WHERE ARE THE PROPERTY AND LAND TAXES [... :( ...]. But really I'd like to see those added along with inheritance/estate and corporate taxes which were mentioned. Like is there a really good two or three graphs (4d?) for all of the axis of taxes state/federal?
State income tax rates do not appear to include local taxes, at least not for Maryland where we live. The map at top of post gives MD top tax rate as 5.75%, but each county adds its own levy. In Montgomery Country where we live the actual state top tax rate, including county tax, is 8.9%
A Flat Rate Tax is not progressive in and of itself but a Flat Rate Tax coupled with a Flat Rate Standard Deduction is (the percentage of income taxed goes up as the income increases). This is a simple way to achieve progressivity.
Sales Taxes are not progressive but Sales Taxes coupled with Standard Exemptions are. For example, the State of Minnesota Sales Tax has exemptions for items such as medicine, food, and clothing < https://www.salestaxhandbook.com/minnesota/sales-tax-exemptions >. If poorer folks spend a higher percentage of their income on food, clothing, shelter, and medical costs than rich folks do, then rich folks spending on non-basic (non-esential/luxury?) items will be taxed to a greater extent of their overall spending than that of poor folks; therefore: progressive.
As Douglas Feltham points out below; the ease, simplicity, and perceived farness of a tax system are critical factors in whether or not such a system will be successful.
A number of issues here. First, Massachusetts doesn't have a flat 5% income tax. For one, it taxes short-term capital gains at 12%. But even more broadly, there is an $8000 exemption. If you make $30,000 a year, your average tax rate is 3.67%. If you make $300,000 a year, it is 4.87%.
Second, why is it "unfair" that you and the Bain partner pay the same percentage rate on state income tax? She obviously pays orders of magnitude more state taxes than you. What level of progressivity is "fair"? Why? And why on this one tiny component of the tax system in isolation? The US tax system as a whole is one of the most progressive in the world.
Third, if you are going to head in this direction, why would you tax income instead of property (or one better, land value)? Income is mobile, and it is extremely volatile, especially capital income. States are generally budget constrained, and short-term downturns will lead to damaging spending cuts.
I don't expect that it would happen, but the US might look north to Canada.
1. Provinces share taxes. That is, there's a calculation as to how wealthy a province is, and the richer provinces share tax revenues with the poorer provinces. It's in our constitution. They're called "equalization payments." Wealthy states (like California, NY) could share some wealth with poorer (Mississippi, Louisiana). Wealth is determined by the potential to raise taxes, not what states actually raise.
2. The national government has a VAT. 5% on all goods and services except foods and medicines. No exceptions. Works well. Funds things like medicare, universal child credit, etc.
The result? Canada has a Gini (the measure of economic inequality) of 33.3 -- in line with Europe -- the US has a Gini of 41.4 -- in line with China, Russia, many African states. Tax policy has a lot to do with it.
IIRC from my fiscal federalism class ages ago, the US is the only federation without some form of explicit equalization payments going from the national to subnational governments, though there's wide variation on exactly how each country implements them (e.g. Canada does it based on fiscal capacity, Australia does it based on fiscal needs). One of the readings argued that the US's approach to equalization is to do it implicitly, via medicaid, medicare, and military spending (read: where are bases disproportionately located?).
They don't; it comes from the federal budget, but approximately nobody understands the actual mechanism by which the money flows, leading to bizarre spectacles like Alberta having a referendum earlier this year to argue that it shouldn't be a net contributor to equalization.
Fun fact: Canada and Switzerland are the only federations where most revenue's raised by subnational governments (~53% and 60%, respectively); in most other federal countries, most revenue's collected by the feds.
Actually, the revenue sharing is done through the Canadian federal government. The feds collect the money from taxpayers (via income taxes, the VAT, etc.) and dole it out to provinces according to how wealthy each is. So when we say that Alberta, for example, with large natural resource revenue from oil, donates money under equalization to the poorer provinces (for example, New Brunswick), what we really mean is that taxpayers in Alberta pay more than they collectively receive from the federal government.
To some extent this parallels the situation in the US in that the federal government is more likely to spend money in poorer states than in richer ones in defense contracts, Medicare payments, etc. see https://www.moneygeek.com/living/states-most-reliant-federal-government/ The Canadian system is more direct and I would argue fairer.
More land taxes, more consumption taxes (which may be regressive when viewed as a percentage of income, but also nice that they can't be avoided - increased consumption is all taxed), fewer income taxes and other "gameable" taxes.
I'm going to put in a shameless plug for FreeTaxUSA.
$0 for federal e-file and $15 for state e-file with a very easy step-by-step process similar to TurboTax but with without the upselling/deceptive practices
I'm a huge truther on the "rich people drink more alcohol" survey results. It's a survey, not observational data, so the data is skewed both by who responds and the difference between who they are and how they want to be seen. Perhaps what this represents is the difference in the social desirability of alcohol consumption between groups.
On a more anecdotal level, that doesn't seem to match at all with who the drunks I know are, who is buying cases of beer, and who attends the mandatory classes you get assigned after getting a dui.
Big agree. I grew up working class and I simply don't believe that alcohol consumption is lower there, to put it mildly. I'm also upper middle class now and I have never seen a big drinking culture at that income level, at least in the US
I'm much more interested in swapping the regressive capped wage tax for a less regressive VAT. It is already difficult to increase the wage tax by enough to fully pay for SS and Medicare, much less other things we ought to finance from taxation like national unemployment insurance that replaces a good portion of lost income and paid family leave.
Milan, good effort. Some constructive criticism below.
Most tax analysis suffers because authors focus on only one side of a two-sided coin: revenue collection and government spending. European countries have a very 'regressive' tax regime; a regime Milan would probably pan in this article. But the conclusion that the European tax system is regressive would miss the mark because, holistically speaking, European systems take money from everyone and give to the poor. The US has one of the most progressive tax collection systems in the world--look it up. But our system is net-less progressive because we spend a larger percentage of that income on the middle class and rich.
A tax analysis that looks at a tax system by just looking at the tax rates is incomplete. Would be interested in a follow-on analysis on how states with similar tax rates/percentages of income spend their money.
Would also be interested in the impacts of fiscal capacity. If you look Mississippi (a red, presumed low-tax state) and Massachusetts have similar marginal tax rates and sales tax rates. But Massachusetts is able to raise significantly more money than Mississippi is per capita because it is a richer state. The first order impacts are obvious, but crucially many of the federal programs we set up have state matching requirements to receive money. We essentially are asking rich (blue) states to incrementally increase their tax rates to raise revenue but are asking poorer red states to hike their rates much higher. It's another barrier to full adoption--and one a barrier progressive legislatures should be sympathetic towards.
>>The first order impacts are obvious, but crucially many of the federal programs we set up have state matching requirements to receive money. We essentially are asking rich (blue) states to incrementally increase their tax rates to raise revenue but are asking poorer red states to hike their rates much higher. It's another barrier to full adoption--and one a barrier progressive legislatures should be sympathetic towards.
Medicaid--by far the biggest joint federal-state matching program--has a sliding scale so that states contribute anywhere between 20-50% of the program cost based on the state's poverty rate. I haven't looked at the rates in a few years, but suffice to say that Mississippi pays close to 20% while Massachusetts (and a few other states) pay a half-share. SNAP and TANF are the two other main state-administered welfare programs I can think of, but there is not state matching of program (rather than administrative) costs to my knowledge. (TANF is block-granted, creating its own state disparities, but that's a separate issue.)
So I'm not sure what programs you're referring to here, unless your point is that the Medicaid sliding scale isn't well-designed (it could be; I don't have a strong empirically-grounded opinion on that). The other big area for federal-state matching I can think of is infrastructure, but in theory those projects should pay for themselves and the projects can be debt-financed on the state end. (And if the problem is that the states are issuing debt that they cannot pay off through increased tax revenues, then they probably shouldn't be building that infrastructure.)
This was more of a general point/critique. From what I understand, the medicaid expansion has a non-sliding scale requirement from states--albeit 'just' 10%. Does the proposed Pre-K program in BBB have a sliding scale for states' fiscal burden based on fiscal capacity? I haven't read anywhere that it does. Fiscal capacity is just something we need to consider moving forward whenever we decide to put funding obligations onto states, and I haven't seen many outside of Joshua McCabe drive the point home.
In Washington, the regressive reliance on the sales tax, and lack of income tax, is a perennial topic of debate. Unfortunately, it always comes down to a fact that seems utterly intractable - WA actually prohibits income taxes in its state constitution. Changing it would require a prohibitively large majority, given how hard it is to get legislators to agree on matters of taxation.
Gov Inslee has been attempting some interesting maneuvers to reinterpret this clause, but it’s one hell of an uphill battle. I’d love to see my home state reduce the burden on its poorer residents, and there are options on the table, but income tax isn’t one of them.
One possible approach rather than cutting sales tax across the board is to bring in a much bigger cut (possibly to zero) on goods that poor people tend to buy more of - "essentials" if you want the marketing term.
Uncooked food (so takeout and restaurants still pay tax) is one obvious one.
Menstrual products and basic personal and household cleaning supplies.
Clothes might be one, but you maybe don't want to zero-out expensive fashion, and drawing a line gets really hard (item price?).
I have been boycotting TurboTax because of their shenanigans and have used TaxAct for the past few years, since it has a high limit for free file.
About two years ago, I was looking for an entry-level data analytics job and saw gobs and gobs of TurboTax jobs. I couldn’t stand working for them, but I hoped that meant that they were in trouble and were looking for a way out.
Also, I live in Wyoming and my taxes are too damn low.
In Washington state, rent and groceries, the two biggest budget items for a low-income person, are not subject to sales tax. Neither is insurance or even gasoline. A 10% sales tax may seem high, but it really only becomes noticeable for people who lack financial discipline, and constantly buy random things they don't need. (The 10% sales tax does bite when buying a new car, or doing a major home improvement project, but low-income people generally don't spend a lot of money on these things).
I also believe, anecdotally, that the lack of an income does indeed help attract jobs to the state. It makes the same pay package worth more, compared to other states with an income which makes employee recruitment and retention easier, all else equal, thereby encouraging companies to locate in the state. I also like not needing to deal with the paperwork of filing a state return.
In 2010, we had a ballot measure to swap out a portion of the state's property tax for an income tax on high earners. It failed in a landslide. Today, Washington seems to do just fine without an income tax, and I don't see any particular reason to change that. If we need more money for services, we can do it through property tax instead.
WHERE ARE THE PROPERTY AND LAND TAXES [... :( ...]. But really I'd like to see those added along with inheritance/estate and corporate taxes which were mentioned. Like is there a really good two or three graphs (4d?) for all of the axis of taxes state/federal?
State income tax rates do not appear to include local taxes, at least not for Maryland where we live. The map at top of post gives MD top tax rate as 5.75%, but each county adds its own levy. In Montgomery Country where we live the actual state top tax rate, including county tax, is 8.9%
A couple of points:
A Flat Rate Tax is not progressive in and of itself but a Flat Rate Tax coupled with a Flat Rate Standard Deduction is (the percentage of income taxed goes up as the income increases). This is a simple way to achieve progressivity.
Sales Taxes are not progressive but Sales Taxes coupled with Standard Exemptions are. For example, the State of Minnesota Sales Tax has exemptions for items such as medicine, food, and clothing < https://www.salestaxhandbook.com/minnesota/sales-tax-exemptions >. If poorer folks spend a higher percentage of their income on food, clothing, shelter, and medical costs than rich folks do, then rich folks spending on non-basic (non-esential/luxury?) items will be taxed to a greater extent of their overall spending than that of poor folks; therefore: progressive.
As Douglas Feltham points out below; the ease, simplicity, and perceived farness of a tax system are critical factors in whether or not such a system will be successful.
We agree.
A number of issues here. First, Massachusetts doesn't have a flat 5% income tax. For one, it taxes short-term capital gains at 12%. But even more broadly, there is an $8000 exemption. If you make $30,000 a year, your average tax rate is 3.67%. If you make $300,000 a year, it is 4.87%.
Second, why is it "unfair" that you and the Bain partner pay the same percentage rate on state income tax? She obviously pays orders of magnitude more state taxes than you. What level of progressivity is "fair"? Why? And why on this one tiny component of the tax system in isolation? The US tax system as a whole is one of the most progressive in the world.
Third, if you are going to head in this direction, why would you tax income instead of property (or one better, land value)? Income is mobile, and it is extremely volatile, especially capital income. States are generally budget constrained, and short-term downturns will lead to damaging spending cuts.
Good piece that will likely never see air in the local paper...But of course should be seen and read for that matter.
I don't expect that it would happen, but the US might look north to Canada.
1. Provinces share taxes. That is, there's a calculation as to how wealthy a province is, and the richer provinces share tax revenues with the poorer provinces. It's in our constitution. They're called "equalization payments." Wealthy states (like California, NY) could share some wealth with poorer (Mississippi, Louisiana). Wealth is determined by the potential to raise taxes, not what states actually raise.
2. The national government has a VAT. 5% on all goods and services except foods and medicines. No exceptions. Works well. Funds things like medicare, universal child credit, etc.
The result? Canada has a Gini (the measure of economic inequality) of 33.3 -- in line with Europe -- the US has a Gini of 41.4 -- in line with China, Russia, many African states. Tax policy has a lot to do with it.
IIRC from my fiscal federalism class ages ago, the US is the only federation without some form of explicit equalization payments going from the national to subnational governments, though there's wide variation on exactly how each country implements them (e.g. Canada does it based on fiscal capacity, Australia does it based on fiscal needs). One of the readings argued that the US's approach to equalization is to do it implicitly, via medicaid, medicare, and military spending (read: where are bases disproportionately located?).
Why are provinces revenue sharing when there’s a Federal government that could do that job with its own tax raising ability?
They don't; it comes from the federal budget, but approximately nobody understands the actual mechanism by which the money flows, leading to bizarre spectacles like Alberta having a referendum earlier this year to argue that it shouldn't be a net contributor to equalization.
Fun fact: Canada and Switzerland are the only federations where most revenue's raised by subnational governments (~53% and 60%, respectively); in most other federal countries, most revenue's collected by the feds.
Actually, the revenue sharing is done through the Canadian federal government. The feds collect the money from taxpayers (via income taxes, the VAT, etc.) and dole it out to provinces according to how wealthy each is. So when we say that Alberta, for example, with large natural resource revenue from oil, donates money under equalization to the poorer provinces (for example, New Brunswick), what we really mean is that taxpayers in Alberta pay more than they collectively receive from the federal government.
To some extent this parallels the situation in the US in that the federal government is more likely to spend money in poorer states than in richer ones in defense contracts, Medicare payments, etc. see https://www.moneygeek.com/living/states-most-reliant-federal-government/ The Canadian system is more direct and I would argue fairer.
More land taxes, more consumption taxes (which may be regressive when viewed as a percentage of income, but also nice that they can't be avoided - increased consumption is all taxed), fewer income taxes and other "gameable" taxes.
I'm going to put in a shameless plug for FreeTaxUSA.
$0 for federal e-file and $15 for state e-file with a very easy step-by-step process similar to TurboTax but with without the upselling/deceptive practices
I'm a huge truther on the "rich people drink more alcohol" survey results. It's a survey, not observational data, so the data is skewed both by who responds and the difference between who they are and how they want to be seen. Perhaps what this represents is the difference in the social desirability of alcohol consumption between groups.
On a more anecdotal level, that doesn't seem to match at all with who the drunks I know are, who is buying cases of beer, and who attends the mandatory classes you get assigned after getting a dui.
Big agree. I grew up working class and I simply don't believe that alcohol consumption is lower there, to put it mildly. I'm also upper middle class now and I have never seen a big drinking culture at that income level, at least in the US
I'm much more interested in swapping the regressive capped wage tax for a less regressive VAT. It is already difficult to increase the wage tax by enough to fully pay for SS and Medicare, much less other things we ought to finance from taxation like national unemployment insurance that replaces a good portion of lost income and paid family leave.
Milan, good effort. Some constructive criticism below.
Most tax analysis suffers because authors focus on only one side of a two-sided coin: revenue collection and government spending. European countries have a very 'regressive' tax regime; a regime Milan would probably pan in this article. But the conclusion that the European tax system is regressive would miss the mark because, holistically speaking, European systems take money from everyone and give to the poor. The US has one of the most progressive tax collection systems in the world--look it up. But our system is net-less progressive because we spend a larger percentage of that income on the middle class and rich.
A tax analysis that looks at a tax system by just looking at the tax rates is incomplete. Would be interested in a follow-on analysis on how states with similar tax rates/percentages of income spend their money.
Would also be interested in the impacts of fiscal capacity. If you look Mississippi (a red, presumed low-tax state) and Massachusetts have similar marginal tax rates and sales tax rates. But Massachusetts is able to raise significantly more money than Mississippi is per capita because it is a richer state. The first order impacts are obvious, but crucially many of the federal programs we set up have state matching requirements to receive money. We essentially are asking rich (blue) states to incrementally increase their tax rates to raise revenue but are asking poorer red states to hike their rates much higher. It's another barrier to full adoption--and one a barrier progressive legislatures should be sympathetic towards.
>>The first order impacts are obvious, but crucially many of the federal programs we set up have state matching requirements to receive money. We essentially are asking rich (blue) states to incrementally increase their tax rates to raise revenue but are asking poorer red states to hike their rates much higher. It's another barrier to full adoption--and one a barrier progressive legislatures should be sympathetic towards.
Medicaid--by far the biggest joint federal-state matching program--has a sliding scale so that states contribute anywhere between 20-50% of the program cost based on the state's poverty rate. I haven't looked at the rates in a few years, but suffice to say that Mississippi pays close to 20% while Massachusetts (and a few other states) pay a half-share. SNAP and TANF are the two other main state-administered welfare programs I can think of, but there is not state matching of program (rather than administrative) costs to my knowledge. (TANF is block-granted, creating its own state disparities, but that's a separate issue.)
So I'm not sure what programs you're referring to here, unless your point is that the Medicaid sliding scale isn't well-designed (it could be; I don't have a strong empirically-grounded opinion on that). The other big area for federal-state matching I can think of is infrastructure, but in theory those projects should pay for themselves and the projects can be debt-financed on the state end. (And if the problem is that the states are issuing debt that they cannot pay off through increased tax revenues, then they probably shouldn't be building that infrastructure.)
This was more of a general point/critique. From what I understand, the medicaid expansion has a non-sliding scale requirement from states--albeit 'just' 10%. Does the proposed Pre-K program in BBB have a sliding scale for states' fiscal burden based on fiscal capacity? I haven't read anywhere that it does. Fiscal capacity is just something we need to consider moving forward whenever we decide to put funding obligations onto states, and I haven't seen many outside of Joshua McCabe drive the point home.
In Washington, the regressive reliance on the sales tax, and lack of income tax, is a perennial topic of debate. Unfortunately, it always comes down to a fact that seems utterly intractable - WA actually prohibits income taxes in its state constitution. Changing it would require a prohibitively large majority, given how hard it is to get legislators to agree on matters of taxation.
Gov Inslee has been attempting some interesting maneuvers to reinterpret this clause, but it’s one hell of an uphill battle. I’d love to see my home state reduce the burden on its poorer residents, and there are options on the table, but income tax isn’t one of them.
One possible approach rather than cutting sales tax across the board is to bring in a much bigger cut (possibly to zero) on goods that poor people tend to buy more of - "essentials" if you want the marketing term.
Uncooked food (so takeout and restaurants still pay tax) is one obvious one.
Menstrual products and basic personal and household cleaning supplies.
Clothes might be one, but you maybe don't want to zero-out expensive fashion, and drawing a line gets really hard (item price?).
I have been boycotting TurboTax because of their shenanigans and have used TaxAct for the past few years, since it has a high limit for free file.
About two years ago, I was looking for an entry-level data analytics job and saw gobs and gobs of TurboTax jobs. I couldn’t stand working for them, but I hoped that meant that they were in trouble and were looking for a way out.
Also, I live in Wyoming and my taxes are too damn low.
In Washington state, rent and groceries, the two biggest budget items for a low-income person, are not subject to sales tax. Neither is insurance or even gasoline. A 10% sales tax may seem high, but it really only becomes noticeable for people who lack financial discipline, and constantly buy random things they don't need. (The 10% sales tax does bite when buying a new car, or doing a major home improvement project, but low-income people generally don't spend a lot of money on these things).
I also believe, anecdotally, that the lack of an income does indeed help attract jobs to the state. It makes the same pay package worth more, compared to other states with an income which makes employee recruitment and retention easier, all else equal, thereby encouraging companies to locate in the state. I also like not needing to deal with the paperwork of filing a state return.
In 2010, we had a ballot measure to swap out a portion of the state's property tax for an income tax on high earners. It failed in a landslide. Today, Washington seems to do just fine without an income tax, and I don't see any particular reason to change that. If we need more money for services, we can do it through property tax instead.