Blood from a stone: new study finds low- and middle-income in unfair tax squeeze

Chalk up another reason why America’s poor keep getting poorer.

Recently, I looked at a trend that showed working-class Americans were losing work hours at an historically faster rate than upper-income earners — a factor that some have argued is a contributor to today’s growing inequality gap.

Today, a new report released by the Institute on Taxation and Economic Policy, a non-profit research and education group, finds that America’s low- and middle-income families are also being taxed on state and local levels at disproportionately higher rates than their wealthy counterparts.

“The study’s main finding,” the authors write, “is that nearly every state and local tax system takes a much greater share of income from middle- and low-income families than from the wealthy[...]”

Fairness is, of course, in the eye of the beholder. Yet almost anyone would agree that the best-off families should pay at a tax rate at least equal to what low- and middle-income families pay. Virtually every state fails this basic test of tax fairness: as this study documents, only two states require their best-off citizens to pay as much of their incomes in taxes as their very poorest taxpayers must pay, and only one state taxes its wealthiest individuals at a higher effective rate than middle-income families have to pay.

whopays3.pdf (application/pdf Object).

Delaware, New York, Vermont, and the District of Columbia have the least “regressive” state and local structures — that’s to say, the rich pay roughly the same percentage of their income as the poor do. The rest are regressive to varying degrees.

Ten states in particular — dubbed the “Terrible Ten” by the study’s authors — have tax systems in which the bottom 20% pay from two to six times what the wealthiest families pay. Meanwhile, middle class families in these states can pay as much as three-and-a-half times what the wealthy pay. Starting with the worst offenders, those states are: Washington, Florida, South Dakota, Tennessee, Texas, Illinois, Arizona, Nevada, Pennsylvania and Alabama.

Reasons for the regressive nature of state and local tax systems are manifold. But one of the biggest factors has to do with the extent to which a state relies on sales or excise taxes vs. income tax.

Sales and income taxes, in general, hit America’s poor and working classes much harder than they hit the rich: “Poor families pay almost eight times more of their incomes in these taxes than the best-off families,” the study notes, “and middle-income families pay more than four times the rate of the wealthy” [my emphasis]. No surprise, then, that six of the “Terrible Ten” states do not levy a “broad-based personal income tax” at all, which means they’re getting their money from sales, excise and property taxes. (Property taxes are generally regressive as well, according to the study.) The other four simply have income tax structures that are significantly less “progressive” than in other states.

Many would argue that the progressive-scale system used for collecting federal taxes — the “tax bracket” system, where the rich pay a higher percentage — is just as unfair. I wouldn’t dispute that. But the poor and working classes are getting the screws in myriad other ways in this country. As stated, they’re working fewer hours. Meanwhile working-class wages have declined relative to the cost of living since the 1970s. (Health care anyone? Education?)

As such, I have a hard time feeling too bad for those in the upper tax brackets. I’m pretty sure they’re still coming out on top.

Interestingly, if you follow the “since the 1970s” link above (or again, here), the link travels to a guest post written by Peter Turchin for the NY Times over a year ago, in which Turchin attempts to link a rise in American killing rampages and the declining-wages-rising-costs trend. I won’t draw any causal links myself, but it strikes me as food for thought in the wake of all the mass killings we’ve had in the news lately.

Hat tip to Rebecca Heath at the Examiner for drawing attention to the study.