by Brian Balfour
Senior Vice President of Research, John Locke Foundation
No amount of money being taxed from working North Carolinians to be spent by the political class will ever satisfy the far-left NC Policy Watch. This much we know.
So of course they raised objections to the state Senate’s recently released tax cut plan, which was rolled into the Senate’s budget proposal.
Predictably, they lamented that the benefits of the cuts would supposedly accrue only to the wealthy. Their critique, however, was flawed and misleading in many ways. This article will focus on a few key points.
Elimination of the corporate tax will “provide little benefit for the least well-off,” with the majority of benefits “going straight into the pockets of the wealthy owners and shareholders.”
Wrong. We’ve written many times before about how the corporate income tax is really a tax on workers. Indeed, an October 2018 study released by the National Bureau of Economic Research found that “increases in corporate tax rates lead to significant reductions in employment and wage income.” Moreover, research has shown that the state corporate income tax is the state tax most harmful to economic growth, and slower economic growth disproportionately harms low-income households and those at the margins of employment.
And to the extent the corporate income tax doesn’t suppress worker wages, its cost is passed along to consumers with rising retail prices, a form of a “regressive” tax because the increase in retail prices harms low-income households disproportionately.
Lowering the PIT (personal income tax) would also disproportionately benefit the rich. ITEP calculated that the poorest 20 percent of the state’s taxpayers would end up seeing a shocking zero percent of the benefit, once the changes are fully phased in. On the other hand, nearly three-quarters of the PIT reduction would benefit the richest 20 percent of income earners. The wealthiest group, the top 1 percent, would see their tax bill plummet by almost $16,000.
The lowest 20 percent of taxpayers would see “zero percent of the benefit” because they largely already pay no state income tax. Tax reforms over the past decade tripled the standard deduction, and as of 2019 “More than 1.5 million working families in North Carolina owe no income tax on their earnings,” according to an April 2019 release from House Speaker Tim Moore’s office.
The Senate plan would bump up the standard deduction still further, exempting thousands more low-income households from any state income tax. Policy Watch left these critical details out of their critique. Also unmentioned was the plan’s increased child tax credit, which would provide zero relief for high-income households who are ineligible for the benefit.
Moreover, as Mitch Kokai points out in this Carolina Journal article, middle-class households would receive a far more significant tax break than “the rich,” percentage-wise. For instance, the median household of four would see their state tax bill reduced at a rate roughly three times that of a household earning $200,000.
Those facts hardly fit with the narrative that the Senate’s tax plan provides “zero benefit” for anyone but the rich.
Of course, in terms of dollars, the “top 1 percent” receive a larger tax cut than lower-income households — because they pay so much more in taxes. According to the State Controller’s Comprehensive Annual Financial Report, the top 3.4% of taxpayers paid 35% of the state’s income tax.
It’s also willful ignorance to overlook the fact that allowing people and businesses to keep more of their income, rather than having it taken and spent by self-interested politicians, improves the economy. The benefits of a growing economy are shared more broadly than just the entity enjoying a smaller tax liability.
Finally, Policy Watch repeatedly conflated “wealth” with “income.” Income is a snapshot; it changes throughout someone’s lifetime. Someone with a high income this year is not necessarily “wealthy,” nor is someone with a low income this year necessarily “poor.” This reality undercuts the “ability to pay” principle that motivates progressive income tax rates proposed by leftists such as Policy Watch. This principle essentially says that those who can “afford” to should pay more in taxes.
Imagine a small business nearly bankrupted by Gov. Cooper’s lockdown orders, racked with debts accumulated in an attempt not to shut their doors permanently. Perhaps, as the restrictions were lifted, this business saw a rebound in revenue this year. But that would not make the small businesses owner “wealthy.”
Or take the case of a college student at a prestigious university who comes from a wealthy family and is a year from graduating and beginning a lucrative career, and who worked part-time. On her tax return, she will appear low-income, but she is not “poor.”
Moreover, there are other circumstances unique to each household that a tax return cannot convey. Someone, for instance, might report high income but be strapped with medical debt and caring for an aging relative. The tax return demonstrates an “ability to pay,” but reality doesn’t.
Policy Watch’s analysis is predictable, sloppy, and naive to second-order effects of tax policy. But mostly, the contrast is one of perspective.
How should decisions be made about how the money you earn is spent: by you and your loved ones at the kitchen table, or by self-interested politicians you’ve never met in committee meetings in Raleigh?
I know which side I’m on.