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Tax truths

The idea that a tax cut for the wealthy will help everyone, though false, is a stubbornly marketable notion.



The idea that a tax cut for the wealthy will help everyone, though false, is a stubbornly marketable notion. Perhaps Peter Lindert, distinguished professor of economics at the University of California-Davis, says it best: "It is well known that higher taxes and transfers reduce productivity. Well known — but unsupported by statistics and history." Unfortunately, this falsehood persists in being "well known" both at the federal level and at home in Arkansas's legislature.

Let's take the most recent in a long line of research on this topic. The Institute on Taxation and Economic Policy compared nine states without income taxes to nine states with the highest income tax rates. Like other studies, they found that there was little evidence that zero-income-tax states were booming. In fact, in many categories, "high-tax" states blew their counterparts out of the water. The states with high income taxes had better economic growth, faster income growth and better employment opportunities. In zero-income-tax states, job growth did worse at keeping up with population growth.

This is not to say that higher income taxes caused these benefits; the point is that the income tax rate alone is largely irrelevant to economic success. And if the states with no income tax at all aren't getting anything out of the deal, what can we hope to achieve from lowering our top rate a few percentage points? The only sure thing from zero-income-tax states is that the wealthiest people in those states get a lot of benefits, and that those benefits come off the backs of everyday workers.

This is a good time to remember that Arkansas already asks lower income people to pay a bigger share of their income to state and local taxes. We are even harder on low-income people than most other states. Arkansas is the 11th worst in the nation for overburdening the poor and letting the wealthy slide on their tax bill (who remembers the capital gains exemption for people making more than $10 million a year?).

In our state, a full-time childcare worker making around minimum wage ($18,000 a year) would pay twice the rate in state and local taxes as a businessman making around $350,000 a year. The childcare worker pays about 12 percent while the businessman pays just under 6 percent. In fact, low-wage workers aren't just paying a higher rate directly because of the current tax system. Their gap in pretax income is also partly a product of the tax system itself. Economists like Thomas Piketty have linked previous cuts in U.S. top tax rates to increasing income inequality, not economic growth. In other words, not only do low-wage workers face higher state and local tax rates, they also likely would have been earning higher wages in the first place if our tax system were more equal.

Sure, if you would rather look at the total tax bill instead of the rate, the businessman is paying more, but the efforts of their contributions look very different. Just look at the time it takes to pay off state and local tax bills. If you believe the most valuable thing we have is our time, you will want to know who is spending more hours investing tax dollars toward the public good in Arkansas. The childcare worker works until around Feb. 12 to pay off their state and local tax bill for the year. The businessman is done by Jan. 19, three full weeks earlier.

Cutting personal income tax rates would make the stark inequalities in Arkansas even worse, and will undercut our hopes of ever affording the investments that would promote our economic success. A progressive income tax structure that asks people to contribute according to their ability to pay does not hurt growth. Income taxes improve our state's ability to invest in what would really move us to the front: a world-class public education system, access to quality health care, highways and roads, and systems that help children who need our help the most, such as child welfare and juvenile justice.

Eleanor Wheeler is a senior policy analyst for Arkansas Advocates for Children and Families.

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