Saturday, May 02, 2015

Kansas as a Microcosm of Regressive Taxation in America

One of the less reported trends in America over the past 20 years or so is the indirect establishment of a flat tax, when one aggregates federal, state and local taxes. This has been accomplished by reducing the marginal tax rates on capital (capital gains taxes) and income (progressive taxation) and replacing the lost income with increased regressive taxation (sales and excise taxes). Income tax, of course, is a progressive tax system in the U.S. where those who make more pay a higher percentage of their income in taxes. Capital gains taxes relate to investments, and generally thus influence the middle class and wealthy, who have more money invested, than the working class and poor. Sales taxes, however, are equal for everyone, and thus regressive – in the sense that the taxes are a lower percentage of total income for those who make more. This is amplified by the fact that the poor tend to spend more of their money on products that are taxed, thus placing the sales tax onus more on their shoulders.

Overall, it is a clever backhand approach to imposing the flat tax that some advocates, like Steve Forbes, pushed hard for back in 1996. The idea was that it was unfair for those who made more money to have to pay a higher percentage of their income in taxes. Of course, this idea has been attacked since progressive taxation was first established, and accelerated under the presidency of Reagan, who cut the highest tax bracket from 70 to 28 percent within six years (along with lowering capital gains taxes). Under Bush we also saw the elimination of the federal inheritance tax (coined the “death tax” by clever conservative rhetoricians) and further reduction in federal taxes. At the state and local levels, tax rate reductions have been a staple for conservative legislatures for over three decades.

The real trick is a bit more nefarious. Given the reduction in state and federal revenue, state and local government tend to run deficits whenever the economy slows even a little. This creates a “crisis,” which means reduction in spending and, rather than adjusting the tax rates back to their previous levels, increasing what are generally called “consumption taxes” (sales tax, toll rates, etc.). Given that this is a shift from progressive to regressive taxation, it disproportionately hurts the poor and working class (as they necessarily spend a larger proportion of their income on consumption). Thus the shift is a key part of the “war on the poor” many progressive journalists discuss in two ways: 1. Reductions in marginal income tax rates lead to lower revenue, which is used as the key excuse for reduced funding for social services that the poor and working class tend to count on, and 2. Rather than increase income taxes, they tend to increase sales taxes to make up these deficits, again hurting those at the bottom of the income ladder more than the middle and the middle more than the top.

Kansas is a hyperbolic exemplar of this trend, with the rich actually paying a lower percentage of their income than the poor by a relatively wide margin. A major overhaul of the Kansas tax code was completed by Republican Governor Sam Brownback a few years ago, cutting the tax rate for the wealthy to stimulate the economy, bring more revenue into the state’s coffers and close the budget deficit. This is, of course, the supply side (“trickle down”) economic approach that has proven itself to be both “funnel up” and “deficit generating” (facilitating the largest transfer of wealth from the poor and middle class to the rich in the history of the world). So it is not terribly surprising that the tax cuts did not stimulate the economy to the extent promised and that instead Kansas is sputtering along at the national economic growth rate and poised for a $143 million budget shortfall next year. Rather than reforming the failed policy and asking the wealthy to chip in their fair share, the legislature instead passed a bill that banned welfare recipients from using their benefits to swim or watch movies and are close to increasing sales and excise taxes yet again.

The progressive Kansas Center for Economic Growth argues that the state's deficit can't be eliminated without reversing some of the income tax cuts Brownback made in 2012, but instead the legislature seems ready to further punish the poor for their own profligacy. Kansas is already among the worst places to be poor in the country, as they actually tax all food (some can get a rebate of this tax, but not those who make no money or too little to earn a return, i.e., the poorest citizens of the state). To put it in numbers, among the fifth of the Kansas population with the lowest income, the average person pays 11.1 percent of what they make in state and local taxes, including sales taxes. Among the wealthiest one in every 100 Kansans, the average tax bill is just 3.6 percent of annual income. The proposal is to increase the sales tax from 6.15 to 6.3 percent. While that doesn’t sound like much, most of the pain will be felt by the poor and working class already food insecure in far too many cases.

The plan for increasing these taxes is defended by economists that argue people should be taxed on what they spend, not what they make, so as not to penalize them for earning more but instead encourage them to save and invest their money. The problem, of course, is that the average American has little to no savings, increasing debt, and thus is punished by these policies without the ability to take advantage of the increased incentive to save and invest. On top of that, given the low interest rates people get at the bank, it makes little sense to save money rather than pay off debts with substantially higher interest rates accruing on outstanding balances. In the end, it is a gift for the rich sold as an economically-sound alternative to progressive taxation and yet another example of the radical GOP agenda to transfer income and democratic power from the majority of the country to its rich minority and corporate sponsors.

And while Kansas is the most obvious and egregious example of regressive taxation policy, one can see the results across the country, including in Los Angeles County where recent estimates claim 1.5 million people are food insecure today. Not that the unofficial state flat taxation trend has stopped calls for an official flat tax at the federal level; two candidates for the 2016 Republican presidential nomination, Ted Cruz and Rand Paul, are leading the charge to give this misguided proposal a comeback from its 20-year nap.

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