You may think that government takes a lot of money from the wealthy and gives it to poor people. You might also assume that the rich pay a lot to support government while the poor pay a pittance.
There is nothing wrong with you if you believe this. Our public discourse is dominated by these ideas, and you’d probably feel foolish challenging them. After Mitt Romney’s comments on the 47 percent blew up on him, conservatives have largely given up talking publicly about their “makers vs. takers” distinction. But much of the right’s rhetoric and many of its policies are still based on such notions.
It is thus a public service that the Institute on Taxation and Economic Policy (ITEP) has issued a report showing that, at the state and local level, government is indeed engaged in redistribution — but it’s redistribution from the poor and the middle class to the wealthy.
It’s entirely true that better-off people pay more in federal income taxes than the less well-to-do. But this leaves out not only Social Security taxes but also what’s going on elsewhere.
The institute found that in 2015 the poorest fifth of Americans will pay, on average, 10.9 percent of their incomes in state and local taxes and the middle fifth will pay 9.4 percent. But the top 1 percent will pay states and localities only 5.4 percent of their incomes in taxes.
When you think about it, such figures should not come as a surprise. Most state and local governments rely on regressive taxes — particularly sales and excise levies. Poor and middle-class people pay more simply because they have to spend the bulk of their incomes just to cover their costs.
This gets to something else we don’t discuss much: Public policies in most other well-to-do countries push much harder against inequality than ours do. According to the Luxembourg Income Study (LIS), the United States ranks 10th in income inequality before taxes and government transfers. By this measure, Ireland and Britain, and even Sweden and Norway, are more unequal than we are. But after government transfers are taken into account, the good old USA soars to first in inequality. Norway drops to sixth place and Sweden to 13th.
It’s not a matter about which we should be proud to shout, “We’re No. 1!”
Actually, things may be a bit worse for us even on pre-transfer incomes, said LIS Director Janet Gornick, because people in the other rich countries tend to draw their pensions earlier.
The overall story is that we are not very aggressive, with apologies to Joe the Plumber, in spreading the wealth around. “Our inequality is already high because of the low minimum wage, the weakness of unions and very high levels of private-sector compensation at the top,” Gornick, a professor at the Graduate Center of City University of New York, said in a telephone interview from Luxembourg. “But on top of that, we are redistributing less than other countries and also have lower taxes on the highest incomes, particularly income from capital.”
And at the state and local level, our governments are exacerbating inequality. The ITEP study concludes that “every single state and local tax system is regressive and even the states that do better than others have much room for improvement.” The five states with the most regressive systems are Washington, Florida, Texas, South Dakota and Illinois. Of the five, only Illinois has an income tax, and it uses a flat rate.
On its face, the property tax would seem progressive, because big houses are taxed more. But the study finds that on average, “poor homeowners and renters pay more of their incomes in property taxes than do any other income group — and the wealthiest taxpayers pay the least.”
There is also an unanticipated consequence of growing economic disparities: Because states and localities tax the wealthy less, “rising income inequality can make it more difficult for state tax systems to pay for needed services over time. The more income that goes to the wealthy, the slower a state’s revenue grows.”
Political debates are typically driven by cliches, but at the very least, we can expect our cliches to be true. We need to stop claiming that we have a massively redistributive government. We need to stop pretending that poor people are “takers” when they in fact kick in a lot to the common pot. And we need to replace arguments about “big” and “small” government with a debate over what governments at all levels are doing to make our society more just — or less.