The Institute on Taxation and Economic Policy is at it again. The think tank, funded by organized labor, consistently pushes for higher, more progressive income tax rates. In a report profiled by major media, ITEP makes the case that “Fairness Matters” in who pays state and local taxes.
Presumably, “fairness” is important because policymakers don’t want a tax code that punishes the poor while rewarding the rich. That said, what’s the purpose of “fairness”? Does envy lift up the poor? When politicians claim that the rich are rich because they make the poor poor, and then enact steeply redistributive income tax laws to “level the playing field” in the name of “fairness,” does it really help the poor?
ITEP claims that “virtually every state tax system is fundamentally unfair, taking a much greater share of income from low- and middle-income families than from high-income families [due to] … an overreliance on regressive consumption taxes and the lack of a sufficiently robust personal income tax.”
ITEP’s report goes on to rank the states by estimating the share of income the richest 1% pay in state and local taxes versus the poorest 20%, and then calculates the gap. States where the wealthy pay a smaller share of their income than the poor are said to have “regressive” tax systems. States where the wealthy pay a larger share of their income than the poor are praised as having “progressive” tax systems.
But do “fair” tax systems really help the poor? Or do the politicians who support high and progressive income taxes merely enlist envy to win votes?
The answer to the first question is painfully obvious: The very places ITEP praises as having the most “fair” taxes also feature the highest poverty rates. Per ITEP, the District of Columbia and California have the first- and second-most fair tax systems in the nation. They also have the first and second-highest Supplemental Poverty rates, according to the Census Bureau’s latest report. The worst offender with the most “regressive” tax system is Washington state. Washington’s poverty rate is 10.7%, almost half that of California’s 19%.
The Supplemental Poverty Measure, published since 2009, was created to address some serious shortfalls in the more than half-century old Official Poverty Measure. The newer, more comprehensive Supplemental Poverty Measure accounts for cost-of-living differences between states, while the old poverty yardstick assumes that food and rent cost the same in New York City as it does in Lubbock, Texas. Additionally, the Supplemental Poverty Measure includes noncash benefits that many poor families receive, such as food, housing, childcare, and medical assistance, as well as the taxes they pay.
Herein is a second major flaw in ITEP’s methodology: Just as with the Official Poverty Measure, ITEP’s tax fairness report ignores noncash benefits. To name two big ones, it’s as if neither the almost $600 billion a year spent on Medicaid (about $7,000 per person covered), nor the $70 billion annually spent on the Supplemental Nutrition Assistance Program for an average benefit of $1,512 per year, exist at all — not to mention a multitude of other supporting programs.
Revisiting the poverty rate and its connection (or lack thereof) to taxes at the state and local level, one explanation of the high poverty rates in D.C. and California might be that those jurisdictions are majority-minority, and America’s minority population, except for Asians, have, as groups, higher than average poverty levels.
But Texas is also a majority-minority state. The percentage of people in poverty as averaged over the three-year period from 2015 to 2017 was 14.7% in Texas. California’s poverty rate was 19% — proportionately 29% higher than in Texas. This is even though, according to ITEP, Texas had the third-least “fair” tax system.
Comparing the Supplemental Poverty rates in the 50 states and D.C. with ITEP’s tax gap calculation shows no relationship between the two — there is no evidence showing that a steeply progressive income tax helps the poor.
In contrast, there is a strong relationship between the unemployment rate and poverty, with lower rates of unemployment corresponding to lower rates of poverty.
There is also a strong relationship between weak property rights and poverty. When government intrudes into the housing market, whether due to pressure from well-to-do homeowners or well-connected progressive social activists, the result is the same: artificial scarcity that pushes housing costs out of the reach of many working families.
This leads to a logical conclusion for policymakers: If the object is to reduce poverty, resist the urge to engage in the politics of envy and instead support policies that encourage job creation and strengthen property rights.