Thursday, March 29, 2007

Fighting over a statistical artifact 

In a commentary in the Bemidji Pioneer, Minnesota Taxpayers Association executive director Lynn Reed makes a very interesting point about the DFL's discussions of tax incidence and tax fairness.
One of the main reasons the tax incidence of lower-income Minnesotans is greater than others is our dependence on business taxes. The Department of Revenue�s study shows that taxes initially imposed on businesses are shifted forward to households, primarily through higher prices and lower wages, which fall more heavily on lower income households. Business taxes shifted to the $17,000 to $23,000 income households take 2.6 percent of their income, while those shifted to the $105,000 and up income households take only 1.2 percent.

In fact, if state and local business taxes were cut in half, the �unfairness� would disappear. The $17,000 to $23,000 income group would pay 9.2 percent of their income in taxes, while the over $105,000 income group would pay 10.2 percent.
I looked at the study, and sure enough there it is, in Tables 2-2 and 2-3 (pages 27 and 29.) I've highlighed the business tax rates in the table to the right (taken from the study: click to expand.) Now oddly enough, I have not heard that proposal from the DFL in its attempts to create more tax fairness (which, as Reed points out "tends to reside in the mind of the one claiming unfair treatment.") Instead they are choosing between two huge tax increases on personal income. Reed argues that if you cut the business tax and replaced it with a slight, across-the-board personal tax increase you would in return get more progressivity.
A slight across-the-board increase in the individual income tax could make up for the loss of business tax revenue, with no overall tax increases, and an even more progressive tax system. While individuals would pay a little more in income taxes, they would pay lower prices for goods and receive higher wages from their employers.

Policy makers and economists know that if you want to discourage behavior, just tax it. This is the rationale behind increasing taxes on cigarettes and liquor. In Minnesota, taxing businesses doesn�t just discourage new jobs in this state, it discourages a progressive tax system. That result doesn�t sound fair for anyone.
Now a fiscally conservative DFL House caucus might be the place to find such a proposal. But alas, none are to be found.

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