January 22, 2009
Why Don't They See This?
In a press release announcing his nomination for Director of the Department of Administration, Governor Carcieri says of Gary Sasse that he has "more than 30 years of experience in crafting and analyzing sound fiscal policies and sustainability for government programs," but I'll risk exposing my ignorance to scratch my head at the proposal taking shape in Sasse's tax panel:
The changes, if adopted, would have far-reaching effects on thousands of taxpayers.Middle-income taxpayers would generally pay more, while lower-income taxpayers and some higher-income taxpayers would generally pay less. ...
Broadly speaking, people with $30,000 or less in AGI would wind up paying less in tax than they do under the current system.
People with between $30,000 and $110,000 in AGI would end up paying more.
Most people with AGI above $110,000 would end up paying less. But those with the very highest incomes, above $5 million each in AGI, would pay more.
That "middle-income taxpayer" group describes pretty precisely the range of households from which Rhode Island is losing population every year, and such folks are crucial to economic recovery and growth. The rich have money to invest, yes, but they're not the ones who'll put in 80-hour workweeks to keep industries developing. What Rhode Island needs is to match the investment-ready dollars with people who can use them — people in the middle-income group who need reassurance that their efforts will bring them closer to six-figure salaries.
That makes these suggestions downright pernicious:
... taxpayers would no longer be able to obtain a state tax benefit by making a separate list of their deductions, a process known as itemizing. ...Under the plan, favorable treatment would be eliminated and capital gains would be treated as ordinary income, the same as wages, for example.
As far as tax rate is concerned, the thousands of dollars that I've invested in tools each of the last four years are of little concern. In terms of both investments and income, the big-nose/big-toes tax regime draining the middle for the benefit of the edges would pound yet another nail in Rhode Island's chance for innovation and accelerated growth.
How is it that such apparently qualified panelists can miss this perspective?
It appears that Sasse’s marching orders were caught with a regime that is effectively “revenue neutral” rather than one which would spur economic growth, but which would by necessity require restructuring (shrinking) Rhode Island’s bloated government. In other words, “maintain the status quo” for the public unions and poverty industry.
The dirty little secret is that to maintain government at or near present levels the middle class has to be soaked.
This is a major reason why in socialist economies (as we are increasingly becoming) you have multitudes of poor people and a class of truly rich people. The middle-class is the hated “bourgeoisie” of Marx, and are effectively wiped out due to high taxation preventing upward mobility and/or an accumulation of assets.
But consider that the “middle class” is paying punitive tax rates to support government as now constructed. FICA taxes take almost 8% off the top, people are charged income tax on the FICA taxes they pay, and the 28% tax bracket kicks in at “lower middle class” income levels. Meaning that even with deductions – between FICA, federal and state income taxes, property taxes and sales taxes – these “middle-class” folks are losing 30-40% of their income to the government. Today one spouse is effectively working full-time just to pay for household’s taxes.
Back in the 1950s the average tax burden was about 10% of the average family’s income (typically with one wage earner). As the 1960s brought with it the growth of government via the “great Society” and Medicare and Medicaid and unionized public sector employees and all the rest, the money had to come from somewhere.
Even were we to go back to the 1950s era top tax brackets of 90% or so, there aren’t nearly enough truly “rich” people to fund government as it now exists. Very high tax brackets on the rich mainly serve the purpose of deluding the middle class (which is the real “working class”) into believing that their tax burden is somehow fair because “rich people” are paying more or paying “their fair share.”
Unless and until we start reversing the growth of government, the middle class in Rhode Island and across the nation will continue to shrink. The wealthy Democrat elites constituency of the “poor” will continue to grow, until the whole system collapses because there aren’t enough middle-class people left to tax.
We’re starting to see the structure crack even now, and just wait until Social Security goes cash flow negative in the next 5-10 years. If we don’t start shrinking government the United States within a few decades will be just another third world country with a small, rich elite and masses of “working poor.”
Posted by: Tom W at January 22, 2009 4:25 PMBTW, does anyone want to sell a U-Haul franchise in Rhode Island?
It looks like that will be the only thriving business for the next couple of years.
Hmmm, if I don't pay the property taxes on the facility for those couple of years I can start depositing the savings in an out of state bank account.
Then, as the owner of the franchise, I'd reserve the last trailer out for myself and abandon the facility, letting the city / town take the property in a tax sale to pay the back property taxes. By then property values in RI will be driven down to Detroit levels, and so it'll probably be a wash.
Hmmm, this plan is sounding better by the minute!
I think Tom W has it pretty close to the mark.
I add this: To best stimulate growth, you need a flat tax rate and also no capital gains tax. In that sense, raising taxes on the middle class is at least intellectually honest.
If you had a straight flax tax with no itemizations, credits, and gimmicks, do you think that people would actually start paying attention to the true problem of gov't largesse?
Posted by: thinkaboutit at January 22, 2009 4:57 PMI should also add that it is that the employee pays far more than his or her 8% share. The employer's 8% and other taxes on labor such as unemployment insurance are basically paid indirectly by the employee in the form of foregone wages. The employer will look at his entire cost of labor when making management decisions.
Posted by: thinkaboutit at January 22, 2009 5:02 PM>The employer will look at his entire cost of labor when making management decisions.
Thanks for bringing that up. I knew about that (being self-employed I'm painfully aware of it since I pay the whole thing), but I didn't want to get into too many details in the post.
The looming element of this is if Obama enacts a Massachusetts / California type "pay or play" mandate that employers provide health insurance for employees, or pay a fee to the state in lieu of.
The employee won't consider this compensation (think by analogy who public school teachers in RI seem to be oblivious to health care and pensions being part of their "pay").
But employers will sure realize it, and factor it in accordingly before hiring an additional body (or considering laying off a portion of their workforce).
Any economist will tell you the the "employer" portion of the FICA tax is ultimately paid by the employee, just as thinkaboutit said.
The more mandates - paid FMLA leave (yes, Obama is considering that too, along with lowering the threshold to 25 employees), "living wages" and increases in the minimum wage, health care "pay or play" and ambulance-chasing attorneys looking for reasons to sue - the more reasons for companies that can to shift employment overseas rather than employ Americans.
Posted by: Tom W at January 22, 2009 5:24 PM"more than 30 years of experience in crafting and analyzing sound fiscal policies and sustainability for government programs,"
where did he get that experience? If it's in RI, he's definitely the wrong guy for the job. But then again, has Carcieri yet to hire anyone compentent?
Posted by: George at January 22, 2009 5:33 PMActually he was with RIPEC for many years, so should know full well the problems and how to solve them.
Hence my early comment (albeit with some typos) that his "marching orders" were to not rock the boat / pretty much maintain the status quo.
This explains the article's reference to an actual increase in the state "earned income tax credit." The EITC is really a welfare program administered through the tax code, giving money to people in excess of what they paid an income taxes (if they paid any all).
So Rhode Island increasing this is actually an increase in welfare benefits in this state, which tells me that the poverty industry has had a hand in formulating this proposal.
So Rhode Island becomes even more of a welfare magnet-exactly what we should not be doing with the tax code.
Tom,
I worry that the RIPEC-style worldview is a little too supportive of less-than-optimal tax and spending schemes, if those schemes supposedly improve the "predictability" of revenues and/or expenditures.
What folks trying to be fiscally reasonable often don't realize is that while they're looking at a "predictable" revenue plan and saying "now we know what exactly what resources we have to solve our problems", progressives are going to use the "predictability" of a plan to argue "now that we know the baseline that's guaranteed to government, let's figure out how to get even more".
Andrew,
You raise a good point.
With an increase in income taxes for those making between 30-110,000, there's just one more reason for middle class people to leave Rhode Island. (Of course people making more than that will be paying those higher rates on their way up too.)
And if the capital gains tax increase is applied to home sales, all the more reason (for those with some equity left) to exit Rhode Island before this kicks in.
New Hampshire operates better than we do without a sales or income tax, and yet Rhode Island wants to raise our taxes in the heart of the worst recession in decades?
Rhode Island with its second-highest in the country unemployment rate, and yet Rhode Island wants to raise our taxes?
I swear this state has a death wish.
TomW wrote:
"New Hampshire operates better than we do without a sales or income tax"
But I've heard from some people in NH that their property tax alone is more than they paid in property and income tax in RI.
Is it possible to find out the truth to that statement? Clearly we'd have to compare housing values in the two states, which is pretty hard to do.
Posted by: Patrick at January 23, 2009 12:00 PMPatrick,
Try this:
Tax Foundation data:
New Hampshire’s rank of the 50 states: 46th
http://www.taxfoundation.org/taxdata/show/468.html
Rhode Island’s rank of the 50 states: 10th
http://www.taxfoundation.org/taxdata/show/478.html
UNEMPLOYMENT RATES:
NOV 2008:
New Hampshire: 4.3% (rank 6th best out of 51)
Rhode Island: 9.3% (rank 50th best out of 51)
http://money.cnn.com/pf/features/lists/state_unemployment/
DEC 2008:
New Hampshire: 4.6%
http://www.wcax.com/Global/story.asp?S=9706309
National Avg: 7.2%
Rhode Island: 10%
http://www.projo.com/news/content/RI_JOBS_01-23-09_RJD28BC_v185.4280185.html
Index Predicts Worse Times Ahead for Rhode Island
Thursday, January 22, 2009:
“For November, the New England unemployment rate rose 0.3 percentage point to 6.2 percent, the highest it has been since February 1994. Over the year, the New England jobless rate has risen 1.8 percentage points.
"The jobless rate in New Hampshire, 4.3 percent, was among the lowest posted nationally. Vermont and Massachusetts, at 5.7 and 5.9 percent, respectively, were also below the national average.
"In contrast, the unemployment rate in Rhode Island, at 9.3 percent, was one of the highest in the nation -- exceeded only by Michigan's rate of 9.6 percent.
"The remaining New England states, Maine and Connecticut, posted jobless rates of 6.3 and 6.6 percent, respectively, in November.”
http://www.istockanalyst.com/article/viewiStockNews/articleid/2974005
Posted by: Tom W at January 23, 2009 6:25 PM