Income Redistribution: The Tax Myth Debunked

Before those of you who are firmly in the middle class get to feeling smug about the rich getting all the breaks, understand that the figures I’m about to share show that you’re doing better than those poorer than you, too. The focus first is on one midwestern state, to keep the facts and figures simple, then I’ll talk about the national situation.

Brief background

Back in March in Minnesota there was a lot of talk about Taxes, triggered by the 2009 Minnesota Tax Incidence Study. In the course of a mounting budget crisis (similar to so many other states) the attention naturally turned from, “how we got here,” to, “what are we going to do?”

Former Minnesota Senate Majority researcher Jim Robins, for instance, had said the following:

“Minnesota’s relatively progressive personal income tax masks the fact that the state is not a leader in progressive taxation, and the trend shows we are gradually getting more regressive over time.”

Robins proceeds to explain the technical details, and points out that the 2009 study should have included in its 2006 data the unambiguously regressive 75-cent cigarette and tobacco “Health Impact Fee” passed in 2005 – a tax, not a fee, according to most Minnesotans (even those who strongly supported it) and the MN Supreme Court. Credit GOP Governor Tim Pawlenty with that deft public relations move, since he was already routinely employing the national “no new taxes” theme in his rhetoric at the time.

Fast forward: The data for MN

On average, the study showed that Minnesotans paid 11.4% of their income in taxes. However, the top 1% of Minnesotans had a much lower effective tax rate of 8.8% – a lower fraction of a higher number. But it gets worse (which is to say, more regressive.) The poorest ten percent of Minnesotans paid a higher fraction of their even lower income. Those taxpayers, with the lowest earnings, surrendered over 22% of their income in taxes – nearly triple the rate for the wealthiest Minnesotans according to the 2009 Minnesota Tax Incidence Study.

In short, Minnesota’s increasingly inadequate state tax policies, which have obviously been ineffective (though not on the scale of California’s) are also increasingly unfair – unless you think the rich deserve to pay less.

The big picture

Nationally it’s no better. The non-partisan Center on Budget and Priority Policy, a research group forcused on federal and state fiscal policies, looked at IRS data and stated in September that:

“Two-thirds of the nation’s total income gains from 2002 to 2007 flowed to the top 1 percent of U.S. households, and that top 1 percent held a larger share of income in 2007 than at any time since 1928, according to an analysis of newly released IRS data by economists Thomas Piketty and Emmanuel Saez.”

In fact, with the exception of a slight reversal that correlates with the Bill Clinton presidency, the chart of this IRS data, reproduced below, reveals an obvious trend in favor of the wealthy.

Class Warfare?

In point of fact, Piketty and Saez relied on several different income concepts and each naturally results in slightly different estimates of the share of income going to each group, so the Center on Budget and Priority Policy conclusion that the share of the nation’s income flowing to the top earning households increased from 16.9% in 2002 to 23.5% in 2007 could have “quibble room.” Yet the fact remains that change represents a larger share than at any point since 1928.

I strongly urge you to read the entire article, and abandon any sense that the wealthy in America are either paying a disproportionate share of their income(s) or losing some mythical class warfare when people talk about income redistribution or raising taxes.