Voice For Liberty

Category: Taxation

  • Tax rates and taxes paid

    Tax rates and taxes paid

    Is there a relationship between marginal tax rates and tax dollars collected?

    The top marginal tax rate — that’s the rate that applies to high income earners on most of their income — was above 90 percent during most of the 1950s. From 2003 to 2012 it was 35 percent, and is now 39.6 percent. Some see that as a lost opportunity. If we could return to the tax rates of the 1950s, they say, we could generate much more revenue for government.

    The top marginal tax rate is the rate that applies to income. It’s not the same as what is actually paid. This fact is unknown or ignored by those who clamor for higher taxes on the rich.

    Top marginal tax rates and tax paid. Click for larger.
    A nearby charts illustrates the lack of relationship between the top marginal income tax rate and the income taxes actually paid. (Click chart for larger version.)

    The top marginal tax rate has varied widely. But since World War II, the taxes actually collected, expressed as a percentage of gross domestic product, has been fairly constant. In 1952 the top tax rate was 92.0 percent, and income taxes paid as a percent of GDP was 18.5 percent. In 2007, for example, the top rate was 35.0 percent, and income taxes paid as a percent of GDP was 17.9 percent.

    Try as we might, raising tax rates won’t generate higher revenues (as a percentage of gross domestic product), due to Hauser’s law.

    W. Kurt Hauser explains in The Wall Street Journal: “Even amoebas learn by trial and error, but some economists and politicians do not. The Obama administration’s budget projections claim that raising taxes on the top 2% of taxpayers, those individuals earning more than $200,000 and couples earning $250,000 or more, will increase revenues to the U.S. Treasury. The empirical evidence suggests otherwise. None of the personal income tax or capital gains tax increases enacted in the post-World War II period has raised the projected tax revenues. Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90). This observation was first reported in an op-ed I wrote for this newspaper in March 1993. A wit later dubbed this ‘Hauser’s Law.’”

    For many people, there is a direct relationship between tax rates and the amount of tax paid. For workers who earn a paycheck, there’s not much they can do to change the timing of their income, find tax shelters, or shift income to capital gains. When income tax rates rise, they have to pay more.

    But people with high incomes can use these and other strategies to reduce the taxes they pay. In fact, there is an entire industry of accountants and lawyers to help people reduce their tax. Often — particularly in the past when top marginal rates were very high — investments and transactions were made solely for the purpose of avoiding taxes, not for productive economic benefit.

    People react to changes in tax law. As tax rates rise, people seek to reduce their taxable income, and make investments in unproductive tax shelters. There is less incentive to work and invest. These are some of the reasons why tax hikes usually don’t generate the promised revenue.

    But: High tax rates make the middle class feel better about paying their own taxes. With top tax rates of 90 percent, they may believe that the rich are paying a lot of tax. The middle class may take comfort in the fact that someone else is worse off. But that is based on the misconception that high tax rates mean rich people actually pay correspondingly higher tax.

    Data is from The Tax Policy Center (TPC), a joint venture of the Urban Institute and Brookings Institution.

  • The Wichita Eagle on Kansas sales tax exemptions

    The Wichita Eagle on Kansas sales tax exemptions

    The Wichita Eagle editorial board writes an editorial that gives false hope to advocates of more taxation and more spending.

    Advocates of eliminating sales tax exemptions in Kansas point to the great amount of revenue that could be raised if Kansas eliminated these exemptions, given at about $6 billion per year, according to a recent Wichita Eagle editorial.1

    Analysis of the nature of the exemptions and the amounts of money involved, however, leads us to realize that the additional tax revenue that could be raised is much less than spending advocates claim, unless Kansas was to adopt a severely uncompetitive, and in some cases, unproductive and harshly regressive tax policy.

    The unsigned editorial notes this: “And sales tax exemptions are costing the state a fortune — about $6 billion a year.” For context, general fund spending in Kansas is about the same amount. That’s a lot of money. Further, the tone of the sentence calls for more taxation so that government can spend more. In a previous op-ed on this topic Phillip Brownlee, opinion page editor for the Eagle, wrote ” And with each added exemption, the state is losing out on more revenue — $5.9 billion this fiscal year, according to the Kansas Department of Revenue. That’s money the state could be using to cover its budget shortfalls, increase funding to public schools or further reduce its income-tax rates.” At least he mentioned reducing other tax rates. Usually advocates of closing sales tax exemptions simply want more tax money to spend.

    In 2015 I looked at the nature of Kansas sales tax exemptions, using data from 2014. The numbers would be a different if I repeated the analysis today. But not different by much, and the same conclusions apply.

    Kansas sales tax exemptions, simplified. Click for larger version.
    Kansas sales tax exemptions, simplified. Click for larger version.
    We need to look at the nature of these exemptions. I’ve prepared a simplified table based on data from the Kansas Department of Revenue.2 I simplified because there are many deductions that probably should be eliminated, but they represent relatively small amounts of money.

    Some sales tax exemptions are for categories of business activity that shouldn’t be taxed, at least if we want to constrain the state to a retail sales tax only. An example is exemption 79-3606 (m), described as “Property which becomes an ingredient or component part of property or services produced or manufactured for ultimate sale at retail.” The tax that could be collected, should the state eliminate this exemption, is given as $3,083.24 million ($3,083,240,000).

    But this exemption isn’t really an “exemption,” at least if the sales tax is a retail sales tax designed to be levied as the final tax on consumption. That’s because these goods aren’t being sold at retail. They’re sold to manufacturers who use them as inputs to products that, when finished, will be sold at retail. Most states don’t tax this type of sales. If Kansas decided to tax these transactions, it would place our state’s manufacturers at a severe disadvantage compared to almost all other states.

    There are two other exemptions that fall in this category of inputs to production processes, totaling an estimated $632 million in lost revenue. Another similar exemption is “Machinery and equipment used directly and primarily in the manufacture, assemblage, processing, finishing, storing, warehousing or distributing of property for resale by the plant or facility.” Its value is nearly $159 million.

    Together, these exemptions account for $3,874 million of the $5,900 million in total exemptions.

    It’s curious that the Eagle editorial did not mention these sales tax exemptions and the disadvantage that taxing these transactions would create. The authors — Brownlee, likely — did mention how other sales taxes would affect Kansas: “For example, eliminating the exemption on legal and accounting services could put Kansas at a competitive disadvantage, as other states don’t tax those services.”

    Another big-dollar exemption is “items already taxed” such as motor fuel. This is an estimated $318.90 million loss in revenue. Other exemptions are purchases made by government, or purchase made by contractors on behalf of government. These exemptions account for an estimated $624.90 million in lost revenue. If these two exemptions were eliminated, the government would be taxing itself, with no net gain.

    Not taxing prescription drugs means lost revenue estimated at $96.49 million. If the state started taxing residential and agricultural use utilities, it could gain an estimated $169.98 million. These taxes, like the sales tax on food and the motor fuel tax, fall hardest on low-income families. As Kansas is one of the few states to tax food, do we want to make life even more difficult for low-income households?

    Adding these exemptions comes to about $5,084 million. There are other exemptions for which we could make similar arguments for their retention. What’s left over — the exemptions that really should not exist — isn’t much at all. The entire category of “Exemptions to Charitable Organizations by Name.” amounts to $3.05 million in exempted sales tax. These represent the organizations where a lawmaker has crafted an exemption like “Property and services purchased by Jazz in the Woods and sales made by or on behalf of such organization.”

    So when the Eagle editorial board writes “As is, favored groups are saving billions of dollars a year, worsening the tax burden for everybody else,” It must be including broad categories of business like “all Kansas manufacturing companies” as a “favored group.” Or maybe he means prescription drug users are a “favored group.” Or families struggling to pay utility bills.

    But there are more problems. The Eagle editorial board writes these sales tax exemptions are “costing the state a fortune.” The only way this makes sense is if one thinks that our property (our money) first belongs to the state, and that in order to spend it, we have to give the state its cut. That’s an opinion that you may agree with, or you may oppose. What’s remarkable — shocking, really — is that in his previous career Brownlee — the opinion page editor — was a Certified Public Accountant. He ought to understand the nature of sales taxes meant to be applied to retail sales, not components of manufactured goods.

    —
    Notes

    1. Eagle Editorial Board. Reduce sales-tax exemptions. Wichita Eagle, February 3, 2017. http://www.kansas.com/opinion/editorials/article130438759.html. ↩
    2. Kansas Department of Revenue. Annual Reports. http://www.ksrevenue.org/annualreport.html. ↩
  • Kansas cities force tax breaks on others

    Kansas cities force tax breaks on others

    When Kansas cities grant economic development incentives, they may also unilaterally take action that affects overlapping jurisdictions such as counties, school districts, and the state itself. The legislature should end this.

    When Kansas cities create tax increment financing (TIF) districts, the overlapping county and school district(s) have an opportunity to veto its creation.

    But for some other forms of incentives, such as tax increment financing district redevelopment plans, property tax abatements, and sales tax abatements, overlapping jurisdictions have no ability to object. There seems to be no rational basis for not giving these jurisdictions a chance to object to the erosion of their tax base.

    This is especially important for school districts, as they are often the largest tax consumer. As an example, when the City of Wichita offered tax abatements to a company in June 2014, 47 percent of the abated taxes would have gone to the Wichita school district. But the school district did not participate in this decision. State law gave it no voice.

    Supporters of economic development incentives say that the school district benefits from the incentives. The argument is that even though the district gives up some tax revenue now, it will get more in the future. This is the basis for the benefit-cost ratios Wichita uses to justify incentives. For itself, the City of Wichita requires a benefit-cost ratio of 1.3 to one or better, although there are many loopholes the city can use to grant incentives when this threshold is not met. For the June project, city documents reported these benefit-cost ratios for two overlapping jurisdictions:

    Sedgwick County 1.18 to one
    USD 259 1.00 to one

    In this case, the city forced a benefit-cost ratio on the county that the city would not accept for itself, unless it uses a loophole. For the school district, the net benefit is zero.

    The Kansas Legislature should look at ways to make sure that overlapping jurisdictions are not harmed when economic development incentives are granted by cities. The best way would be to require formal approval of the incentives by counties, school districts, and any other affected jurisdictions.

    Two examples

    In June 2014 the City of Wichita granted tax abatements for a new warehouse. City documents gave the benefit-cost ratios for the city and overlapping jurisdictions:

    City of Wichita General Fund 1.30 to one
    Sedgwick County 1.18 to one
    USD 259 1.00 to one
    State of Kansas 12.11 to one

    It is not known whether these ratios include the sales tax forgiveness.

    While the City of Wichita insists that projects show a benefit-cost ratio of 1.3 to one or better (although there are many exceptions), it doesn’t apply that standard for overlapping jurisdictions. Here, Sedgwick County experiences a benefit-cost ratio of 1.18 to one, and the Wichita school district (USD 259) 1.00 to one. These two governmental bodies have no input on the decision the city is making on their behalf. The school district’s share of the forgiven taxes is 47.4 percent.

    In November 2014 a project had these dollar amounts of property tax abatement shared among the taxing jurisdictions in these estimated amounts, according to city documents:

    City $81,272
    State $3,750
    County $73,442
    USD 259 $143,038

    The listing of USD 259, the Wichita public school district, is likely an oversight by the city, as the subject properties lie in the Derby school district. This is evident when the benefit-cost ratios are listed:

    City of Wichita 1.98 to one
    General Fund 1.78 to one
    Debt Service 2.34 to one
    Sedgwick County 1.54 to one
    U.S.D. 260 1.00 to one (Derby school district)
    State of Kansas 28.23 to one

    Note that the ratio for the Derby school district is 1.00 to one, far below what the city requires for projects it considers for participation. That is, unless it uses a loophole.

  • Sedgwick County delinquent property tax

    Here is an interactive version of the list of delinquent property taxes in Sedgwick County. This list is printed in a local newspaper three times each summer.

    The Sedgwick County Treasurer issues a disclaimer regarding this list, which is that some of the taxes may have been paid, or are waiting the result of a grievance or protest.

    Click here to open the interactive list in a new window. As shown in the illustration below, you may click to expand the addresses of properties for an owner, and sort by any column.

    Sedgwick County delinquent tax list instructions 2015-10

  • State taxes and charitable giving

    State taxes and charitable giving

    States with higher rates of economic growth grow total charitable giving at a faster rate than states with low rates of economic growth, finds a new report by American Legislative Exchange Council.

    From ALEC: Charity is a crucial component of efforts to address societal challenges and help individuals thrive. From religious organizations to community charities, philanthropic donations drive the institutions of civil society and enable communities to develop around a greater sense of shared purpose. Despite this important role, charitable giving is rarely addressed in discussions around public policy — especially state tax policy.

    ALEC State factor charitable giving cover imageThe report uses data collected from the Internal Revenue Service (IRS) and focuses on both the levels of charitable giving and the growth of charitable giving throughout the states. We examined these trends over two different time periods. First, the IRS data begins in 1997 and is available through 2012. Second, we measured state charitable giving from 2008 to 2012 to understand how states fared during the recession.

    Here are some of the most significant findings from our report:

    • States with higher taxes generally experienced lower levels and lower rates of growth in charitable giving compared with their lower tax counterparts
    • A one percent increase in a state’s total tax burden is associated with a 1.16 percent decrease in the state’s rate of charitable giving
    • A one percent increase in a state’s personal income tax burden is associated with a 0.35 percent decrease in the state’s rate of charitable giving as a percent of total state income
    • In every category, over each time period, the nine states without income taxes grew their rates of charitable giving more than the nine states with the highest income taxes

    The report is available to download and read at The Effect of State Taxes on Charitable Giving. Following is material from the report’s executive summary:

    An often overlooked aspect of public policy is the role that charitable organizations have in addressing some of society’s most pressing concerns. Because of this important role and since charitable organizations are funded privately through donations, understanding how state policies interact with charitable organizations is crucial for a robust discussion about public policy. This State Factor examines state tax policies that encourage charitable giving, apart from the charitable giving deduction.

    While many factors certainly influence an individual’s choice about donating to charity, there are broad policy choices that can encourage higher rates of growth in charitable giving. By examining various tax burdens and tax rates with rigorous economic analysis, this paper’s research findings show that a 1 percent increase in the personal income tax burden is associated with 0.35 percent decrease in charitable giving per dollar of state income. Similarly, this State Factor found that an increase in personal income tax burden of roughly 1 percentage point of total state income results in a roughly 0.10 percentage point decrease in the level of measured charitable donations as a percent of income.

    When all state taxes are considered, a 1 percentage point increase in the total tax burden is associated with a 1.16 percent drop in charitable giving per dollar of state income. Similarly, this State Factor found that an increase in total tax burden of roughly 1 percentage point of total state income results in a roughly 0.09 percentage point decrease in the level measured charitable donations as a percent of income.

    According to the new report, The Effect of State Taxes on Charitable Giving the following states donated the most to charity as a percent of total income between 1997 and 2012, in order from 1st to 10th: Utah, Wyoming, Georgia, Alabama, Oklahoma, South Carolina, Maryland, Idaho, North Carolina and Mississippi. The report examines patterns of philanthropic contributions in the states over time and uses rigorous economic analyses to draw significant conclusions about charitable giving in the United States.

    The report is written by Jonathan Williams, William Freeland, research analyst for the ALEC Center for State Fiscal Reform, and Ben Wilterdink, research manager for the ALEC Center for State Fiscal Reform. The report reveals that states with higher rates of economic growth grow total charitable giving at a faster rate than states with low rates of economic growth.

  • Wichita property taxes still high, but comparatively better

    Wichita property taxes still high, but comparatively better

    An ongoing study reveals that generally, property taxes on commercial and industrial property in Wichita are high. In particular, taxes on commercial property in Wichita are among the highest in the nation, although Wichita has improved comparatively.

    50 State Property Tax Comparison Study, Selected Wichita Data. Click for larger version, or see text for pdf version.
    50 State Property Tax Comparison Study, Selected Wichita Data. Click for larger version, or see text for pdf version.
    The study is produced by Lincoln Institute of Land Policy and Minnesota Center for Fiscal Excellence. It’s titled “50 State Property Tax Comparison Study, April 2015” and may be read here. It uses a variety of residential, apartment, commercial, and industrial property scenarios to analyze the nature of property taxation across the country. I’ve gathered data from selected tables for Wichita. (A pdf version is available here.)

    In Kansas, residential property is assessed at 11.5 percent of its appraised value. (Appraised value is the market value as determined by the assessor. Assessed value is multiplied by the mill levy rates of taxing jurisdictions in order to compute tax.) Commercial property is assessed at 25 percent of appraised value, and public utility property at 33 percent.

    This means that commercial property faces 2.18 times the property tax rate as residential property. (The study reports a value of 2.173 for Wichita. The difference is likely due from deriving the value from observations rather than statute.) The U.S. average is 1.710.

    Whether higher assessment ratios on commercial property as compared to residential property is desirable public policy is a subject for debate. But because Wichita’s ratio is high, it leads to high property taxes on commercial property.

    For residential property taxes, Wichita ranks below the national average. For a property valued at $150,000, the effective property tax rate in Wichita is 1.253 percent, while the national average is 1.490 percent. The results for a $300,000 property were similar.

    Commercial property taxes in Wichita compared to nation.
    Commercial property taxes in Wichita compared to nation.
    Looking at commercial property, the study uses several scenarios with different total values and different values for fixtures. For example, for a $100,000 valued property with $20,000 fixtures (table 25), the study found that the national average for property tax is $2,519 or 2.099 percent of the property value. For Wichita the corresponding values are $3,289 or 2.741 percent, ranking fourteenth from the top. Wichita property taxes for this scenario are 30.6 percent higher than the national average.

    In other scenarios, as the proportion of property value that is machinery and equipment increases, Wichita taxes are lower, compared to other states and cities. This is because Kansas no longer taxes this type of property.

  • Kansas sales tax has disproportionate harmful effects

    Kansas sales tax has disproportionate harmful effects

    Kansas legislative and executive leaders must realize that a shift to consumption taxes must be accompanied by relief from its disproportionate harm to low-income households.

    While Kansas legislative leaders and the governor praise the shift from income taxes to sales taxes, they ignore the severely regressive effect of sales taxes in Kansas. That is, a sales or consumption tax affects low-income families in greatest proportion relative to their incomes. The primary reason for the harshness of the Kansas sales tax is its application to food purchased in grocery stores. Few states tax food, and many of those that do apply a lower tax rate to food.

    During the debate over a proposed sales tax increase in Wichita last year, I gathered data from the U.S. Census Bureau regarding expenditures on various categories for five different levels of household income. My findings were that if the city raised sales tax by one cent per dollar, the lowest income class of families would experience an increase nearly four times the magnitude as would the highest income families, measured as a percentage of after-tax income. Others produced similar results. This is the regressive nature of sales taxes.

    At the national level the Fair Tax is a program whereby income taxes are replaced by consumption taxes. Proponents believe it would be a positive factor for economic growth. In recognition of the regressive nature of sales taxes, the Fair Tax plan includes a “prebate” to compensate households for the sales tax paid on necessities like food. In effect, there would be no tax on food and other necessities, up to the poverty level.

    During the legislative session this year, Kansas Legislative Research told legislators that increasing the sales tax from 6.15 percent to 6.50 percent would generate $164,200,000 in additional revenue to the state. This implies that a one percent increase in the sales tax rate would generate about $469 million in revenue. (This is based on static analysis, and therefore does not account for the changes in behavior that the higher sales tax would induce, however large or small the effect.)

    Effect of sales tax on consumers of different income levels. Click for larger version.
    Effect of sales tax on consumers of different income levels. Click for larger version.
    It’s thought that the present sales tax on food results in about $390 million in tax collections. While these two values — 469 and 390 — are not equal to each other, the $469 million figure is close to the gap between revenues and expenses. (The tax bill the legislature passed will raise about $400 million, but it is widely believed the governor will have to make an additional $50 million in cuts.)

    So what would have happened if the legislature had raised the sales tax by one cent per dollar and eliminated the sales tax on food? The answer is the sales tax in Kansas would be less regressive.

    I modified my worksheet to allow for adjustment of the sales tax rate for general purchases, and for food separately. I gathered the results for three scenarios and present the results in a chart. I use the sales tax rates that Sedgwick County residents would experience. This includes a one cent per dollar county-wide tax in addition to the statewide rate. (Most counties and cities add to the statewide rate. The unweighted average sales tax rate for Kansas cities is 7.835 percent, based on Kansas Department of Revenue figures.)

    Kansas sales tax effects by income quintile, three scenarios. The vertical distance between the lines is a measure of the degree of regressivity. It is larger for lower income households. Click for larger version.
    Kansas sales tax effects by income quintile, three scenarios. The vertical distance between the lines is a measure of the degree of regressivity. It is larger for lower income households. Click for larger version.
    The blue line, labeled “Sales tax at 7.15% on all purchases” is the current tax in effect in Sedgwick County. Note that the lowest quintile of households pay nearly seven percent of their after tax income in sales taxes. For the highest quintile the value is less than two percent.

    The gold line (“Sales tax at 7.50% on all purchases”) represents the rates that will be in effect after July 1. Note that the vertical distance between the blue and gold lines is larger for low-income households than for high-income households, again illustrating the regressive nature of sales taxes.

    The red line (“Sales tax at 8.15%, food at 0%”) illustrates the situation had the legislature raised the sales tax by one cent per dollar and eliminated the sales tax on food. Notice that the vertical distance between the red and gold lines is greatest for lower-income households, and becomes less as income increases. This means that under this policy, the sales tax is less regressive. But the Kansas Legislature did not do this. Instead, it implemented a sales tax changes that increases its regressive nature.

    Kansas has a food sales tax refund program. It has been altered several times in recent years. Even if households can — and do — claim it, it doesn’t cover their likely cost of sales tax on food. At a rate of 7.50 percent, the lowest quintile of households pay an estimated $263 in sales tax, which is far above the maximum refund.

    Kansas legislative leaders have said that food sales tax could be an issue to tackle next year. One proposal this year had the tax on food falling to 4.90 percent. That is welcome, and would reduce the harsh regressive nature of Kansas taxation. But Kansas would still have a high tax rate on food. Kansas legislative and executive leaders must realize that a shift to consumption taxes must be accompanied by relief from its disproportionate harm to low-income households.

  • Tax rates and taxes paid

    Tax rates and taxes paid

    Those who call for a return to 90 percent tax rates should be aware that few people actually paid tax at those rates.

    Progressives are calling for higher income tax rates on the rich. The top marginal tax rate — that’s the rate that applies to high income earners on most of their income — was above 90 percent during most of the 1950s. From 2003 to 2012 it was 35 percent, and is now 39.6 percent. Some see that as a lost opportunity. If we could return to the tax rates of the 1950s, they say, we could generate much more revenue for government.

    The top marginal tax rate is the rate that applies to income. It’s not the same as what is actually paid. This fact is unknown or ignored by those who clamor for higher taxes on the rich.

    The mistake the progressives make is equating tax rates with the tax actually paid. For many people, there is a direct relationship. For workers who earn a paycheck, there’s not much they can do to change the timing of their income, find tax shelters, or shift income to capital gains. When income tax rates rise, they have to pay more. But people with high incomes can use these and other strategies to reduce the taxes they pay. In fact, there is an entire industry of accountants and lawyers to help people reduce their tax. Often — particularly in the past — investments and transactions were made solely for the purpose of avoiding taxes, not for any other economic benefit.

    But: High tax rates make the middle class feel better about paying their own taxes. With top tax rates of 90 percent, they may believe that the rich are paying a lot of tax. The middle class may take comfort in the fact that someone else is worse off. But that is based on the misconception that high tax rates mean rich people actually pay correspondingly higher tax.

    Top tax rates and taxes actually paid

    Figure 1. The top marginal income tax rate has varied widely, but since World War II, tax revenue collected as a percent of GDP is remarkably constant.
    Figure 1. The top marginal income tax rate has varied widely, but since World War II, tax revenue collected as a percent of GDP is remarkably constant.
    A series of charts illustrate the lack of a relationship between the top marginal income tax rate and the income taxes actually paid. (Click charts for larger versions.)

    Figure 1 shows that that top marginal tax rate has varied widely. But since World War II, the taxes actually collected, expressed as a percentage of gross domestic product, has been fairly constant. In 1952 the top tax rate was 92.0 percent, and income taxes paid as a percent of GDP was 13.5 percent. In 2012 the top rate was 35.0 percent, and income taxes paid as a percent of GDP was 11.2 percent.

    Figure 2. The top marginal income tax rate has varied widely, but the average federal tax rates paid by top earners has varied less.
    Figure 2. The top marginal income tax rate has varied widely, but the average federal tax rates paid by top earners has varied less.
    Figure 2 shows how the top marginal income tax rate has varied widely, but the average federal tax rates paid by top earners has varied less. Data for this series is available only back to 1979.

    Figure 3. The top marginal income tax rate has varied widely and has mostly fallen, and the share of federal taxes paid by top income earners has risen.
    Figure 3. The top marginal income tax rate has varied widely and has mostly fallen, and the share of federal taxes paid by top income earners has risen.
    Figure 3 shows how the top marginal income tax rate has varied widely and has mostly fallen, and the share of federal taxes paid by top income earners has risen.

    Sources of data for these charts are the Internal Revenue Service, Bureau of Economic Analysis, and Congressional Budget Office.

    Hauser’s Law

    In 2010 W. Kurt Hauser explained in The Wall Street Journal: “Even amoebas learn by trial and error, but some economists and politicians do not. The Obama administration’s budget projections claim that raising taxes on the top 2% of taxpayers, those individuals earning more than $200,000 and couples earning $250,000 or more, will increase revenues to the U.S. Treasury. The empirical evidence suggests otherwise. None of the personal income tax or capital gains tax increases enacted in the post-World War II period has raised the projected tax revenues. Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90). This observation was first reported in an op-ed I wrote for this newspaper in March 1993. A wit later dubbed this ‘Hauser’s Law.’”

    Incentives matter, economists tell us. People react to changes in tax law. As tax rates rise, people seek to reduce their taxable income. A common strategy is to make investments in economically unproductive tax shelters. There is less incentive to work, to save and build up capital stocks, and invest. These are some of the reasons why tax rate hikes usually don’t generate the promised revenue.

    The subtitle to Hauser’s article is “Tax revenues as a share of GDP have averaged just under 19%, whether tax rates are cut or raised. Better to cut rates and get 19% of a larger pie.” Figure 1 illustrates. The top line, the top marginal tax rate in effect for each year, varies widely. The other two lines show total taxes and federal income taxes as a percent of gross domestic product. Since World War II, these lines are fairly constant, even as the top marginal tax rate varies.

  • Taxation in the states

    Taxation in the states

    Examining tax collections by the states shows that Kansas collects more tax than many of our neighbors, and should put to rest some common myths.

    Tax Collections by the States, Kansas and selected States, total and per capita.
    Tax Collections by the States, Kansas and selected States, total and per capita.
    Of a selection of nearby states, Kansas collects more taxes than most, on a per-person basis. The nearby table shows total tax collections, and tax collections per person. The chart shows collections grouped by major category, and one special category, which is severance taxes.

    Some of the data regarding specific taxes is revealing and should shape the debate over taxes in Kansas. Consider severance taxes, which are taxes levied on extracting materials like oil, gas, and coal. The common narrative in Kansas is that states like Texas are sitting atop a sea of oil, with the severance taxes funding a major portion of state government. The data shows that Texas collected $223 per person in severance taxes in 2014. For Kansas the figure is $43. This difference — $180 — doesn’t account for the difference in total tax collections between the states. Texas collects $2,050 in total taxes per person, while Kansas collects $2,526, a difference of $476.

    Tax Collections by the States, Kansas and selected States, 2014. Click for larger version.
    Tax Collections by the States, Kansas and selected States, 2014. Click for larger version.
    We also commonly hear that Kansas doesn’t have the tourism of states like Florida, and therefore doesn’t have the flood of tourism spending and accompanying sales tax. Again, looking at the data, se see that Florida collected $1,460 in Sales and Gross Receipt Taxes per person for 2014. Kansas collected $1,340. This is a difference of $120, while the difference between total tax collections for Florida ($1,779) and Kansas ($2,526) is $747.

    You may use this interactive visualization to customize the table to fit your own needs. Click here to open the visualization. Data is from the U.S. Census Bureau, Survey of State Government Tax Collections and Bureau of Economic Analysis, along with author’s calculations. Visualization developed using Tableau Public. Data is expressed on a per person basis, not adjusted for inflation.