May 12, 2006
Federal Tax Cut Lessons Apply to Minnesota
The recent extension by Congress of the Bush tax cuts on investment income is deeply irresponsible, both because we can't afford tax cuts when the deficit is ballooning and because this particular provision so overwhelmingly favors the very wealthy. These two editorials from the NYT vividly make the point:
Tax Cuts for a Favored Few
Tax Increases for Everyone Else
There are important lessons here that apply to Minnesota's tax situation as well.
First, beware of tax-cutters citing "averages." Supporters say this bill, for example, will cut the average American's tax bill by over $400. But only people earning well over $100,000 a year would get that average or better. People earning $1 million a year would save about $42,700, and reap about 22 percent of the total tax cut, according to the Tax Policy Center, a research group in Washington. People earning $40,000 to $50,000 a year would save about $47 and receive less than 1 percent of the benefits.
The difference between the mean and the median may seem like arcane statistical mumbo-jumbo to a lot of people, but it's the key to understanding tax fairness.
In Minnesota, the average (or mean) tax share is about 11% – which means that about 11 cents of every dollar earned by Minnesotans goes to state and local taxes. But for the median family – half make more, half less – that share is about 12%. And for the wealthiest 1% of households, it's only 8.5 cents on the dollar.
Second, beware of tax-cutters telling you that lowering taxes on investors strengthens economic growth and pays for itself. The Times editorial called his "seriously delusional." As the Times explains it, economic theory says it should be true, all other things being equal. But all other things are never equal.
At the federal level, the tax cuts increase the deficit. At the state level, they lead to cuts in spending on such things as education and transportation — which are building blocks of economic growth. That's why the real-world evidence does not support the theory that lower taxes (especially on the wealthy) create more economic growth.
What they created in Washington this week was a $40,000-plus windfall for people earning more than $1 million a year.
– Joel Kramer, Growth and Justice
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You may know the classic illustration of the Tax Cutter's Law of Averages.
Economist Paul Krugman puts it this way:
Say 10 middle-class guys are sitting in a bar. Then the richest guy leaves, and Bill Gates walks in. Because the richest guy in the bar is now much richer than before, the average income in the bar soars. But the income of the nine men who aren't Bill Gates hasn't increased, and no amount of repeating "But average income is up!" will convince them that they're better off.
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Economist Paul Krugman puts it this way:
Say 10 middle-class guys are sitting in a bar. Then the richest guy leaves, and Bill Gates walks in. Because the richest guy in the bar is now much richer than before, the average income in the bar soars. But the income of the nine men who aren't Bill Gates hasn't increased, and no amount of repeating "But average income is up!" will convince them that they're better off.
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