both incomes and total taxes. In addition, the federal government permits taxpayers to write-off their state and local taxes so they essentially get some of it back in their federal returns.
What’s missing is an assessment of combined federal, state and local taxes. A full picture would tell us in total terms and as a proportion of income how much Americans pay at levels of income. That’s what should then inform policy.
CNBC agrees:
A new study finding an "unfair," rich-poor balance in state and local taxes has been getting big traction on the Web this week.
The study, from the Institute on Taxation and Economic Policy, found that "virtually every state's tax system is fundamentally unfair, taking a much greater share of income from low- and middle-income families than from wealthy families." It added that state and local tax systems are "indirectly contributing to growing income inequality by taxing low- and middle-income households at significantly higher rates than wealthy taxpayers."
In other words, it said the tax systems are "upside down," with the poor paying more and the rich paying less…
Yet while the report is sure to spur calls for higher taxes on the rich, its findings paint a misleading picture of the broader taxes paid by Americans, rich and poor included.
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So far, it doesn't appear that any study has looked at the combined federal, state and local tax burdens as a share of certain income groups. But Roberton Williams of the Tax Policy Center said that combining all taxes would almost certainly show that the wealthy pay more than the rest.
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The second problem with looking purely at state and local taxes is that taxpayers can deduct state and local taxes from their federal taxes. So some of that tax burden shifted to the middle and lower class at the state level is given back by the federal government. The federal tax system, in other words, rebalances or cancels out some of the regressive structure of the state and local taxes.
This debate tautological. No one pays just one tax. To argue that because of state taxes we must be more aggressive about “soaking the rich” is misleading. At the same time, we must not ignore the burden of state taxes on the poor and middle class.
The real culprit here is the overall system of taxation in this country. We need taxes at all levels o be reduced or eliminated (where possible). That‘s the fastest way to boost discretionary income and to ease the financial burdens on all of our shoulders.