Left launches initial demagoguery against tax changes

Already one can envision the mouse spinning away in the wheel inside the heads of Louisiana’s leftist policy-makers, trying to come up with a line of attack to stop the badly-needed tax simplification on tap for the state’s tax code. Their first try doesn’t seem very promising.

Gov. Bobby Jindal seems to have developed a pattern of choosing thematic approaches to each legislative session, and shortly after the conclusion of the most recent (with education reform, of a high-quality type as it turned out, that one’s theme) he alerted the world that simplification of Louisiana’s corporate and personal tax codes, with among the highest top income rates and most exemptions of all the states, would get a deserved overhaul if he had anything to do about it next session. He plans to lower rates in exchange for fewer exceptions, allied with an effort in the Legislature to review those exceptions.

Of course, this threatens directly both the left’s power and privilege as well as its core faith in an America rigged in favor of the wealthy, where it responds to this imaginary environment by trying to use government to rig America in favor of its special interests. The system Jindal prefers removes government from making decisions about winners and losers, i.e. who gets exceptions and who doesn’t, while these opponents precisely want government to maximize exceptions because of the control it gives them as a tool to keep power and privilege flowing their ways, and to keep higher rates in order to satisfy their craving to redistribute for ideological salvation and to buy electoral support.

So, upon notification of the issuance of a set of briefing papers concerning simplification, the media sought out one of several most reliable shills on the left, state Rep. Sam Jones, for comment, whereupon he delivered this paean to the wonderful, wild, and wacky world of televised wrestling: “It’s just really a smackdown on the middle class, and I certainly would be opposed to that kind of logic,” and elaborated that he feared the governor would try to help the wealthy by lowering tax rates while hurting people with modest incomes by eliminating tax exemptions on groceries, medicine and utilities in order to keep these proposals as a whole revenue neutral.

Note the tactics here. First, he subsumes the entire exercise into a single kind of exemption, both the largest (at almost $1.1 billion in forgone revenue in fiscal year 2011) and one of the most distortive for economic growth and fiscal efficiency purposes. Second, he frames it into an overgeneralization that assumes that if anybody of the “deserving” (i.e. non-wealthy) as a result of the process pays more taxes that it affects everybody in that category in the same way. Finally, he inserts an idea that neither Jindal nor anybody else has endorsed, raising middle-income household’s taxes to provide relief for those with higher incomes. In short, he addresses just part of the issue in a way that bears no relationship to reality.

About the only useful portion of his opinion on the issue is acknowledgment that the exemptions he cites almost certainly must be addressed in order for any meaningful change to come, given their sizes of $300-400 million a year each. But Jones, whose financial disclosure reports tell us real estate makes his family personally wealthy and whose major source of income is taxpayer-subsidized pensions from government service, likely has little idea about how that other 99 percent live.

He is correct in one respect: reduction of elimination of one to all of these exemptions will largely move money around for the middle class, not the poor. As it is, only those close to the poverty level would be affected at all relevant to basic necessities because they pay little or nothing for those anyway, and little or nothing in income taxes (if not getting money kicked back to them through the state and federal Earned Income Tax Credits). Medicaid for most picks up their medicine, Supplemental Nutrition Assistance Program, Women, Infants, and Children (which is actually state tax exempt), and others their basic food bills (although probably a good chunk of this is spent by them on prepared foods not covered by the exemption), and other federal programs may pick up their utilities costs (although the total state tax on this probably is not more than $100 a year in any event).

The middle class, of whom not many can benefit from these kinds of programs, would be most affected by change to exemptions. But its members, unlike almost all among the lower-income, pay income taxes. Using a purely static analysis, and assuming ‘”middle class” is defined as Louisiana income tax filers from $20,000 to $100,000 in income, they pay an average of $1,101 in state income taxes, of which 62 percent of that number pay at the 4 percent rate and the remainder at the 6 percent. This means an average tax savings, if a flat 2 percent rate came about, of $304 per filer per year would come under this kind of simplification. To offset this on groceries alone, assuming no more exemption on the state’s 4 percent rate, a household would have to be buying $7,600 a year in unprepared food, or over $633 a month.

Most households don’t have to spend that much; according to federal government statistics, even a family of two adults and two children doesn’t spend that much under its “thrifty” plan (which still meets all recommended quantity and nutrition criteria). Of course, these are national statistics (actually, Louisiana’s costs probably are significantly lower), and households may choose to spend much more and/or may get a substantial portion of chow from eating out. Yet the larger point is that they can choose their budget in this regard, knowing the tax implications under any change. Perhaps consumption patterns will change when the possibility exists that more tax could be paid under a change for foodstuffs even with income tax savings.

And, in this specific example, that may not be a bad thing. Louisiana has the second-highest adult obesity rate in the country at a shocking nearly one-third. If the price of unprepared food relatively does go up, maybe that will encourage less consumption and/or a shift to unprepared from prepared food (the latter generally considered less healthy) consumption in order to save money. Both would affect favorably this crisis rate.

There’s medicine (but we’re told that the imposition of the Patient Protection and Affordable Care Act will drive this tax burden way down) and utilities (again, usually a relatively much smaller expense) to add in, but these back-of-the-envelope calculations should tell us that quite a number of middle-class families will be better off under this kind of trade. And it’s worth remembering that, in sum total, wealthier earners stand much more to lose in exemption reduction simply because they take more of them and for bigger amounts – the two percent of total filers between $200,001 to $500,000 in annual income take an average of $1,000 in credits, while the three-times many six percent of total filers between $50,001 and $60,000 take an average of $78, so the wealthier filers’ percentage tax savings of income will be much less, even as their total tax savings still would be higher (unless they very conspicuously consume).

No doubt a lot of details of this nature will get the proper hashing when the full report comes dues at the beginning of next February. Just as little doubt exists that the effort also will receive a full slate of demagoguery of the kind Jones offered against it before, during, and after. Some households will be better off, and some worse by this kind of change, but in ways that most of the time if worse off could be ameliorated by behavioral changes. Because the one known quantity here is that having these exemptions on the sales tax is a subsidization of consumption, while having a higher income tax rate structure is a penalty on savings and investment – a very desirable behavior change. Indisputably, if unacknowledged by economic illiterates such as Jones, a tax structure that favors investment over consumption stands the better chance of generating in the future more money for state coffers while its rising tide lifts all boats.