The far-left NC Justice Center is once again touting the annual report put out by the left-wing Institute on Taxation and Economic Policy (ITEP) titled “Who Pays?” The purpose of the report is to cultivate envy and resentment between people in various income levels by purporting to show that state tax structures compel lower-income households to pay a greater share of income to state and local taxes compared to higher income households.
According to their findings, the lowest-income North Carolinians pay 1.5 times more in taxes as a percent of their income compared to the state’s wealthiest residents. As illustrated below, the lowest 20% of North Carolina taxpayers pay 9.5% in total taxes as a percentage of their income, while the top 1% of North Carolina taxpayers pay 6.4% in total taxes as a percentage of their income.
This “study”, however, is worthless and potentially harmful due to several flaws:
- Why does it compare tax burdens of the lowest 20% with the highest 1%? Why not the lowest 1% versus the highest 1%?
- This study excludes the federal income tax burden, which is highly progressive. With that factored in, we get a much different picture of the overall tax burdens on various income levels.
- This represents merely a snapshot in time. Of course, people move about income levels through the duration of their lifetime. Today’s “low-income” individual may be a recent college grad from an upper middle class family merely working an entry-level job on her way to a lucrative career. Conversely, today’s “high-income” earner may be a small business owner who struggled for decades and finally had a successful year. This snap-shot report in no way tells us anything about the financial well-being over the lifetimes of the people being studied. In short, simple “income” statistics often provide a misleading snapshot of citizens’ financial well-being, and therefore of how taxes really affect them.
- Likely the largest flaw, however, is the study’s failure to take into account the value of many government benefits available to low-income households. From ITEP’s methodology, they state that government programs distributing cash as benefits, such as social security, unemployment benefits and worker’s comp. are included – but this leaves out significant other benefits such as Medicaid, food stamps, etc. For instance, in a 2013 report prepared by NC’s legislative Fiscal Research Division, it was reported that, for example, a single mother with two young children with an income of $15,000 would be eligible for government benefits valued at about $30,000. Or a married couple with two young children earning $25,000 would be eligible for benefits worth roughly $25,000. Most of these benefits would not show up in ITEP’s measure of income.
- Clearly, a failure to take these benefits into account heavily skews the impact that taxes have on a household’s ability to consume goods and services.
Lawmakers, citizens and the media alike should be highly leery of studies claiming to measure the burden of a tax on households of various incomes. Universally, these studies suffer from the fatal flaws of ignoring individuals’ typical lifestyle earnings cycle and instead using a static snapshot of income, as well as denying the value of government benefits received by low-income households. Upon closer consideration, such tax burden studies have no credibility and serve to only distract from the more important debate of how to modernize our tax code to maximize economic growth and job creation.