One of the most loved policy ideas of conservatives is the flat tax. This is an idea that shows up from at least one Republican presidential hopeful each and every time we go through the process. And in many cases, the flat tax is the primary focus of the campaign. The most recent example of this was Herman Cain’s 9-9-9 plan, which consisted of a 9% business transaction tax, 9% personal income tax, and 9% federal sales tax. This sounds to me very much like a 27% flat tax, which is undoubtedly a lot more than most people pay at the federal level. But it would thrill the rich in various ways such as destroying the estate tax and allowing the rich to spend huge amounts of money outside the United States without having to pay sales taxes.
The reason that conservatives are focused so much on federal taxes is because that’s the only level at which our tax system can have any amount of progressivity. Cain’s 9-9-9 plan was actually a whole lot more progressive than most such plans. This is because his plan would get rid of the payroll tax, which is the most regressive tax in the nation. But I always figured that once the details of the plan came out, it would be revealed that the plan was yet another giveaway to the rich.
At the sate and local levels, things are already to the liking of the rich — and thus the conservatives. I’m not sure just how true it is, but the conventional wisdom is that states must keep taxes down on the rich because they can so easily move to a low tax state. I’m sure this happens, but a much bigger issue seems to be companies running to low-regulation states. But this ends up with states providing only the most minor progressivity in their income tax code. For example, when I lived in Oregon, there were only two marginal tax rates: 7% and 9%. And that’s saying nothing of other advantages the rich have, the the regressivity of other less visible taxes.
Yesterday, the Institute on Taxation and Economic Policy (ITEP) released a report, Who Pays: A Distributional Analysis of the Tax Systems in All Fifty States. It provides a great interactive map that shows the percentage of income that families pay in taxes for each state. And it ain’t pretty. Consider Texas, for example. Families in the bottom 20% of earners pay 12.5% of their incomes in state and local taxes while families in the top 1% pay 2.9%. That’s right: the poor pay over four times as much in state and local taxes as the rich. But it isn’t just in the south or in red states. Washington state is even worse with the bottom 20% paying 16.8% and the top 1% paying just 2.4% — a seven fold difference. Even California — the best by far — taxes the bottom 20% of families 10.5% and the top 1% of them 8.7%.
So here is the average for all the states and the District of Columbia. Notice that at every level, the more you make, the less you pay. And the top 1% goes way down. I assume that we would see an even steeper decline for the top 0.1% and 0.01%. And it is these people who tend to pay very little taxes at the the federal level as well: they pay almost no payroll taxes and most of their “income” is taxed at 15% as capital gains.
What I find most amazing is that this is something you never hear about on Fox News or any other conservative outlet. If fairness really was what was driving the conservative obsession for a flat tax, they would be appalled about the situation in the states. But the truth is that conservatives know exactly what is going on in the states. They know that taxation is regressive there, and they are fine with that. It is only the federal income tax that makes our overall tax system slightly progressive. And that’s why they want to create the flat or “fair” tax: because they know that will put far more of a tax burden on the poor than on the rich.
You really owe it to yourself to read the executive summary of the report. It lays out all you really need to know about the issue. For example, the reasons that the poor and middle class get taxed so much is not because of income taxes, which are usually slightly progressive. The regressivity comes in because of sales, excise, and property (think: car) taxes. Similarly, the states that advertise themselves for their “low taxes” are also the states with the highest taxes on the poor. For example, in Texas, your taxes really will be low (about 5%) if you are in the top 20% of earners. On the other hand, if you are in the upper middle class (second highest quintile), your taxes will be about the same as they are in California. And if you are middle class or below, California taxes you a lot less. So “low tax” actually means “low tax on the rich.”
Don’t expect to hear anything about this on the nightly news. But you will hear what happened on Wall Street today. We have to have our priorities. And our priorities are those of the rich.