Wednesday, March 23, 2011

Dayton’s Tax on Savings and Jobs

Minnesota Governor Mark Dayton is trying to make the case that it would be in the interest of “fairness” to raise the top income bracket because “The newest study shows that low- and middle-income Minnesotans continue to pay a much larger share of their earnings in state and local taxes than our state's wealthiest citizens.”

First of all, notice the phrase “…continue to pay.” In other words, this has always been the case; it’s in the nature of our state’s tax mix. And it’s important to understand why.

Taxes are levied on either consumption (sales and property taxes) or income. Since the study he cites shows on page 30 that the income tax is indeed very progressive, that can’t be the source of the ‘inequity.’

That leaves consumption taxes, and the tables indeed show that the lower the income, the higher percentage of that income is paid in sales taxes. But we’ve always known this; ‘regressivity’ is the main argument against a sales tax. Quite simply, consumption does not rise equally with income. A family of four with a household income of $180,000 doesn’t necessarily spend three times as much on taxable food, clothing appliances, etc. as the family earning $60,000. The sales tax table on page 27 bears this out; as income goes up by about 115% (from the 5th to 8th decile), sales taxes rise by only 66%, a ratio of almost 2-to-1. Likewise, a family earning $800,000 doesn’t necessarily buy a house ten times the value of one purchased by the family making $80,000.

So…what happens with that increased income that avoids 'taxation through consumption?' It goes towards savings (emergency nest egg, college funds for the kids, etc.) or investments (IRA, 401-K, entrepreneurship, etc.). This is a good thing. ‘Savings’ results in thrift and reduced dependence on government programs. ‘Investments’ yield jobs. Yet because Minnesotans’ increased savings results in lower “effective tax rates” on consumption, the chimerical ‘effective rate inequity’ results. Governor Dayton thinks this is bad, so he wants to increase taxes on saved and invested income because those dollars are not taxed by being spent.

So there you have it. Mark Dayton wants to increase taxes on thrift and jobs. Not a very Minnesotan thing to do, is it?

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