California Has the Nation's #1, #2, #3, #5, and #9 Highest State Income Tax Rates

New Jersey vs. California--The Governor Smackdown!

Recently, New Jersey's rotund and robust Governor Chris Christie and California's venerable Governor Jerry Brown entered into what might best be called a smackdown.  The entire escapade is somewhat funny given the horrible economic condition of BOTH states.  It's like the zombie telling the corpse that he stinks.

The battle began when Christie Christie, during a speech at the Republican National Convention, called Jerry Brown an "old retread" and a "bad choice".  Jerry Brown, despite his advanced age, shot back with a physical fitness challenge to the immensely obese Chris Christie, including a three-mile race.  Apparently, Jerry Brown misheard "physical" for "fiscal" fitness.

The real loser in this "Battle of the Governors" are the people of California and New Jersey.  Both California and New Jersey suffer from a variety of similar economic maladies and for similar reasons.

• Both California and New Jersey have among the nation's highest state income tax rates.  New Jersey's top income tax rate is 8.97% and starts at incomes over $500,000 (single taxpayer).  In contrast, California's second-highest rate is 9.3% and starts at incomes over $48,000 (single payer)!  California also adds a 1% surtax on incomes over $1 million, resulting in a 10.3%, which is second nationally only to Hawaii's top rate of 11%.
  
  California Governor Brown wants to raise California's ALREADY-high state income tax rates via Proposition 30.  Under Governor Brown's plan, those making over $250,000 would pay 10.3%, which is the rate currently only paid by millionaires in California.  Proposition 30 adds two new tax brackets, including an 11.3% bracket at incomes over $300,000 and a 12.3% bracket at incomes over $500,000.  Both new brackets are higher than any other state in the nation.  As before, the 1% surtax on millionaires would boost California's top income tax rate to 13.3%--a full 21% higher than the next highest state, Hawaii!

• Both California and New Jersey have among the nation's highest state sales tax rates.  California currently has the nation's highest statewide rate, although the combined state, city, county, and local rates in other states may be higher. Governor Brown's Proposition 30, if passed by California voters, would raise the state sales tax rate to 7.50%.

• California has the nation's highest gasoline tax.  Surprisingly, New Jersey's gasoline tax is relatively low--well below the national average.

• Both the California and New Jersey Legislatures are dominated by Democrats with close ties to powerful public-sector unions.  In California, public-sector unions are among the biggest spenders in California politics.  Both the Speaker of the California Assembly and the President pro Tempore in the California Senate have strong ties to California labor unions.  Perhaps unsurprisingly, California's public-sector unions are also major funders of Governor Jerry Brown's Proposition 30 tax hikes.

• Both California and New Jersey are union-only states, where some jobs in the public sector require union membership. In fact, Jerry Brown expanded collective bargaining for California's teachers.
• Both California and New Jersey have among the nation's worst-rated business climates. Both California and New Jersey duke it out for one of the "coveted" bottom five positions.

On the Kauffman Foundation survey of small business friendliness, California ranked 'F'--primarily for its tax code.  Proposition 30, if passed by voters, will no doubt lower California's already dismal ratings.

• Both California and New Jersey have unemployment rates well-above the national average. As of July 2012, California had the nation's 3rd worst unemployment rate at 10.7%.  New Jersey had the nation's 4th worst but is almost a full percentage point better than California.  California's unemployment remained steady from June-to-July while New Jersey's rate worsened slightly from 9.6% to 9.8%.

• Both New Jersey and California have low credit ratings, although California's currently ranks the lowest in the nation. Illinois has since been downgraded since this chart was created, but still ranks above California.

• California has the nation's largest population of Temporary Aid to Needy Families (TANF) welfare recipients, while New Jersey's TANF population is toward the low end nationally.

While California's Governor Jerry Brown in old and New Jersey's Governor Chris Christie is fat, neither state Governor can boast he has a beautiful economy.  However, in my opinion, Governor Brown is leading California in the wrong direction with his Proposition 30 tax hikes.  I encourage California voters to VOTE NO on PROPOSITION 30 this November.

Pretty Pictures and a Political Rorschach Test

"The power to tax is the power to destroy"
John Marshall, Chief Justice of the United States (1801-1835)

A recent blog post regarding U.S. income tax caught my eye. The post included an aesthetically beautiful infographic from data artist Stephen Von Worley and his Data Pointed blog that, according to multiple blog posts, purports to show once again that those #@*&# rich people are just not being taxed enough.

"Chart shows low tax burden for rich"news.yahoo.com/s/yblog_thelookout/20110316/ts_yblog_thelookout/chart-shows-low-tax-burden-for-rich

"Shifting Burdens"www.datapointed.net/2011/03/relative-us-income-taxes-1913-2011

"Chart of the Day, US taxes edition"blogs.reuters.com/felix-salmon/2011/03/15/chart-of-the-day-us-taxes-edition

Unfortunately, as an engineer and scientist, I have a number of problems with the infographic. One problem is that the original chart is mislabeled, based on the data that it presents as I will explain below. Another problem is that many people apparently misinterpreted what the chart actually tells you.

Infographics, though often useful, are essentially "visual statistics," which reminds me of a favorite quote.

"Statistics are like bikinis. What they reveal is suggestive, but what they conceal is vital." -- Aaron Levenstein

Why the Chart is Mislabeled

The original post proclaims "The tax man cometh, and to illustrate the inequities of his cleft-hoofed embrace, we’ve charted the shift in U.S. income taxes from rich to poor over the past century." Unfortunately, the data behind the chart does NOT show this.

The chart claims to show relative tax burden, which in the post is defined as "the amount of tax due relative to the long-term average at each income level."

So what does the infographic actually show? After some reverse engineering, it actually shows the relative change in marginal income tax rate compared to historical averages. Keywords here are "relative change, " "marginal income tax rate," and "historical averages" It’s a common mistake, but high marginal tax rates DO NOT equate to actual tax burden or increased revenues for the government. High marginal tax rates do affect behavior and dissuade earning and investment plus encourage tax avoidance strategies.

Choose Your Average

The non-obvious distortion is that the chart relies on historical averages. Averages themselves can be greatly deceiving.

"Then there is the man who drowned crossing a stream with an average depth of six inches." -- W.I.E. Gates

"The average human has one breast and one testicle." -- Des McHale

Fist, a little background information. Since the inception of the federal income tax, the top marginal tax rate ranged from 7% to 94%. The chart below is color coded according to a chart used later in this post. The source data is available here.

Marginal Tax Rate for Top Income Category, by Year (1913-2011)

Meanwhile, for the bottom tax bracket, the tax rate varied from a low of 0% in the 1970's/1980's to a high of 23% during the New Deal, World War II.

Marginal Tax Rate for Bottom Income Category, by Year (1913-2011)

The average marginal tax rate for top earners was over 59%, with a standard deviation of ±25% for the specified 99 year period (1913-2011) since the 16th Amendment was passed. If considering the entire 235-year history of the United States, the average drops to 25%. If using just the last 25 years, then the historical average is 35.8%. Choosing the specific time period dramatically affects the average.

Relative Difference in Top Marginal Tax Rate Compared to
Historical Average, by Year (1913-2011)

Marginal tax rates for all income taxpayers were at historic highs for twenty years, from 1944 to 1963. For upper income taxpayers, the top marginal rate was 90% or more. Even for the bottom of the income ladder, the rates were over 20%.

However, there was a ten year period (1977-1986) when the marginal rate for lower-income taxpayers was 0%--zip! Mathematically, these zeroes reduce the average. For example, the average marginal tax rate for low-income taxpayers over the thirty-year period (1944-1963, 1977-1986) drops to 13.7%.

The History Embedded in the Charts

With due apologies to Stephen Von Worley for mashing up two of his beautiful infographics, here is some of the history of the U.S. income tax embedded in the charts. The numbered annotations are described below.

Marginal Tax Rate

This is an excellent infographic showing how the marginal tax rate changed over time. The tax rate is presented as a heat map. The higher the tax rate, the closer the color is to white hot. The lower the tax rate, the closer the color is to cool black. The data is also adjusted for inflation, which shows the effect of "bracket creep" over time.

Original, unmodified image:

http://www.datapointed.net/visualizations/money/historical-us-income-tax-brackets/

I re-oriented this graphic to match the "tax burden" chart.

(click image to enlarge)

Changes in Marginal Tax Rate Compared to Historical Average

This is an aesthetically beautiful infographic showing how the marginal rates changed compared to their historical average, over the lifetime of 99-year history since the 16th Amendment was ratified.

Original, unmodified image:

http://www.datapointed.net/2011/03/relative-us-income-taxes-1913-2011

(click image to enlarge)

Note 1:Two lines are added to the United States Constitution upon ratification of the 16th Amendment, legalizing federal income tax.

"The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."

Congress subsequently passed the Revenue Act of 1913. The 18 pages of legislation imposed a federal income tax ranging from 1% to 7%, depending on income. The 1913 federal income tax form and instructions are simple and run just four pages.

Note 2:

Due to the costs of World War I, Congress passes the War Revenue Act of 1917 and the Revenue Act of 1918, dramatically increasing the top marginal tax rate to 67%, then to 77%.

Treasury Secretary Mellon understood the negative impact on the high level of taxation.

"The present system is a failure. It was an emergency measure, adopted under the pressure of war necessity and not to be counted upon as a permanent part of our revenue structure. The high rates put pressure on taxpayers to reduce their taxable income, tend to destroy individual initiative and enterprise, and seriously impede the development of productive business…. Ways will always be found to avoid taxes so destructive in their nature, and the only way to save the situation is to put the taxes on a reasonable basis that will permit business to go on and industry to develop."

Note 3:

Due to the unpopularity of the Wilson Administration and World War I, Warren G. Harding was elected President, along with solid Republican majorities in Congress. Congress reduced tax rates by passing the Revenue Act of 1921.

Note 4:

Congress, under the leadership of President Coolidge, reduced all income tax levels by passing the Revenue Act of 1926. The bottom marginal rate was reduced to 1.5%. The top marginal tax rate was reduced to 25%.

Note 5:

The Republican Congress had previously passed the disastrous Smoot Hawley Tariff, heavily opposed by Democrats. Democrats made major gains in the Congressional election of 1930.

Congress, under President Hoover, increased income taxes for all income levels by passing the Revenue Act of 1932. The bottom marginal rate was increased from 1.5% to 4%. The top marginal tax rate was increased from 25% to 63%. It was the largest peacetime tax increase in U.S. history, up to that point.

The combination of bad policy and increased taxation lead to disastrous unemployment, shifts in economic activity, and decreased investment activity. Welcome to the Great Depression.

Note 6:

Congress, under the President Franklin Roosevelt (FDR), passes the "soak the rich" tax policies of the Revenue Act of 1935 (The Wealth Tax Act) and the Revenue Act of 1936. Top marginal tax rates increased to 79%.

Roosevelt’s leadership was challenged by previous Democratic Presidential candidate, Alfred E. Smith, in his famous 1936 radio address, "Betrayal of the Democratic Party."

Note 7:The immense costs of the "New Deal" policies of FDR's Administration plus World War II lead to the highest marginal tax rates for all income levels. Top marginal rates reach an astonishing 94%. Even low-income taxpayers faced a 22.2% rate.

The United States emerged from World War II with its industrial and manufacturing capacity relatively untouched. Much of Europe and Asia were enslaved by oppressive Communist regimes. India was seduced by the unfulfilled promises of Socialism. The United States helped rebuild Europe and Japan and was engaged in a Cold War with the Soviet Union and the Communist Chinese.

Because the United States was essentially the only game in town for those that enjoy Western-style democracy, the federal government could continue to oppressive tax rates.

Note 8:
The Revenue Act of 1964 cut all income tax levels by about 20%. Top rates were reduced to 70% while bottom rates were reduced to 14%.

The tax cut was made popular by Democratic President John F. Kennedy and was an attempt to spur the U.S. economy. Unfortunately, President Kennedy was assassinated before the legislation was finally enacted.

Note 9:The Tax Reduction and Simplification Act of 1977 essentially reduced bottom tax rates to 0% for the next ten years. Top rates were unaffected.

This 0% rate effectively reduces the historical average for lower income taxpayers and causes the "birds eye" pattern in chart of relative marginal tax rates.

Note 10:Congress passes Economic Recovery Tax Act of 1981 (ERTA), better known as the Kemp-Roth tax cut. Top rates were reduced to 50% while bottom rates remained at 0%.

Tax brackets indexed to inflation, reducing "bracket creep." Note how the white line in the tax brackets chart flattens after this point.

Note 11:

Congress passes the Tax Reform Act of 1986, eventually reducing top tax rates to 28%, their lowest levels in modern history. The act also increased bottom tax rates from 0% to 14%.

Although many consider it the second Reagan Tax cut, the act was officially sponsored by Democrats, Richard Gephardt of Missouri in the House of Representatives and Bill Bradley of New Jersey in the Senate.

Note 12:
Congress passes the Omnibus Budget Reconciliation Act of 1993, raising top marginal tax rates from 28% to 39.6%.

The act received no Republican votes and was opposed by some Democrats. Vice-President Gore provided the tie-breaking vote in the United States Senate.

Note 13:
In response to recession from the Dot-Com bubble, Congress passes the Economic Growth and Tax Relief Reconciliation Act of 2001. The act is also known as the first of the Bush tax cuts. Rates were reduced at all levels. The top marginal tax rate was reduced to 35% while the bottom marginal tax rate was reduced to 10%.

In response to the further recession caused by the September 11, 2001 World Trade Center terrorist attack, Congress accelerated some of the changes by passing the Jobs and Growth Tax Relief Reconciliation Act of 2003.

The Open Question

So the question remains, are marginal rates too low for top income earners?

By international comparison, no.

Marginal Tax Rateshttp://www.nationmaster.com/graph/tax_hig_mar_tax_rat_ind_rat-highest-marginal-tax-rate-individual

The marginal tax rate is less important than the effective tax rate. Despite the official tax rate, how much to people really pay. This is measured as the tax paid divided by the adjusted gross income.

The Tax Foundation tracks this information (see Table 8), but only since 1980. Using their information, the following chart shows that top tax payers pay more as a share of the adjusted gross income (AGI). The calculations for AGI changed with the 1986 tax law, which results in the apparent spike on the chart.

Because top taxpayers have more income, they would also pay more taxes in absolute dollars, even if their tax rates were the same or lower. However, the chart shows that high-income taxpayers do indeed pay a larger share of their income in taxes than do almost all income classes.

Average Effective Tax Rate by Income Class and by Year

This effect is also obvious looking at the amount of share of revenue contributed by different income levels. Not surprisingly, high-income taxpayers pay the bulk of U.S. income tax.

See also ...

"The Rich Don't Pay Taxes" Lie: Purposely Deceptive, Or Backed Up by Data?

soquelbythecreek.blogspot.com/2010/02/rich-dont-pay-taxes-lie-purposely.html

The Oppressive Progressive Income Tax: California Edition

soquelbythecreek.blogspot.com/2009/07/oppressive-progressive-income-tax.html


Is Warren Buffett Paying His "Fair Share"?
soquelbythecreek.blogspot.com/2011/08/is-warren-buffet-paying-his-fair-share.html

Who Pays Their "Fair Share" in California?
soquelbythecreek.blogspot.com/2011/10/who-pays-their-fair-share-in-california.html

Useful Information for Under-taxed Individuals

Despite ample evidence (here, here, and here) that wealthier taxpayers already pay the bulk of U.S. taxes, a number of supposedly wealthy commentators and bloggers believe that they are under-taxed and should be forced to pay more taxes. I say, why wait for Congress to take action? If you truly believe that the government is the best and most-prudent investment of your hard-earned income, you can make additional voluntary contributions now.

1. Decide not to declare any deductions and not take any exemptions or credits on your federal income tax return. This will immediately boost your adjusted gross income (AGI) and increase the amount of taxes owed. For example, if you have a large mortgage on your home, do not take the deduction allowed on mortgage interest. Do not write off other taxes that you might have already paid. WARNING: Your accountant may question your sanity.

2. Give directly to the United States Government. Here's how, courtesy of the United States Treasury web site. Okay, in full disclosure, you are not actually paying additional income tax but you are helping to reduce the tremendous $13 TRILLION+ national debt, which reduces current and future interest payments paid by the government. Reducing interest payments frees those funds so that the government can spend on other programs.

How do you make a contribution to reduce the debt?

There are two ways for you to make a contribution to reduce the debt:

1. You can make a contribution online either by credit card, checking or savings account at Pay.gov
   
2. You can write a check payable to the Bureau of the Public Debt, and in the memo section, notate that it's a Gift to reduce the Debt Held by the Public. Mail your check to:

Attn Dept GBureau of the Public DebtP. O. Box 2188Parkersburg, WV 26106-2188

Alternatively, you can provide your money as a gift to the United States Government.

Gifts to the United States Government

How do I make a contribution to the U.S. government?

Citizens who wish to make a general donation to the U.S. government may send contributions to a specific account called "Gifts to the United States." This account was established in 1843 to accept gifts, such as bequests, from individuals wishing to express their patriotism to the United States. Money deposited into this account is for general use by the federal government and can be available for budget needs. These contributions are considered an unconditional gift to the government. Financial gifts can be made by check or money order payable to the United States Treasury and mailed to the address below.

Gifts to the United States
U.S. Department of the Treasury
Credit Accounting Branch
3700 East-West Highway, Room 622D
Hyattsville, MD 20782

Any tax-related questions regarding these contributions should be directed to the Internal Revenue Service at (800) 829-1040.

If you do decide to donate or provide a gift to the United States Government, please let me know via the comment section or send me an E-mail. Any donation larger than $250 will receive a personal "Thank You!" from me, another average citizen. Also, please let me know if you would like your name added to the Honor Roll below.

HONOR ROLL

[updated 3-AUGUST-2011]

The following individuals have contributed $250 or more to reduce the national debt and to help reduce the cost burden of the United States Government for all Americans. On behalf of all Americans, you have our thanks and gratitude!

[NONE REPORTED TO DATE]

See Also ...

• "Who Pays Their "Fair Share' in California?"
  
• http://soquelbythecreek.blogspot.com/2011/10/who-pays-their-fair-share-in-california.html
  
• "Is Warren Buffett Paying His 'Fair Share'?"
  
• http://soquelbythecreek.blogspot.com/2011/08/is-warren-buffet-paying-his-fair-share.html
  
• "Pretty Pictures and a Political Rorschach Test: A History of the U.S. Income Tax System"
• http://soquelbythecreek.blogspot.com/2011/03/tax-infographic-is-political-rorschach.html
  
• "The Rich Don't Pay Taxes" Lie: Purposely Deceptive or Backed Up by Data?
  http://soquelbythecreek.blogspot.com/2010/02/rich-dont-pay-taxes-lie-purposely.html
  
• The Oppressive Progressive Income Tax: California Edition
  http://soquelbythecreek.blogspot.com/2009/07/oppressive-progressive-income-tax.html

A Hidden Gem: Even Authors Get It!

With Tax Day rapidly approaching, I thought I would share a little gem discovered while reading Steve Martini's political thriller, Shadow of Power, embedded on pages 126 and 127.

As dreaded April 15th engulfs me, I have just finished another frustratingly-confusing 80-plus-page love letter to my favorite uncle, Uncle Sam, who seems in constant need of ever more money. My accountant assures me that all is correct, but how am I to know for sure?

I thought about highlighting the particularly good or entertaining sections of this gem but then realized that I would end up highlighting most of it anyway.

"Only the insane of the eighteenth century could foresee that a bleak two lines added to the Constitution a century after its creation, authorizing the collection of a federal income tax, could result in a seventy-year rampage by government to mentally rape its own citizens with millions of pages of totally unintelligible tax laws, rules, regulations, and forms.

"Today we have special federal tax courts because the law is so convoluted that ordinary federal judges are presumed too ignorant and unschooled to understand the complexi­ties of laws and forms that every citizen down to the village janitor is required to understand, to obey, and to sign under penalty of perjury and threat of imprisonment.

"Nor could it be possible in the Age of Reason to foresee a Social Security system that if run by a private business would result in their arrest, prosecution, and conviction for operating a Ponzi scheme. In the real world, taking invested funds in the form of Social Security taxes, paying current claims, and skimming the rest for other purposes is called embezzlement. When government does it, it is simply called politics. In either case the arithmetic is always the same. When the scheme goes belly-up, its operators, if they're smart, will be in Brazil, or, in the case of Congress, retired, which is the political equivalent of being in Brazil.

"With all of this, the people in what is touted as the great­est democracy on the planet have no effective recourse. They cannot act directly to fix any of the obvious open sores or seeping wounds in their own government, because the founders didn't trust them with the only effective medicine, the power to amend their own Constitution. That is reserved the power to a serpent its creators never saw. 

"Short of revolution, something Jefferson urged take place at least every twenty years, the average citizen is left to pound sand by casting a largely empty vote to replace the devil-in-office with the devil-in-waiting and hope that the caustic nature of power to corrupt can somehow be neutralized.

"Praying for the devil to grow a halo, we all plod on, one foot in front of the other, trusting that somehow we will not follow the Soviet Union over the national cliff."

"The Rich Don't Pay Taxes" Lie: Purposely Deceptive, Or Backed Up by Data?

The Center on Budget and Public Priorities (CBPP) recently released a report entitled ...

Tax Rate for Richest 400 Taxpayers Plummeted in Recent Decades, Even as Their Pre-Tax Incomes Skyrocketed
www.cbpp.org/cms/index.cfm?fa=view&id=3090#_ftn1

From the title alone, one can guess the conclusion. If not, here is an excerpt.

The top 400 households paid 16.6 percent of their income in federal individual income taxes in 2007, down from 30 percent in 1995. This decline works out to a tax cut of $46 million per filer in 2007, or a total of $18 billion in tax cuts for these households per year.

From this report, certain politicians will continue their lies that "the rich don't pay their fair share of taxes."

Let's look at the data with a bit more intellectual honesty.

• The Top 400 taxpayers represent less than 0.00035% of the total number of taxpayers for the years mentioned, or about three taxpayers out of a million. Other than through political contributions, this group has little power at the ballot box to prevent runaway government spending.
• Indeed, according to the data, the effective tax rate for these Top 400 taxpayers has decreased from a high of 29.93% in 1995 to 16.62% in 2007. Much of this is due to the Bush tax cuts and the decreased tax rates on capital gains and qualified distributions. The effective tax rate on the bottom 50% of taxpayers also trended downward. The CBPP chart above appears more dramatic because the Y-axis origin visually starts at 15%, which happens to be above the average tax rate. The average tax rate does have a slight downward trend over this period.

• However, the effective tax rate for all taxpayers in 2007 was 12.68%, or less than the 16.62% rate paid by the Top 400. However, as reported by CBPP, the Top 400 did indeed pay less as a percentage (but not in absolute dollars) than other groups within the top 10% of taxpayers, as shown in Tax Foundation report (see "Average Tax Rate" in Table 1 and all of Table 6).
• The average federal income tax bill in 2007 was just over $7,900 per taxpayer. The average income tax for the Top 400 was over $57,311,000 ($57.3M) per taxpayer, or 7,200 TIMES the average. The average tax bill for the bottom 50% of taxpayers was just $460. At that price, I certainly hope that the "rich" receive a better government than the rest of us for all that money.
  
• The Top 400 taxpayers as a group in 2007, all 400 of them, paid nearly $23 billion in taxes. Meanwhile, the bottom 50% of taxpayers, all 70,535,485 of them, paid $32 billion. Think of it, 0.0028% of taxpayers paid an amount approaching that of half of the taxpayer population. At the ballot box on spending issues, this is 400 votes versus 70+ million. Guess who wins.

Congress can raise taxes because it can persuade a sizeable fraction of the populace that somebody else will pay.

-- Milton Friedman

A government with a policy to rob Peter to pay Paul can be assured of the support of Paul.

-- George Bernard Shaw

• While the effect tax rate for the Top 400 has dropped from a high of 29.93% to 16.62%, the total income tax for Top 400 has increased 214% measured in inflation-adjusted dollars (or 365% without adjusting for inflation). Image that! Lower taxes might actually result in higher revenues. Over that same time period, federal spending doubled (non-inflation adjusted).
• The Top 400 have consistently paid more in taxes than their fraction of the total income. In 2007, the Top 400 earned 1.59% of all income but paid 2.05% of all taxes.

• Despite representing less than 0.00035% of the taxpayer population and despite a descrease in their effective tax rate, the Top 400 pay an increasing percentage of the total tax bill, approaching the amount and percentage paid by the bottom 50%.
  
  
  
• Mathemetically, the Top 400 group is different than the others. It is an extremely small population, less than 0.00035%, meaning that high incomes from a few individuals will greatly skew the data. Similarly, whereas other taxpayer groups, such as the bottom 50%, fit within a defined income range, the income limit for the Top 400 is infinite. Again, extremely large incomes or losses from a few individuals will affect the results for the Top 400.

Multi-billionaire friends Bill Gates and Warren Buffet walk into a bar. A man at the bar yells out, "Bartender, I'd like to buy everyone a round of drinks!" After pouring the drinks and collecting the money, the bartender asked the man why he was so generous. The man replied, "Didn't you know? Now that Bill Gates and Warren Buffet are here, our average income is over a million dollars!"

Reports like the one from CBPP may lead politicians astray. They may buy into one or more of the following fallacies.

Fallacy #1: Money is better spent and benefits the society more when spent by the government instead of by taxpayers.

This is perhaps the greatest fallacy of all. Certainly, multi-millionaires or multi-billionaires may squander some of their money on foolhardy exploits. However, the government has not proven to be a virtuous spender either. Do you remember the infamous Bridge to Nowhere or the John Murtha Airport? There are countless other examples. At least the Top 400 taxpayers demonstrated the ability to generate (or hold onto) great wealth. Do we honestly believe that their money in the hands of government will benefit society or the economy more than if it is kept in the hands of the taxpayer?

Fallacy #2: Increasing the top marginal tax rates will increase revenues.

Increasing the top marginal tax rate may indeed increase government tax revenues -- temporarily. All intelligent beings move away from pain. Increasing the pain of taxation will cause high wager earners to take appropriate actions. At the state level, this may mean estabilishing residency in lower-tax states or moving assets overseas to tax heavens. At a minimum, it means employing the best accountants and lawyers to avoid taxation, sometimes by engaging in economically-inefficient activities just to generate tax benefits. Remember, for the Top 400, each 0.1% difference in their tax rate represents over $57,300. Wouldn't you attempt to avoid taxes as much as legally possible?

Fallacy #3: We need a special tax on these Top 400 taxpayers.

We've already tried a similar strategy in the past with the Alternative Minimum Tax (AMT). The AMT was originally created by Congress to target 155 taxpayers (yes, only 155 taxpayers) that "paid less than their fair share" while fully complying with all U.S. tax laws. This ill-conceived piece of -- er, well, let's call it legislation -- was never indexed for inflation and has since affected millions of middle-class taxpayers. The Stimulus bill (ARRA) provided one year's relief for most but it expired at the end of 2009.

Some readers may think, "Well, he must be one of the Top 400 taxpayers." To that I say, "I WISH!!!" I am not a fan of the so-called "progressive" income tax as I believe it to be anti-democratic and encourage excess government spending. Our elections are based on the principle of "one person, one vote" and not "one dollar, one vote". Politicians have a built-in incentive to increase spending in order to win votes. Those that pay the most taxes to fund government spending have the least say at the ballot box.

See also ...

Is Warren Buffett Paying His "Fair Share"?

soquelbythecreek.blogspot.com/2011/08/is-warren-buffet-paying-his-fair-share.html

Who Pays Their "Fair Share" in California?

soquelbythecreek.blogspot.com/2011/10/who-pays-their-fair-share-in-california.html

The Oppressive Progressive Income Tax: California Editionsoquelbythecreek.blogspot.com/2009/07/oppressive-progressive-income-tax.html

Not All Money Is Created Equal
www.politicalmathblog.com/?p=270

Taxation Charts
perotcharts.com/category/charts/taxation-charts

Tax Foundation Data
www.taxfoundation.org/taxdata

Source Data:

[1] "The 400 Individual Income Tax Returns Reporting the Highest Adjusted Gross Incomes Each Year, 1992-2007," Internal Revenue Service
www.irs.gov/pub/irs-soi/07intop400.pdf

[2] "Summary of Latest Federal Individual Income Tax Data," Tax Foundation. See Table 1 and Table 4.
www.taxfoundation.org/news/show/250.html

Spreadsheet:

http://www.editgrid.com/explore/user/soquel_by_the_creek/Top_400_Taxpayer_Comparison_Data

The Oppressive Progressive Income Tax: California Edition

I thought I would share a few charts on California’s Personal Income Tax (or PIT for short). I haven’t had time to analyze the federal IRS data yet. California’s PIT is more heavily progressive than the federal income tax and California relies on PIT for a greater share of total revenues (nearly 50% in 2006). California treats all income equally. Unlike the federal government, California taxes capital gains at the ordinary income level. Most of the taxes collected at the upper end are from stock and real-estate gains which have been devastated by the simultaneous downturns in both areas (hence the California budget disaster).

Recently, many in California pointed to the 2/3rds majority tax approval requirement as a stumbling block to patching the state government’s massive spending crater. Some argued that California needs to impose higher taxes on the rich because “we all know that the rich don’t pay their fair share.” These charts were meant to analyze these arguments.

The following charts use data freely available for download from California’s Franchise Tax Board (FTB, or California’s IRS).

I then sorted the percent of PIT taxes paid by population. I think that the chart speaks for itself, showing that the state’s need for revenues falls on a small minority of (i.e., electorally insignificant) taxpayers.


If distributed equally, the “average” state tax bill would be $3,100. By population, 85% of taxpayers paid below the average while just 15% paid above the average. Amazingly, half of the entire PIT tax bill is paid by just 2% of taxpayers. The other 98% of taxpayers pay the other half. The 2/3 majority requirement is the ONLY real check against runaway spending, and admittedly not a very good one.

Back to the 2/3rds discussion for a second. The majority of Californian’s already pay less than the “average”, even at the 66.7% population level. In fact, that electorally-strong 2/3rds contributed just 6% to the entire PIT tax bill. The electorally-weak 1/3 contributed the other 94%. Remember the 2% that pays 50% of the PIT bill? Well, because PIT is half of California’s revenues, those 2% provided a full quarter of the entire state’s revenues (thank you, my beloved fellow Californian). That 2% of taxpayers equates to a city the size of Riverside, CA or about 280,000 people. Remember, the state’s entire population is roughly 37 million, so we’re talking less that 0.8% of the entire population. But this is fair, right (he writes with fingers dripped in sarcasm)?

Let's look at it another way. Would you agree that all California residents benefit from state government? Do all state residents benefit equally? Sure, some argue that the rich benefit more because they have more to lose while others point to the costs of welfare and social programs at the low end. So let's look at the effective cost of state government by population. This following chart shows the effective cost of $1 of state government. Those taxpayers that pay below the “average” cost pay less than $1, those that pay above the average pay more. We won’t even discuss the estimated 7%-8% of the population that is here illegally and likely pays nothing in PIT.


Two-thirds of Californians effectively pay only 25 cents on each $1 of state service that they receive. A full half of taxpayers pay less than 12 cents. The remainder of that cost is subsidized by those at the upper end. High wage earners (we should all be so luck), effectively pay over $500 for every $1 of service.

Here is where the conflict emerges. We have two different systems when voting on spending and tax-related measures.

On one side, we have "one person, one vote". Many who vote in favor of more spending will never have to pay for the consequence of their vote.

On the other side, we have the progressive income tax system where top income earners pay more for government programs, despite having just one vote.

Politicians love to promise new spending to win votes and guarantee re-election. Voters love new services for which they do not have to pay. The progressive income tax system gives both the politicians and voters what they want without any pesky checks and balances.

Let's use an illustrative example. Say that, in order to ensure re-election, the dominant political party decides that every Californian MUST have a 50-inch HDTV on which to watch (and snicker at) the Governor's latest action flick. Due to State's buying power, the State can buy these TVs for $1,000. Just vote "Yes" on the ballot proposition and you too can have one of the beauties. The cost will be painlessly applied to your annual Personal Income Tax bill.

If you are in the bottom two-thirds of the taxpayer population, you pay just 25 cents or less on the dollar. Effectively, you are insulated from the true cost of operating the state government. This means that the $1,000 TV costs you $250 or less. If you are in the bottom 30%, the cost is only $100 or less because you effectively pay 1 cent on the dollar or less. So which way are you going to vote? I'd guess YES.

Now, let's say that you happen to be in the top 15% of taxpayers. Due to the progressive income tax, this means that you effectively pay more than $1 for every $1 of service. "That's fair," you say, "because they earn more money." Okay, let's look at the top-most 2% of taxpayers, you know, the ones that pay 50% of the entire bill. These "lucky" citizens effectively pay $4.75 and much, much more for every $1 of government service. That $1,000 TV effectively costs a minimum of $4,750 to these taxpayers. For the very top taxpayers, the bill comes to an amazing $507,000! All this, despite that these taxpayers likely already have two better-quality TVs at home. If you are in this category, I'd guess that you would vote NO. Unfortunately for you, you are electorally insignificant. It REALLY DOES NOT MATTER if you think this is a good idea or not but you WILL have to PAY FOR IT.

At the ballot box, the top 15% of taxpayers can NEVER prevail in a free and fair democratic election against the majority for popular programs. Want a low-cost 50-inch HDTV? Vote "YES" and make somebody else pay for. Want free higher education? Vote "YES" and make somebody else pay for it. Want free medical care? Vote "YES" and make somebody else pay for it.

The politicians that use these techniques appeal to the broad masses, ensuring re-election. There are no checks and balances against such abuses. While I have not found "smoking gun" evidence, it does offer an explanation for California’s constant overspending (above inflation and population growth), the lack of fiscal discipline, and the domination of one party in the California Legislature.

There is also a separate debate as to whether the excess tax money better serves society when in the hands of government, or left in the pockets of those that earned it. By California’s example, even a spoiled rich heiress might make better spending decisions.