Wednesday, May 25, 2005

Why we're broke almost every year

Breaking news: Alabama has a horrible tax system.

OK, you might already have heard that. Perhaps you read about it somewhere. Or maybe you've just encountered it in everyday life. But in case you weren't sure before, a new study by the Center on Budget and Policy Priorities has confirmed that beating up on poor people and relying too much on too-high sales taxes isn't a formula for fiscal success.

You already knew that the Alabama income tax threshold is an absurdly low $4,600 a year for a family of four. Today's rather depressing fun fact: "[A] person making $30,000 a year pays the same income tax rate as a person making $300,000 a year."

Did someone mention constitutional reform?

8 Comments:

Blogger Hanging by the News said...

I blogged about this in March, but I reprinted it on my Blogger account in light of your post.

You're right on the high sales taxes, as the MSN article I link to in my post says Alabama contains the highest sales tax rate in the country (though I believe they do not have the highest basic state rate of sales tax). And to some extent, the high sales taxes do beat up on poor people.

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But as a sort of aside to this response, I'm of the school of thought that a sales tax, a flat rate of tax, is a fair way to tax our citizens. Yes, the poor family may have to scrape up a few more cents when they buy bread and milk, but the upper class will have to pay the same amount when they purchase a yacht (because yachts are common in Alabama).

Some poor families in Alabama, however, are eligibile for food stamps, and they do not pay sales taxes on eligible food items. They would still be taxed on diapers, clothes and other items, but those families at least get some break on the sales taxes.

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As far as normal state and federal taxes go, Alabama's paying some of the lowest in the country: At 9.1 percent in state and local taxes, Alabama ranks 42nd; factor in the federal taxes and Alabamians are only paying 25 percent, 50th in the nation (I believe out of 51, as I think Puerto Rico was included in the rankings). So the poor aren't being hit hard by those state/local/federal taxes.

So as it stands, we could stand to lower the sales taxes and raise property taxes and maybe some other state and local taxes. That way, hopefully those who have little won't be taxed as hard as those who have much.

11:42 AM  
Blogger Alabamian said...

I agree with the conclusion in your last paragraph, but sales taxes indisputably are regressive. With sales taxes, those who earn less are taxed at a higher rate than those who earn more, because the poor have to spend a larger percentage of their income on necessities.

As another example, assume two people want to buy the same $20,000 car and that sales tax on the purchase is 5 percent. That same $1,000 tax bill hits the guy who makes $30,000 a year much harder than the guy who makes $500,000 a year. That's why sales taxes, though flat in theory, aren't really flat in application.

12:10 PM  
Blogger Hanging by the News said...

True, the poor spend a larger percentage of their income on sales taxes on necessities. However, that brings to mind two concepts.

First, can these lower-income families afford their necessities? If the sales taxes are preventing a family from buying their necessities, then that's a problem. If sales taxes are merely reducing the amount of disposable income they have, then that's not such a problem.

Disposable income is just that - disposable. It's extra money and they don't need it to survive. If you don't make enough money to buy an XBox, then that's tough but a hard fact of your life. Work harder to earn a promotion or keep working to land a better job elsewhere.

The second concept is - what are necessities? Food is a necessity; caviar is not. Shirts, pants and shoes are necessities; Tommy Hilfiger, FUBU and Nikes are not.

And we see that the failure of grasping this concept contributing to the dumbing down of America and kids in school either dropping out or passing only by the skin of their teeth. Bill Cosby puts it well: "These people are not parenting. They are buying things for kids – $500 sneakers for what? And won't spend $200 for 'Hooked on Phonics.' "

While your $20,000 car example is mathematically sound, it wouldn't be feasible for a lower-income family. They should buy a vehicle or any other necessity (a car is a necessity [in most cases], but a luxury car is not) that remains within their means.

In our country with so many people with credit card debt, we obviously need consumer math back in our schools, as well as for people who are out of school and still lack that sense.

2:47 PM  
Blogger Alabamian said...

Disposable income is what keeps vast sectors of the economy running. If you take all or most of the disposable income that poor or lower middle-class people have in the form of taxes, consumer sales plummet because fewer people have the means to buy things that aren't strictly necessities. That kind of tax system is bad business.

The specific numbers in my example aren't important; what is important is the underlying principle that sales taxes take a bigger bite out of people who have less money, which is the opposite of what you'd look for in a fair tax system.

You're right about the consumer math instruction. All children should receive civics and consumer math education no later than junior high.

3:15 PM  
Blogger Hanging by the News said...

I want the lower class to have some disposable income, but not at the expense of cutting a few necessities (like nutritious meals for their children, warm clothes, materials to aid them in their education, etc.)

I don't want the lower class to stop buying non-necessary goods. I just want to see the lower class and every American be responsible with their money.

And that's the more important underlying principle of your example. Yes, the numbers aren't important, but it demonstrates the principle that one should be prudent with their money.

And what is a "fair tax system"? What is more fair than sales tax? Granted, sales taxes could stand to be lower, but the more you spend, the more tax you pay.

What's fair about drawing arbitrary lines to determine different tax brackets? What's far about having more than one tax bracket anyway? If our country's all about equality, why should people be taxed at different rates? Don't we all equally reap the benefits of our government provided education system, police forces, fire protection and more?

12:43 AM  
Blogger Alabamian said...

So because some poor people might not spend their disposable income as wisely as you'd like, all of them should be punished by high sales taxes, which collect a higher percentage of their money than of more affluent people's money?

If you don't know why sales taxes aren't the fairest form of tax, you've ignored my previous comments. If the "$20,000 car" part of the example is what bothered you, let's replace that with a $5,000 annual grocery bill with a 10 percent sales tax. The $500 tax bill eats up only a thousandth of the income of a family who makes $500,000 a year, but that same tax bill eats up 10 times as much of the income of a family who makes $50,000 a year.

To repeat, sales taxes take a bigger bite out of less affluent people than out of more affluent people, regardless of how wisely or foolishly those people spend their money. That's not to say there's no place for sales taxes -- I think they should be charged on non-necessities at reasonable rates -- but they aren't as fair as they might seem at first blush.

The idea that all citizens benefit equally from public education, highways, policing, etc., is attractive, but it's a misconception. Corporate executives, for example, benefit not just from the public services provided to them personally but also from the public services provided to their employees and companies.

1:55 AM  
Blogger Hanging by the News said...

I never said I want sales taxes to be a punishment to anyone. All I want is for people to be prudent in their spending. There's nothing partisan or cruel or shortsighted about that at all.

I grasp your concept that sales taxes take a bigger chunk out of less affluent peoples' budget. That's a mathematical concept, and I have no failure to grasp that. There's no need to keep repeating it.

Maybe having that flat tax rate taking a bigger chunk from the poorer families isn't fair. But what tax system is fair? (Seriously, because I want to know.) Should we have a sliding sales tax, where the poor pay little to none and the affluent pay the most?

I don't like the concept of a sliding scale on any type of tax. Whose to say that it's fair to make person A pay x percent tax but make person B pay a higher percentage y because he/she makes a few hundred dollars more? Should we have that system for every government tax or fee?

If you had every family pay a flat income tax, say 20 percent, then yes, it will still hurt poor families more because the 80 percent they have left is less than the 80 percent more affluent families have.

Why is it fair to charge the middle and upper class a higher percentage? If every tax was flat, then they would still be paying more than the lower class because the percentage they pay would contain more money.

And if they have more money that's not automatically taxed, then they'll likely still put that money into the economy with a greater rate of spending (more sales tax revenue) or into banks or the market to keep them stimulated.

They can even put some of that money into their church or charities that could help the lower class.

If a family is deemed too poor by the government, they can get assistance in the form of food stamps, which as I said, allows them to purchase qualifying foodstuffs without paying sales taxes. The food stamps make the sales tax a little more fair by reducing the burden on poor familes.

If a family isn't "poor" enough to be on food stamps, then they should pay the sales tax like everybody else. But they have to realize that the difference between needs and wants; they need to buy the necessities first then maybe some non-necessities.

You seem to be advocating eliminating the sales tax on necessities (your "I think they should be charged on non-necessities at reasonable rates" comment). But even the definition of "necessities" is up in the air. I wouldn't deem every type of food a necessity, for instance. Milk and bread, in my opinion, would be, but not Doritos and candy.

A good chunk of the state's sales taxes go to the public schools. It helps fund the (almost) free public education. The rich and the poor can take advantage of that.

I call it an "almost free education" because families now have to buy goods for their child's classroom (like Kleenex, soap and other items) in addition to the materials their children need. That is a good reason why other taxes, like property taxes, ought to be raised.

12:33 PM  
Blogger Alabamian said...

No one kind of tax is perfectly fair; that's why we have a mixture of several types of taxes -- some regressive, some progressive -- to try to achieve something that, on the whole, resembles fairness.

Some degree of progressive taxation is justifiable because from those to whom much is given, much is expected. It's legitimate to ask people who have done better in society to pay a little more to sustain that society. Progressive taxation also isn't quite as unfair or arbitrary as it might seem, because the higher percentage rate is assessed only against the amount of income earned above a given threshold, not against the entire income.

Where it's feasible, I'm for eliminating the sales tax on food and medicine.

11:10 PM  

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