Fairness asks benefit recipients to pay taxes in support

The leftist Center for the Budget and Policy Priorities, in a study reported by its affiliate the Louisiana Budget Project, identifies Louisiana as one of a minority of states where households whose reported income falls below the poverty line pay state income taxes. Which should elicit a huge collective yawn from citizens and policy-makers considering the report’s incomplete picture and lack of context with larger policy concerns, but should generate concern if then used to justify having fewer people pull the wagon while more jump on it.

The report notes that, while the majority of states create no tax burden on households defined as poor and in some of these, through an earned income tax credit, they actually receive money from the state for not paying state income tax, in Louisiana the cutoff for not owing tax is slightly below that of the poverty level, although slightly above it for earners of the minimum wage (which comprise a very small proportion of all adult earners in the state). The same holds true for families at the 125 percent of poverty level, a small amount of tax due.

The national group generally, and the state group specifically, express concern that the “poor” (who in many cases, in comparative perspective, are anything but) must pay any income tax at all, and worry that a trend may develop where more states extend that taxation to lower income households.

But these views ignore the larger picture where a comprehensive understanding of wealth redistribution, government spending, and their impact shows, if anything, that trend would prove helpful to society.

In a methodological sense, the report is flawed in its complete ignoring of government benefits that the typical household classified in poverty receives. This is substantial, with means-tested welfare spending averaging from both federal (about three-quarters of the total) and (the remaining quarter or so) state governments of around (as of 2008) $16,800 per person for those under the poverty line. To put this in perspective, if all of these kinds of programs (excluding those that are not means-tested but are generally available as quasi-insurance plans, such as Social Security retirement pay, Medicare, and unemployment insurance) were converted into cash grants, that would pay to bring the income of every poor person in America up to the poverty line four times over.

Therefore, adjusted for this (recalling it is an average figure where those with the very lowest incomes get larger benefits), the typical household under the poverty line makes much more in total income, excluding non-means tested benefits (of which Social Security is taxable as income) than households at or above, perhaps even considerably above, the poverty line not receiving such benefits. This creates the perverse result where the return on earning income through work for the bottom two quintiles of earners is essentially zero, which helps explain the long empirically-confirmed fact that the multiplicity and generosity of welfare programs discourages productivity and encourages dependency on the state.

Thus, it should not be too much to ask for those reaping such enormous benefits at least to pay a little into them, instead of relying exclusively on those receiving no benefits but paying for the benefits of others. That also would reduce the disincentives to aspire to work more and more productively.  Obviously, providing benefits which substitute for earnings from working does this but even the earned income tax credit has the effect of encouraging people to work less and less productively as well that is reflected in the fact that those workers earning the lowest on average work about half as much as the highest earners.

As it is, the ideal tax policy would be either to repeal the recently-enacted state EITC or, perhaps better, lower the level at which the marginal rate paid is zero. The latter would remove some of the productivity-sapping elements of the EITC that discourage striving for better-paying (thus more productive) work or working more hours. Best of all, even as the ceiling for the marginal zero rate is lowered, all rates could be lowered. Such policy also would create a more efficient revenue collection system for the state, as the flatter the system (including shedding deductions), the fewer disincentives get created to avoid tax payments and unproductive behavior that discourages wealth creation that then may be taxed.

Of course, that kind of change would need complementing by many others to maximize economic and thereby tax revenue growth, and always will face constraining by federal economic policy, which drives in the main job creation. Appropriate to this lesson, if the country has learned nothing else over the past three years, it is that Pres. Barack Obama evidently loves the poor – after all, his economic policies have created so many of them.

While policy from that source more than anything affects the proportion of households in poverty from an economic perspective (although other culturally-based policies, such as those encouraging two-parent households, do even more), state policy still matters even if to a lesser degree. Cheering for lowering state tax burdens on those who already pay little or none and who are eligible for substantial benefits without lowering the burden on those subsidizing them ignores the larger question of fairness.