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October 19, 2011


Millionaire tax myths: the sequel

E.J. McMahon

“First get your facts,” Mark Twain once said, “and then you can distort them as much as you please.”  Following Twain’s advice, State Sen. Daniel Squadron (D-Brooklyn) and Assemblyman Rory Lancman (D-Queens) have unleashed a fresh set of purported “facts” about New York taxes, in response to my criticism last week of their call for higher state income taxes on households earning more than $1 million a year.

Unfortunately, their distortion field remains intact.  Here’s my fisking of the latest from the two legislators.

Mr. McMahon focuses on which party held the governor’s office while New York state’s tax code was progressively made more regressive; but that focus is misplaced. It was, after all, Republican tax policy guru Grover Norquist who made it an article of conservative faith “to reduce [government] to the size where I can drag it into the bathroom and drown it in the bathtub,” by no longer asking for a fair contribution from America’s wealthiest citizens, demanding comparatively higher taxes from middle-class and working families, and creating a new political imperative to starve government.

Talk about changing the subject.  I pointed out that the bulk of New York’s marginal income tax rate reduction was enacted in the 1970s and ’80s under two Democratic governors, Hugh Carey and Mario Cuomo, with overwhelming support of state legislators in both parties.  This reflected a bipartisan consensus that New York’s economic competitiveness had been harmed by the double-digit tax rates of the Rockefeller era.  It’s a lesson worth remembering today.

The reply from Squadron and Lancman?  They say it doesn’t matter “which party held the governor’s office” when New York cut rates — as if any governor, ever, could be a mere bystander to a major state tax cut.  Apparently, a sinister Republican “guru” – none other than Grover Norquist – was pulling the strings in Albany all along.  Who knew?

As to McMahon’s challenge to the widely accepted fact that middle class Americans pay more in federal, state and local taxes as a share of their income than do America’s wealthiest citizens, we are tempted to tell him to take it up with Warren Buffett, who has publicly expressed his disgust that his secretary has a higher share of her income taxed than he does.

The “widely accepted fact” is dubious, too.  The following chart is derived from calculations by the Tax Policy Center, a project of the Brookings Institution and the Urban Institute.  It reflects the impact of all federal income taxes — including payroll taxes, excise taxes, and imputed corporate taxes, as well as the individual income tax.

Empire Center chart based on data from Tax Policy Center

Note that the top 1 percent pays twice the effective rate for the middle-income quintile, and seven times the effective rate paid by the poorest Americans. And in the past 30 years, the total burden of federal taxes have been reduced by the greatest percentage for those in the lower half of the income distribution, especially in the bottom 40 percent.  In other words, Norquist’s quest to “starve” government by “demanding comparatively higher taxes from middle-class and working families” seems to have been an abject failure.  As for Warren Buffett’s position, the estimable Ira Stoll disassembles it here.

The chart above  does not include state and local taxes, which vary by jurisdiction. It would take a lot of work to calculate New York’s state and local taxes on the same basis as the Tax Policy Center, which uses a broader definition of income than the state-by-state comparison favored by the Institute on Taxation and Economic Policy (ITEP) analysis that is frequently cited by Squadron, Lancman and other millionaire tax proponents.  However, given the big differences in federal burdens shown here, if you simply overlay the ITEP distributions estimates on the federal shares depicted above, the wealthy still don’t pay a smaller share of all taxes than those in lower or middle income categories.

In any event, the sad fact is that even after including the income tax paid by New York City residents in the calculation, the top 1% of earners in New York state pay, on average, only 7.2% of their income in state and local taxes after federal deductions, while the middle 20% of earners pay 11.6% of their income.

The ITEP analysis is questionable in several respects. For one thing, its estimate of the tax bite on middle-income earners assumes the average low- and middle-income family makes a ton of taxable retail expenditures ($15,325 by a family earning $43,800, for example), plus thousands more in taxable fuel, booze and/or cigarettes. And despite the Squadron-Lancman assertion, the ITEP model pretty clearly does not include New York City resident income tax in its calculation of taxes paid by the top one percent, half of whom live in the city.  So the tax percentage for low and middle-income quintiles is probably too high, and the percentage for the top 1 percent is probably too low.  And those ITEP percentages cited by Squadron and Lancman are net of deductions on federal taxes — i.e., those taxes that, as the chart shows, are actually highest for the wealthy. Finally, even ITEP tips its cap to New York for maintaining a “close-to-flat tax system overall through the use of generous [earned income tax credits for the working poor] and an income tax with relatively high top rates.”

Mr. McMahon also criticizes the extent to which New York relies on its wealthiest citizens for most of its revenue because of the potential volatility resulting from Wall Street’s periodic crashes. But he misses these fundamental points: New York has become more reliant on the wealthiest five percent of taxpayers because this small group takes in half of all income in the state, up from 30 percent of income in the state 20 years ago. At the same time, the wealthiest are now paying a lower percentage in taxes than they did for decades.

My point was that volatility is not desirable and that the tax base should be as broad and stable as possible, which are accepted as virtual truisms in the tax policy field.  Squadron and Lancman respond by changing the subject yet again:  volatility, schmolability — let’s talk about income distribution! The income distribution estimates they cite are not independently verifiable, as it happens.  And suddenly, their focus shifts from the top 1 percent to the top 5 percent.  According to published state income tax data, the top 5 percent begins at an income level below $200,000.  Sen. Chuck Schumer, among others, doesn’t think everyone in this group is wealthy.  In fact, (unionized) cops married to (unionized) school teachers in the New York metro area can easily pull down joint incomes of over $200,000.

The undisputed facts are that New York’s highest marginal tax rate was cut by almost two-thirds between 1977 and 1997. And, without the high-income surcharge, the state’s highest marginal income tax rate kicks in for couples paying taxes on over $40,000 — the same rate applied to someone making $10 million.

From a peak of 15.35 percent in 1977, New York’s marginal rate was cut to the current permanent-law level of 6.85 percent by 1997.  This was a rate reduction of just over one-half, not “almost two-thirds.”  But just because the marginal rate was cut 55 percent doesn’t mean the effective rate went down by a similar amount.

During this same period, in fact, the federal income tax base broadened through the elimination of many shelters and loopholes used by wealthy households under the pre-1986 income tax code.  Although the federal government’s marginal income tax rate has dropped by one-half (from 70 percent to 35 percent) since Ronald Reagan’s election as president, the Tax Policy Center estimates the effective income tax rate for the top 1 percent decreased by just 4.5 percent between 1980 and 2007.

Squadron and Lancman also again imply, this time using slightly different wording from their original piece, that a $40,000-a-year couple pays the same income tax rate as a household making $10 million.  Here are the actual “undisputed facts” on that point:

Under the New York State personal income code, the highest rate applies to taxable incomes above $40,000.  But net tax bill is not determined by the rate table alone.  A person’s taxable income is calculated as his gross income minus exemptions, credits and deductions, which are far more generous for lower and middle-income families. Moreover, under a unique feature of New York’s tax code, the top rate applies as a flat tax to the entire taxable income of filers earning more than $150,000, while lower and middle income taxpayers benefit from paying lower graduated rates on taxable incomes below $40,000.  The net effect of all this is, as I stated in the Post:

As a percentage of gross income, a wealthy family pays well over twice as much as a childless middle-class couple, and more than 10 times as much as a $40,000-a-year family with a couple of kids.

Don’t take my word for it.  Fill out an IT-201 New York Resident Tax Form for hypothetical families at different levels, and see what you come up with. Or save a lot of time and use this handy online model sponsored by the National Bureau of Economic Research.

Filed under: Taxes, Uncategorized

1 Comment »

  1. E.J.
    Well done. And I love the Twain quote, so apt these days.
    Ken

    Comment by Ken Gilman — October 20, 2011 @ 12:01 pm

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