Ron Amundson’s Political Blog

Governor Dayton campaigned on the richest MN paying their fair share of taxes, and has proposed increased income taxes on the richest folks in the state. In a similar vein, Sen. John Howe has suggested a expanded sales tax to replace / reduce income tax, with some type of offset for poorer residents as a method for a fairer method of taxation. The question that both scenarios are based off of, is what is a fair share.

Tax fairness is a tricky deal, in the days of old, progressive taxation was pretty much the rule, namely if one made more, one should contribute more. If one looks at income taxation in isolation and without deductions or credits, at both the fed and state levels, such is how the system is set up.

Regressive taxation, where in the lower incomes pay higher taxes as a percentage of income is thought by many to be counter productive. The proverbial Warren Buffet comment of the wrongness of his secretary paying more in taxes as a percentage of income than he does comes to mind. Likewise, being the poor do not have access to the tax strategies of the rich, there are offsets in place like the EIC and others, where in the poor may pay zero income tax, and may even get tax rebates to offset the other taxes they indirectly pay in order to achieve some level of overall fairness in taxation policy.

The talking point about the poor not paying any taxes is a huge myth. They do not pay any income taxes, but they are swamped with others… albeit the income data in and of itself is likely skewed. Note that the poorest 10% of MN are paying ~30% of their income in taxes, albeit indirectly through direct and passed on local, property, business, and sales taxes. Also note that the income data on the poorest 10% may be substantially in error (page 17 of the MN tax incidence study)

Another issue to consider when it comes to taxation fairness is the resulting economic impact. Ie., a fair system of taxation may not necessarily make for optimum economic output for society at large, both rich and poor, as well as the the government.

1. If taxes are too progressive, net economic output will drop and likewise will government tax collection per the Laffer curve. An example of such might be the time frames when the Fed’s top income tax rates were above 70%. Such was the basis in part for supply side (trickle down) economics policies brought in by Reagan. Such is likely a primary issue behind current Republican strategies of no new income taxes, and most certainly no new taxes on the richer individuals.

2. The reverse is that if taxes are too regressive, the greater number of non-rich individuals will have reduced purchasing power, which reduces demand, which kills off real economic output which likewise leads to reduced tax collection per the Laffer curve. (Bear in mind, there is real economic output, and there is fictional economic output which often serves to mask reality… case in point Bernie Madoff etc). Many liberals believe taxes are too regressive today, and this in addition to fairness is likely behind the stance of Governor Dayton.

Putting the economics issues aside for a future blog entry, lets take a look at some data to see where MN really is. The Suits index is a measure of how progressive, or regressive a given taxation strategy is. A truly fair system would be neither progressive, nor regressive and have a suits index of 0. A fully progressive system would have an index of 1.0, and a fully regressive system would have an index of -1.0.

The following is taken from the MN Dept of Revenue Tax Incidence Study page 13 and is from 2008.

Personal Income Tax +0.218

Sales Tax -0.229

Business Taxes -0.204

Personal Taxes -0.020

All State Taxes -0.004

All Local Taxes -0.202

Total Taxes in MN -0.060

With a Suits index of -0.060, there is no question that Governor Dayton is correct in that the rich are not paying their fair share. In fairness though, it must be considered that the income data on the poorest MN decile is likely to be skewed substantially. The MN Dept of Revenue recognizes this (again on page 17), and by removing the first decile from the analysis, they come up with a suits index of -0.046 for 2008… It helps, but it still shows the current taxation system is anything but fair.

Next, lets go back in time…. Here is a chart from 1988 to a 2013 of the Suits index.

Again, it appears the rich have not been paying their fair share for many years, at least when it comes to a total taxation point of view.

I am guessing such may be a reason why Sen. Howe’s * proposal is getting so little traction, and likewise why the Republican party is so much against Governor Daytons approach.

A fair taxation system if based upon a sales tax would have to be quite expansive and as such would severely impact the richest 1%, as well as probably the top 10% of Minnesotans in a very negative fashion in contrast with the last 20 years or so.

The other option would be to provide offsets & credits for the many of the deciles as compensation… but such opens up a huge and likely contentious can of worms. I applaud Sen. Howe’s attempt as well as Governor Daytons to bring fairness to the tax system, but this is an exceedingly uphill battle no matter which party one is on.

*Bear in mind, the Suits index is based upon income, some economist suggest a consumption based index may be a more appropriate measurement…. alas one which is significantly harder to measure. It may be that Sen Howe is privy to some consumption data apart from the MN dept of Revenue income study which makes his approach more tolerable to all sides.