Tuesday, October 4, 2011

Who Pays Their "Fair Share" in California?

See also "California Proposition 30: Jerry Brown's Big Government Tax Hike" that gave Californians the nation's highest state sales tax rate and the nation's 1st-, 2nd-, 3rd-, 5th-, and 7th-highest marginal state income tax rates.

President Obama is fond of saying that "millionaires and billionaires" are not paying their "fair share" of taxes.  Of course, the President never explicitly defines what someone's "fair share" should be.

Here is a chart showing the average effective tax rate for California taxpayers, paying the state's highly income-progressive Personal Income Tax (PIT).  The effective rate is the tax paid divided by the Adjusted Gross Income (AGI).  The effective tax rate for the supermajority (66.67%) of Californian taxpayer's was between 0% and 1.5% in 2008--the latest tax data available. Meanwhile, the superminority (33.33%) paid between 1.5% and 8.97%.  Why is this important?  California requires a two-thirds majority to pass a tax increase.  Effectively, the supermajority of Californian's impose excess taxes on the one-third majority.




Revenues from Personal Income Tax (PIT) contributed over half (58%) of the state's General Fund (see Figure SUM-04), ...



... which pays for the majority of California's governmental services, including K-12 and secondary education, corrections, health and human services, etc. (see Figure SUM-05).


The General Fund also pays off California's General Obligation Bonds. In 2011-12, about 5.57% of the General Fund is allocated to paying off California's debt-financed projects.  An October 2011 report from the California Treasurer indicates that debt service is over 7% and will spike at over 9%, even without new borrowing.

The 33.33% superminority pays roughly 94% of all California Personal Income Taxes (PIT), effectively contributing over half of the entire General FundThe 66.67% supermajority contributes just the remaining 6% of PIT, and roughly 3% of the General Fund.  Those with an Adjusted Gross Income (AGI) of $50,000 or less were in the bottom 66.67% in 2008.



At the ballot box, however, every taxpayer has the equivalent voice.  Consequently, the supermajority decides the projects and programs for which the superminority shall pay and how much the superminority will be charged for the privilege. 

The Occupy Wall Street movement employs divisive "us-versus-them" class-warfare rhetoric when it talks of "The 99%" and "The 1%."  Maybe the "The 1%" in California aren't pulling their weight.  Let's look at the data.  Despite being only 1% of the taxpaying population, "The 1%" paid 42% of all California Personal Income Tax (PIT) in 2008--the latest data available.  On average, the tax rate paid by "The 1%"  was over three times higher than the average rate paid by "The 99%."  At the ballot box, "The 1%" represents about 0.86% of all registered voters.  Want to understand why there is so much money distorting our political process?  It's because one set of voters decides how to spend the money raised by a minority of wealthy voters, who cannot prevail at the ballot box.


Again, 58% of California's General Fund revenues comes from Personal Income Tax (PIT) revenues.  Consequently, due to California's highly income-progressive tax system, "The 1%" pays 24% of the entire General Fund while the remaining 99% pay 34%.

It should be noted that California ALREADY implements President Obama's "Buffett Test."
  • California ALREADY imposes significantly higher marginal tax rates on upper-income taxpayers.  Consequently, California has one of the most income-progressive tax systems in the United States.
  • California taxes capital gains exactly like it does ordinary income.  There is NO capital gains tax preference in California.
If the "Buffett Test" really provided a solution, then California wouldn't have significant budget shortfalls.

Also, in honor of Governor Brown's tax increase proposal, the following chart cuts the day by those making over $300,000 (the target of most of the increases) and the 2/3rds majority of taxpayers, required to pass a tax increase (and who happen to earn $60,000 or less).


See also ...

5 comments:

  1. The top 1% are hiding behind the top 33% in all of these graphs. If the poorest 66% had more income, they would be paying a much higher share of income taxes. Your charts support a more equitable income distribution.

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  2. Thank you for your comment, Chris C.

    Based on your comment, I added charts showing the amount of taxes paid by "The 99%" and "The 1%."

    Personally, I think it is idealistic to assume that you can ever achieve income distribution--at least not without imposing draconian income tax rates, which will hurt real employment and the California economy, or erecting physical barriers to keep California citizens from moving to better tax climates.

    There will ALWAYS be income inequality. Those paying income tax include low-income workers, part-time workers (who naturally pay less because they work fewer hours), new workers (who earn less than experienced workers, even in unions), and retirees.

    California ALREADY imposes a number of economic barriers that are meant to "spread the wealth." We ALREADY have highly income-progressive tax rates. We ALREADY tax capital gains exactly like ordinary income. What would you advocate to alleviate the situation?

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  3. I think you did a great job of laying out the picture of why California is failing.

    "Democracy... while it lasts is more bloody than either aristocracy or monarchy. Remember, democracy never lasts long. It soon wastes, exhausts, and murders itself. There is never a democracy that did not commit suicide." - John Adams

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  4. I see these graphs and I don't see a failed state. I see a relatively balanced set of expenditures based on a fair taxation structure. This is how a state is supposed to work.

    Obviously the current levels of debt mean California shouldn't take out a whole lot more, but it's definitely not unsustainable either, as the steep falloff in debt service load shows. I don't get what everyone is so worked up about.

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  5. Omar, I guess it depends on whether you're a net producer or a net taker on whether California's taxation scheme is "relatively balanced." California has an even more income-progressive tax burden than the federal government with no exclusions for capital gains. This scheme delivered us into our current predicament. The California government is too dependent on a small number of relatively wealthy taxpayers whose capital gains revenue is highly volatile.

    Here's a chart that shows the problem. The two biggest generators of capital gains--real estate and the stock market--nosedived at the end of 2008. Look what happen to incomes, especially at the top, and the effect that had on California tax revenues.
    http://www.twitpic.com/8pvtzj/full

    California has bad tax policy, as evidenced by our bottom-scraping business climate, which ironically damages the tax-producing private sector economy. Governor Brown's Proposition 30 tax hikes will only make the situation worse.
    http://soquelbythecreek.blogspot.com/2012/07/california-proposition-30-governor.html

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