Notes on State Taxes

The motivation for creating the featured chart today came from a post on Market Size Blog on the subject of sales taxes collected by states in 2011 (link). I went in search of historical data and found them on the Census Bureau website (link). My presentation shows all revenues collected by states for the 20-year period, 1992-2011. Here is the graphic:

The chart clearly shows the importance of sales tax collections in state-level revenues. In this 20-year period they have averaged to 48.3 percent of total state income, and the same percent in 2011. They reached their highest share in 2003 (49.9%), the same year when state income taxes reached their lowest share in this time period (38.3%). Note here the much more cyclic behavior of state income taxes. Sales taxes also weaken in period of economic down-turn, but nowhere near as sharply as income—thus underlining Monique’s comment that sales taxes are regressive. They fall most heavily on the poor.

The third curve is a combination of property taxes, license fees, and a category labeled All Other.  Of these, in 2011, Licenses accounted for 56.3 percent, All Other for 28.5 percent, and Property taxes for 15.1 percent. Property taxes have been losing share of this category, having been 18.3 percent in 1992—and as low as 13.6 percent in 2008 when real estate fell down its own unique cliff and nearly sank the whole economy.

Progressivity or Lack Thereof

Now that the mountain has labored and brought forth a mouse, herewith a little doodling to show how the likely new tax rate would compare to a genuinely progressive income tax. In the example shown, I have subdivided a minimum household income of $17,000 and a hypothetical top income (for purposes of this illustration) of $500,000 into even ranges. Then I’ve assumed a minimum tax of 10 percent and a maximum of 50 percent divided into segments the same way. This then represents a progressive form of taxation. Against this I have charted the likely 2013 taxation level, thus using the existing rates up to $450,000 and a top rate of 39.6 after that.

What emerges from this view is just how far our current tax code diverges from the ideal of a progressive pattern. Note especially that rates for households between $125,000 and $286,000 are well above the progressive rate—and the income of those from $339,000 to the top, which is here arbitrarily defined as $500,000, is below the line where a progressive taxation system would put the rates. One could also calculate a progressive line, for these data, topping out at 39.6 percent. In that case, all groups but two would get a lower tax rate. The two exceptions would be the very bottom and the very top.

As things stand, those in the well-off middle get the whack, those in the upper reaches get the miss. Genuine tax reform? We’d need a Napoleon for that.

Tax Rates in 2002 and 2012

With but three days to go until the Bush tax cuts sunset, it might be well to look at the change in taxes that would occur. For this purpose I am comparing marginal tax rates, and the incomes to which they apply, for 2002 and for 2012. Here they are:

Tax Rates in 2002
At least	But no more than	Tax Rate
0	12,000	10%
12,000	46,700	15%
46,700	112,850	27%
112,850	171,950	30%
171,950	307,050	35%
307,050	Sky's the limit	38.6%

Tax Rates in  2012
At least	But no more than	Tax Rate
0	17,400	10%
17,400	70,700	15%
70,700	142,700	25%
142,700	217,450	28%
217,450	388,350	33%
388,350	Sky's the limit	35%

These rates are for a married couple filing jointly. Please note that these structures are not comparable—even if we ignore the tax rates. The rates apply to differently sized increments of income. To illustrate this, let’s calculate the taxes due on an income of $69,677, which just happens to be the average household income in 2011.

Income of $69,677 Taxed at 2002 and 2012 Rates
2002 Rates Applied		2012 Rates Applied
Increment	Tax due	Increment	Tax due
12,000	1,200	17,400	1,740
34,700	5,205	52,277	7,842
22,977	6,204
69,677	12,609	69,677	9,582

Notice that in 2002, a portion of the total income was taxed at 27 percent, not so in 2012. In 2012 the maximum of the 15 percent increment was higher than  the $69,677. If 2002 tax rates come into effect next year, the tax bite on this income, a national average, increases by 31.5 percent, by $3,027 a year, and $252 per month.

Let me now look at a range of incomes. For this purpose I’ve selected the top or maximum earnings of the first four quintiles (fifth) of households, the lowest income of the fifth or top quintile, and then, for good measure, an income of $250,000 and one of $1 million. First the tabular results:

	Earnings	2002 Tax	2012 Tax	Difference
Top of lowest quintile	20,262	2,439	2,169	270
Top of Second quintile	38,520	5,178	4,908	270
Top of Third quintile	62,434	10,653	8,495	2,158
Top of Fourth quintile	101,582	21,223	18,073	3,150
Bottom of Fifth quintile	186,000	46,913	42,165	4,748
Earning $250,000	250,000	69,313	62,993	6,321
Earning $1 million	1,000,000	356,759	347,512	9,247

These results, graphed, bring home why it is that the political battles rage about the top layers—which are the last three groupings in the table and the chart. To be sure, $270 is a huge amount of money for a household earning a shade over $20,000. And a shade over $9,000 could not possibly bother a millionaire very much. But you get the picture:

Both in terminology and in likely effect, that phrase, Fiscal Cliff, is fear mongering. There is pain here, to be sure, but it is much more like slipping and falling on an icy sidewalk than a drop off a cliff. And, let us not forget, most millionaires do not get their income in earnings, taxable at these rates, but in capital gains, taxed at a much lower percent.

Taxes Through a GDP Lens: Revisited

I’m showing today an updated version of a graphic I showed on  December 21 of last year. Results for 2011 have been added to it, thus it is more up to date. Also shown on this graphic is the top marginal tax rate over the 1960-2011 period. A key point of the last posting (link) was that the tax rate appears to influence tax revenues and Social Security contributions not at all, but tax rates are certainly influenced by other events in the economy. I said:

Recessions, booms, and busts, however, do show an influence. Booms and busts? Well, the biggest rise in tax collections as percent of GDP came during the dot-com boom, the biggest drop in the dot-com bust. And the next up-then-down is the housing bubble.

The interesting things to note here is the up-turn of tax revenues from 2010 to 2011, signaling recovery—if not massive growth—and the down-turn in contributions to social security in the last year. That dip was caused by a law passed in 2010 but effective in 2011—lowering payroll taxes.

What with top tax rates having no visible effects on taxes, the hullabaloo about rates today are entirely off the mark. They represent political realities, not economic. The notion that raising rates will cause the economy to dive are belied by this chart. Taxes rose sharply from the 1988 to 1992 level. So that happened? Tax revenues went for the sky—for an entirely unrelated reason.

The data I am using comes from the BEA using the facility located here. Following links from there, I used Table 2.1 for Personal Income and Its Disposition and Table 1.1.5 for Gross Domestic Product.

Taxation with Representation

Instead of “taxation with representation” we have gradually made a transition to “taxation with titular representation.” Representatives are elected in Congressional districts and in States and, in a formal, titular way, they represent the public residing in those geographical regions.

The problem is that getting elected requires an enormous amount of money. I know that’s true because a member of our family ran for Congress a few years back and I have personal experience to back up what is commonly repeated in the media and backed by published statistics. After a person is elected, especially to the House, where the term is a mere two years, the need to raise new funds, for the next election, begins almost at once. Under such circumstances, the tendency is very strong for the legislator to “represent” the biggest sources of his or her funding rather than the masses who contribute very little. Who pays the piper calls the tune.

Okay. This is rocket science. It’s difficult because we cannot see, touch, feel, and taste motivation. We have to infer it. We don’t have time to shadow the legislator’s every move and record his/her every statement, read every piece of paper he/she sees. But if money matters a whole lot, those who have the most should be harvesting the biggest benefits from legislation.

I show a chart taken from a Congressional Research Service (CRS) report that issued this September (link).† Understanding that graphic is not rocket science, however.

Nothing on LaMarotte should be read as advocacy. I’m personally sure that the state of a society always mirrors the state of the individuals in it. No mechanical fixes, reforms, stratagems, or devices (like public funding of elections) change things. Societies are too vast and complex to be ruled by anything other than inspiration—meaning the deepest convictions that move the most people. When things have come to this state, very serious troubles loom ahead. They will eventually produce vast public trauma. And that trauma will, in turn, erase our democratic institutions except (that word again) in titular form. Will oligarchies rule us forever? No. This sort of thing eventually produces a kind of dictatorship but under exalted names—and the ruler will be the enemy of the oligarchy. That’s the way we’re going. Advocacy, no. But I like to know what lies ahead.

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† Thomas L. Hungerford, Congressional Research Service, Taxes and the Economy: An Economic Analysis of the top Tax Rates Since 1945, September 14, 2012.

Coming Soon to a Freeway Near You

A year ago Florida introduced cashless toll roads. Cameras arranged above the toll ways photograph passing vehicles’ license plates. In due time the auto’s owner gets a bill for the toll charge. The system is at present limited to the Miami/Dade region and south, including the only convenient freeway that gives access to the Florida Keys. As best as I can make out, the only other state that “offers” this new convenience is Texas—but I understand that Missouri is pondering such a scheme as well. Progress, progress.

Here the consequences of a political culture where cutting taxes has taken on the rudiments of a new religion. Just ponder the benefits. Foremost among these, from the states’ point of vantage, is that people employed in collecting tolls at booths may be laid off; in the construction of new toll ways, toll booth construction may also be avoided—although mounting metallic structures to hold the cameras will be a new cost. No people needed. Lenses and computers do the whole job.

What this portends is that, ultimately, all roads will turn into toll roads once cities catch up with the states. As technology makes yet another leap, it may also be possible, perhaps, to measure the intake of air by people breathing as they walk on public thoroughfares, like sidewalks, and air intake will then be tolled next. That, of course, will generate additional exciting industries such as breathing masks with little tanks, the oxygen inside them priced just a mill or so below the cost of the cashless air toll of the future.

Ain’t it grand to be living in our hi-tech times?

Taxes: a GDP Perspective

Reader russel, commenting on the last post, inspired another look at taxes and social security contributions. russel pointed to a graphic (link) showing that income taxes paid are 8 percent of GDP and essentially flat. What follows is a slightly different take on this same subject sticking to the 1960-2010 time frame. My data show all taxes paid (somewhat higher than federal income taxes alone) and also charts contributions made to “government social insurance,” to use the Bureau of Economic Analysis’ phrasing. I presume that it includes both Social Security and Medicare Contributions. Here is the graphic:

The total personal taxes paid averages, in this 51 year period, 11.9 percent of GDP. The trend line of the data is ever-so-slight up. The trend of social insurance contributions, which averaged 7.2 percent for the period, is strongly ascendant, but that may be due to the fact that the Medicare program passed in 1965.

I am again showing the top marginal tax rate for the period. It appears to have no influence on the trend of total personal taxes paid.  Recessions, booms, and busts, however, do show an influence. Booms and busts? Well, the biggest rise in tax collections as percent of GDP came during the dot-com boom, the biggest drop in the dot-com bust. And the next up-then-down is the housing bubble.

My conclusion is that tax rate shifts reflect the relative power of the various classes in the United States and act to distribute the wealth now in one direction, sometimes in another. When we do not feel a genuine threat—I’m thinking of communism now—the distribution is from bottom to the top. Oh, Stalin! Where are you when we really need you!

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The data I am using comes from the BEA using the facility located here. Following links from there, I used Table 2.1 for Personal Income and Its Disposition and Table 1.1.5 for Gross Domestic Product.

Taxes in Some Perspective

With the payroll tax cut shenanigans now provided to give us holiday entertainment, I thought I would add some perspective on taxes over a 50-year period. We’ll start with total revenues collected by the Internal Revenue Service in graphic form, showing various tax categories as percent of total IRS revenues in 1970, 1980, 1990, 2000, and 2010:

What I’m showing here is business and individual income taxes, the employment tax deducted from wages, estate taxes, and excise taxes. Excise taxes are levied on alcohol, tobacco, telephone services, and transportation fuels. Not shown are gift taxes; they’ve amounted to maximally 0.2 percent of total in each of these years, most recently, in 2010, 0.1 percent of total IRS revenues. These data are from Table 6 of the 2010 IRS Data Book.

Note here the importance of individual income taxes. They amount to more than half of all revenues right up to 2010, and in that year they represented 49.6 percent of total. Note that all categories show a drop in share of total except employment or payroll taxes. These have been climbing. The interesting aspect of that is that employment taxes are categorical. They constitute Social Security and Medicare Contributions.

Income tax totals, while they are interesting in showing their importance, do not show changes in tax rate. Therefore I next show the top marginal tax rate next, going back to 1960:

What this graphic shows is that the top tax rate has dropped from a 1960 peak of 91 percent to 35 percent. That last rate, in 2011, was levied on all income exceeding $379,150 for a married couple filing jointly. You might say that that number is where wealth really begins. Now some will say that a rate of 35 percent on income above $379,150 is not comparable to a rate of 91 percent in 1960—because of inflation. Indeed, that is true. That sum, in 1960, would have been $52,095. And the 1960 tax rate on that amount was 62 percent. I obtained the data shown from the Tax Foundation (link).

I am providing, below, a tabulation of the data used in this last graphic. Years not shown had the same rate as the last year actually shown. Thus in the period 1961-1963, the rate was also 91 percent on all income exceeding $400,000.

Year	%	On income of more than ($):	Year	%	On income of more than ($):
1960	91	400,000	1995	39.6	256,500
1964	77	400,000	1996	39.6	263,750
1965	70	200,000	1997	39.6	271,050
1970	70	200,000	1998	39.6	278,450
1977	70	203,200	1999	39.6	283,150
1979	70	215,400	2000	39.6	288,350
1980	70	215,400	2001	39.1	297,350
1982	50	85,600	2002	38.6	307,050
1983	50	109,400	2003	35	311,950
1984	50	162,400	2004	35	319,100
1985	50	169,020	2005	35	326,450
1986	50	175,250	2006	35	336,550
1987	38.5	90,000	2007	35	349,700
1988	28	29,750	2008	35	357,700
1990	28	32,450	2009	35	372,950
1991	31	82,150	2010	35	373,650
1992	31	86,500	2011	35	379,150
1993	39.6	250,000

My purpose in showing such data? I’m interested in looking at the proposition that cutting taxes on the wealthy increases jobs—because it is the rich who create jobs. Well, here are some early indicators. The following table shows increase in employment, December to December in four decades:

Decade	Tax rate change in %	Employment change %
1960-1970	-23.1	31.7
1970-1980	0.0	28.5
1980-1990	-60.0	20.0
1990-2000	41.4	21.4
2000-2010	-11.6	-1.7

Here the tax rate change is from the first to the last year. The employment change is from  December to December, thus in the first line, 12/1960 to 12/1970. What this tabulation tells me is that top tax rates may have nothing whatsoever to do with employment increase or decline. We’ve had the largest increase in employment in a period where the marginal rate went from 91 to 70 percent. In the 1970-1980 decade, when the top rate was at 70 percent, we still had high growth in jobs. When rates dropped from 70 to 28 percent, the biggest drop ever, we added the fewest jobs—but did much better in the next decade when taxes increased from 28 to 39.6 percent. And in the last decade, when our taxes dropped again, from 39.6 to 35 percent, we actually lost job in absolute count.

It feels better to know something than not to. In any case, the notion that giving the wealthy more dollars to spend will result in job creation is certainly a big canard.