Income Inequality: A Problem That Isn’t

The debate over “income inequality” has simmered for some time, but now seems to be upfront as a key dividing line in American politics. President Obama uses the concept to make his case for raising the federal minimum wage. And, the Oregon Department of Employment reports on the so-called growing wage gap between rich and poor in our in state as though that were our primary economic problem.

But many who see income inequality as a major problem tend to have a fuzzy understanding of how our economy works―and who is to blame for our economic problems. They seem to think capitalism is evil. They seem to think “rich people” are evil, and they assume rich people gained their wealth by stealing money from the rest of us.

But that’s wrong. Most rich people got that way because they operate in our free-market system to provide goods or services that the rest of us willingly purchase. They create value for us, and for themselves.

Take, for example, the late Steve Jobs of Apple Computers. Jobs died in 2011 at the age of 56. From starting Apple in his garage back in 1976, he accumulated some $8 billion by creating and selling a number of very innovative products to millions of people. From desktop computers, to iPods, to iPhones, and now iPad tablets, Jobs made many lives easier and more enjoyable, and made many of us more productive. For that, those of us who freely purchased his products rewarded him with great wealth. He didn’t steal money from his customers. No one was forced to buy Apple products.

And yet, many people seem to believe that somehow Jobs and other rich people did just that: stole money from them. They think rich people get rich by making other people poor. What they fail to recognize is that poverty is not created. It’s the default condition of mankind. It’s wealth that has to be created.

People like Steve Jobs, Bill Gates of Microsoft, and Sam Walton of Walmart created fabulous amounts of wealth by meeting the needs of the rest of us. We gladly buy their products because they make us better off, not because there is some government mandate that we do so.

But, President Obama either doesn’t understand that or chooses to ignore it. In 2010 he told us that he thinks at a certain point “you’ve made enough money,” meaning that after that point you should pay more taxes than other people.

However, rich people are, if anything, already paying more than their fair share. In the year the President made that statement, the top one percent of tax returns included 18.87 percent of all adjusted gross income and 37.38 percent of all federal individual income taxes paid. The top 5 percent earned 33.78 percent of income and paid 59.07 percent of taxes. The top 10 percent earned 45.17 percent of income and paid 70.62 percent of taxes. How much more should they pay to make everything “fair?”

Billionaire Warren Buffet says that, because much of his income is in the form of capital gains, he pays a lower tax rate than his secretary. Those who seem to envy the rich are demanding he pay at least as much as his secretary. They want to raise his tax rate up to hers.

But I suggest instead that we might want to lower her rate, and ours, down to Buffet’s. I think most of us would prefer to have our taxes lowered, rather than increase taxes on the few billionaires among us. That would help make most of us better off, rather than making the rich few worse off.

And, even if income inequality were a bad thing, a strong case can be made that government solutions may make the inequality worse. As recently noted by the non-partisan Congressional Budget Office, President Obama’s proposed $10.10 minimum wage, if applied across the economy, likely would reduce total employment by some 500,000 jobs. This is another acknowledgement that raising wages above what relatively unskilled workers are worth to a business is likely to lead to some of those workers either not being hired, or actually losing jobs they already had at the bottom of the economic ladder. Raising the minimum wage simply chops off some of those lower rungs on the ladder.

Whether or not income inequality is fair, finding ways to reduce it by helping low-income earners improve their skills and qualify for more demanding positions would be a good idea. However, reducing it by pounding down the top earners through higher taxes will not help low-income earners; it will actually make them worse off.

Steve Buckstein is Founder and Senior Policy Analyst at Cascade Policy Institute, Oregon’s free market public policy research organization.

Cascade in the Capitol: Tax Reform Testimony Presented to the Senate Finance Committee

Senior Policy Analyst Steve Buckstein testified on Thursday before the Senate Committee on Finance and Revenue about a series of tax reform proposals. Below is his testimony to the panel of legislators.

Testimony before the Senate Committee
on Finance and Revenue
regarding Tax Bill HB 2456
by Steve Buckstein

Good afternoon, Chair Burdick, Vice-Chair George, and members of the Committee. My name is Steve Buckstein. I’m Senior Policy Analyst and founder of Cascade Policy Institute, which is a non-profit, non-partisan think tank based in Portland. Cascade’s mission is to develop and promote public policy alternatives that foster individual liberty, personal responsibility, and economic opportunity.

I’m here to express my support for amending HB 2456 to include a new, lower income tax rate for most small businesses in the state. Small businesses, including start-ups and individual entrepreneurs, are a significant source of job creation. I have it on good authority that all state legislators would like to take credit for creating more jobs in this state. Here’s your chance.

I cannot support other changes in the bill which would jack up tax rates on C corporations and in effect raise taxes on high-income individuals. Such provisions will simply reinforce Oregon’s reputation as business-unfriendly.

In this modern world, people and capital are mobile. Investors and businesspeople change their behavior based on the incentives and disincentives they face. Oregon’s high tax rates shine like a big STOP sign at the border, warning high-income people and most businesses that the cost of coming here may be too high compared to other states.

So, by all means lower tax rates where you can, especially for small businesses. And rather than rely on taxing others more to generate revenue, rely on the fact that making Oregon more business friendly will in itself generate revenue–and jobs.

Thank you.

Cascade in the Capitol: Testimony Against Local Tobacco Tax Proposal

John A. Charles, Jr. submitted testimony on Monday to the Senate Committee on Finance and Revenue, speaking against a proposal to allow counties to impose local tobacco taxes.


Testimony of John A. Charles, Jr.

President & CEO 

Before the Senate Committee on Finance and Revenue

Regarding HB 2870-A

April 29, 2012 

 

I am writing in opposition to HB 2870-A.

This bill suffers from an inherent contradiction in its twin policy objectives: raising money and reducing tobacco consumption. For one to succeed, the other must fail.

None of the proponents want to admit this. They prefer to claim that the primary goal is “public health.” However,  the bill only requires that a minimum of 40% of the proceeds be spent on tobacco use prevention and cessation programs, which means that 60% of the funds will go for other uses. This clearly shows that public health is not the primary motivation behind the bill, revenue generation is.

If we admit that this is just a money bill, then there is no compelling argument in favor of taxing a product used by only a fifth of the population, in order to create a revenue stream that will likely benefit everyone. The only reason such bills get introduced is because it is politically easy to pick on a minority group engaged in a habit that is publicly scorned.  But we should not tax minorities just because we can.

If local governments genuinely want to spend more money on tobacco cessation programs, they already have access to the MSA settlement funds. Oregon has received over $1 billion in MSA money since 1998, but virtually none of it has gone to directly help smokers. Since that was one of the express purposes of creating the fund, I’d suggest local governments direct their lobbying efforts at state legislators who continue to use revenue from the MSA as an all-purpose slush fund.

Between state and federal tobacco taxes, plus the price hikes needed by the major tobacco companies to make the MSA payments, tobacco users have paid more than their fair share for any so-called “negative social externalities” associated with smoking. Please leave them alone by tabling HB 2870.

The Marketplace Fairness Act: Taxation Without Representation?

Congress is poised to raise taxes again, this time by allowing states to impose sales taxes on online sales. Senators Ron Wyden (D-OR), Max Baucus (D-MT), and Kelly Ayotte (R-RH)―all representing states without sales taxes―oppose the Senate’s “Marketplace Fairness Act” as “taxation without representation.” The proposed legislation would burden online businesses with enforcing potentially thousands of state and local taxes across the country at the point of sale.

 

Andrew Moylan, senior fellow with the R Street Institute in Washington, D.C., writes, “This means quizzing purchasers about their location, looking up the appropriate rules and regulations in more than 9,600 taxing jurisdictions across the country, and then collecting and remitting sales tax for that distant authority. No brick-and-mortar shop has to do this for in-store sales, and yet every online retailer would have to do it for remote sales.”

 

In an editorial this week, The Wall Street Journal added: “Small online sellers will therefore have to comply with tax laws created by distant governments in which they have no representation, and in places where they consume no local services.”

 

Senator Dick Durbin (D-IL) claims tax accounting software makes it easier for smaller businesses to comply with the proposed law than opponents allege. Still, forcing retailers to enforce the tax laws of thousands of different localities across the country is a massive change in the way we do business―one that will have far-reaching consequences for small businesses and consumers alike.

 

Kathryn Hickok is Publications Director and Director of the Children’s Scholarship Fund-Portland program at Cascade Policy Institute.

Tobacco Cessation or Just Increasing General Fund Revenue?

The Oregon legislature is once again trying to raise the cigarette tax, this time by $1.00 per pack. According to the sponsors of the bill―Representative Mitch Greenlick and Senator Elizabeth Steiner Hayward, both of west Portland―the primary purpose of HB 2275 is to reduce tobacco consumption, not raise revenue for the state.

But the bill itself tells another story. It states in Section 6 that “All moneys from the taxes imposed by this Act shall be credited to the General Fund.” Where is the specific assistance for smokers trying to quit smoking? It’s not there. Under current law, the state’s Tobacco Use Reduction account receives only 2.9% of all current cigarette tax revenue, and HB 2275 does not increase that.

Moreover, since 1999 the state has received more than $1 billion from smokers through the so-called “Master Settlement Agreement” with the four largest tobacco companies. That money was supposed to pay for the “costs of smoking” imposed on society. Yet, most of those funds were spent on other programs that had little to do with public health, and none of it went to tobacco cessation programs.

Smokers are routinely picked on by legislators because they are a vulnerable minority, but they are already paying more than their fair share of taxes. If reducing tobacco use is really the goal, it’s time for politicians to try another approach.

John A. Charles, Jr. is President and CEO of Cascade Policy Institute, Oregon’s free market public policy research organization.

Charity’s Unseen Benefit: Protecting Civil Society from the State

By Benjamin Zycher

Charities and other nonprofit institutions perform a vast array of altruistic works yielding benefits for both the direct beneficiaries and for society writ large.

Most such activities are obvious: medical services for the indigent, educational services for the disadvantaged, support for the arts, and the like. But such organizations serve a deeper function as well: They act as an important buffer between the citizenry and the state.

Government by its very nature is coercive: Tax, spending and regulatory policies inexorably generate wealth transfers among groups, thus creating winners and losers. These effects induce individuals and groups to find routes around the constraints created by government policies, increasing the incentives of government to impose further rules, and so on.

Private organizations, on the other hand, by definition are voluntary; and as they compete with government agencies in the provision of various services, they have powerful incentives to protect their activities and freedoms from efforts by government to expand its powers.

The current efforts by the Catholic Church and other religious organizations to challenge the contraception/abortifacient mandate in the Patient Protection and Affordable Care Act—an obvious attempt by federal policymakers to transform important institutions of civil society into agents of the government—is a prominent example of this phenomenon.

Accordingly, public financial support for private giving can be viewed not only as a way to engender additional charitable activity passing a market test, but also as a tool with which to constrain government power by creating a corrective for the incentives of individuals acting alone to offer too little resistance to the expansion of the state.

The institutions of civil society receiving such support help to protect freedoms from government coercion in ways that individual citizens might find far more difficult to undertake.

This public support is provided primarily through the tax deduction for charitable donations. Tax reform as part of a broad reform of fiscal policy is back in the news, and with it are various proposals to limit or change this tax treatment. Most such proposed changes would increase the after-tax “cost” of giving for many taxpayers by reducing the incremental subsidies created by the current structure of income tax rates. The scholarly literature suggests, roughly, that each 1% change in the after-tax cost of giving reduces giving by the affected taxpayers by about 1%.

One prominent proposal is for a cap of 28% on the marginal tax rate applied to charitable contributions by taxpayers above a given income level. That would raise the perceived cost of giving by, roughly, 18% for the taxpayers affected, leading to a reduction in total giving by all taxpayers of about 2%, or roughly $5 billion annually. In a world of trillion-dollar deficits, that may sound small; but it is 40% greater than the operating budget of the American Red Cross.

Another proposal would convert the current deduction into a 15% tax credit for all taxpayers, but impose a floor of 2% of adjusted gross income for eligibility.

That combination would reduce contributions by an estimated $10 billion or more, an amount equal to about half the operating budget of Catholic Charities. A similar proposal for the conversion to the 15% credit, but without the floor, would reduce giving by about $8 billion.

There are other proposals with varying effects. Perhaps a tax reform that results in substantially greater economic growth in the aggregate would compensate for these impacts.

Or, perhaps, tax reform may be sufficiently important to justify them. But the public discussion of changes in the tax treatment of charitable giving should consider not only the narrow effects on contributions, but also the more subtle but larger implications for the substantial benefits that the institutions of civil society yield in terms of the protection of our freedoms from the coercive and confiscatory power of the state.

Benjamin Zycher is a senior fellow at the Pacific Research Institute in San Francisco, a visiting scholar at the American Enterprise Institute, and a guest contributor for Cascade Policy Institute, Oregon’s free market public policy research organization.

Tax Certainty for Nike? “Just Do It” for All

Governor Kitzhaber has called a special session of the Oregon legislature to enact what he calls the Economic Impact Investment Act of 2012. It would give him the authority to directly negotiate with, and offer “tax certainty” to, any company promising to create at least 500 jobs and invest at least $150 million over five years in our state. Any future changes in Oregon’s business tax structure would not apply to such firms over the lifetime of their agreements.

 

The urgency of this proposal comes from the fact that Nike is looking to expand soon and is apparently being courted by other states. According to the Governor, if his proposal is rushed into law, Nike has agreed to expand here with a proposed $400 million investment and more than 2,000 jobs.

 

Unfortunately, the Governor made it clear that he would only approve such deals for companies that create a lot of relatively high wage jobs. He explicitly rejected the idea that a company offering 500 minimum wage jobs, for example, would be approved.

 

While it’s good to seek high wage jobs here, rejecting low wage jobs hurts those with little education and/or few skills. These are often the young and minorities. They have little reason to rejoice over the Governor’s new plan.

 

Granting Nike tax certainty is a good idea, but it would be an even better idea if all companies got the same certainty—big and small alike. That way, all Oregonians would stand to benefit.

Steve Buckstein is founder and Senior Policy Analyst at Cascade Policy Institute, Oregon’s free market public policy research organization.

Raising Taxes Won’t Reduce the Deficit

With just weeks to go before America slides off the so-called Fiscal Cliff, many politicians and pundits argue that we must forge a “grand bargain” which includes tax increases and spending cuts. But now, two noted economists have crunched the numbers and conclude that Nobel-Prize-winning economist Milton Friedman was right when he said, “Politicians will always spend every penny of tax raised and whatever else they can get away with.”

 

Stephen Moore of the Wall Street Journal and Richard Vedder of Ohio University recently updated a study done for the congressional Joint Economic Committee in the late 1980s that found every dollar of new taxes led to more than a dollar of new spending by Congress.

 

Moore and Vedder “found that over the entire post World War II era through 2009 each dollar of new tax revenue was associated with $1.17 of new spending. Politicians spend the money as fast as it comes in—and a little bit more.”

 

They looked at different time periods, used different data, altered other variables, and never once found that higher tax collections resulted in less government spending. These results completely counter the argument that we can solve our nation’s fiscal problems by combining spending cuts with tax increases.

 

The “grand bargain” isn’t such a bargain after all. The only way to cut spending…is to cut spending.

Steve Buckstein is founder and Senior Policy Analyst at Cascade Policy Institute, Oregon’s free market public policy research organization.

Three Oregon Tax Measures: What They Would Do

With less than a week to go in this election cycle, Oregonians are faced with nine statewide ballot measures.

 

Here are my thoughts on the three that are primarily tax measures.

 

Measure 79 bans future state or local real estate transfer taxes. Only Washington County imposes such a tax now, as anyone who has sold a home there knows. The realtors who put Measure 79 on the ballot don’t want to see such taxes spread to the rest of the state. Government always looks for ways to raise revenue, but taxing home sales isn’t a good idea now or later. I voted Yes.

 

Measure 84 phases out Oregon’s estate tax and forbids taxes on property transfers between family members. Working all your life to build up an estate valued over the $1 million estate tax exemption should not give government the right to tax what you or your family have paid taxes on all your lives. I voted Yes.

 

Measure 85 takes any future corporate kicker money from the companies that earned it and places it in the state General Fund. Nothing in the measure assures that the money will benefit public education as the public employee unions that put it on the ballot claim. Special interests will be in Salem lobbying for that money just as they do now. Measure 85 simply takes money from the private sector and grows government. I voted No.

 

Steve Buckstein is founder and Senior Policy Analyst at Cascade Policy Institute, Oregon’s free market public policy research organization.

Portland’s Proposed “Arts Education Tax”― Why Creativity and Government Subsidies Are Fundamentally at Odds

By Shane Young

The “Arts Education and Access Income Tax” proposed by Portland Mayor Sam Adams aims to hire more elementary school art teachers and fund local arts organizations by implementing a $35-per-year income tax (maximum) on all residents 18 years old and older who live above the poverty line. The City of Portland is promoting the levy, expected to raise $12 million annually, on the grounds that art education in public schools is vulnerable to budget cuts relative to schools’ other academic priorities.

Numerous criticisms of the tax measure have been raised, including the likelihood that the tax as constructed would be unconstitutional under Oregon law. It also can be noted that it is not the proper function of city government to levy this kind of tax, since the Portland School Board has primary jurisdiction over funding public education in Portland and has its own tax base. Even the editorial board of The Oregonian opposed the ballot measure on the grounds that art education, while valuable, doesn’t merit a dedicated tax. According to the board, Portlanders have “plenty of opportunities and incentives to support” the arts and art education, including a state income tax credit.

The proposed tax measure can and should be opposed on any or all of these grounds, but there is another reason why levying a tax to benefit art fails on principle. Portlanders should recognize what makes art so important to begin with and why government involvement and taxpayer subsidies are at odds with its purpose.

Art allows us to develop and foster creativity. It allows us to take chances and risks. It allows us to make sure that the diverse realm of ideas remains constantly expanding. Because of these benefits that art gives us, Portland should be cautious about putting creativity and diversity, the heart and soul of art, into jeopardy through dedicated, taxpayer funding of government-selected arts institutions.

Unlike the sciences, music, painting, sculpting, photography, poetry, and the many other constantly growing categories of art, have no black-and-white criteria with which to determine their success. In fact, many times art is admired, and established into history, because of its willingness to stray from the standard. It is this very deviation from the norm that allows creativity and diversity, the things art should be praised for in the first place, to flourish.

By allowing the city to take over more responsibility for the artistic growth of children, and to fund organizations solely of its choosing, taxpayers give city bureaucrats complete control over defining what exactly “art” is―and, furthermore, what “good” art is―for the purposes of public funding. Taxes thus will go to promoting one art form over another―and one standard of “good” art over another.

This isn’t to say that artistic development and success do not require discipline and some kind of formal guidance in an art class―it almost always does. Yet, because of the diverse nature of art, and the wide range of criteria used to judge its quality, this discipline and guidance must happen at a much more specialized and intimate level than what the city can or should provide. Therefore, if people are not satisfied with the art education available in Portland’s public schools, they should take The Oregonian’s advice and support the arts on an individual level.

Instead of increasing dedicated spending on the arts through taxation for the benefit of public schools and selected nonprofits, Portlanders should supplement the current art activities in schools, as they choose, with a willingness to allow and encourage children to individually explore the arts for themselves. Financially contributing directly to the areas in which children are interested, rather than simply allowing the city to mass-regulate artistic creativity and diversity, honors and respects the nature of creative expression. This November, Portlanders should allow future generations to answer the age-old question of “What is art?” for themselves, rather than hand city government more taxpayer money to answer it for them.

Shane Young is a research associate at Cascade Policy Institute, Oregon’s free market public policy research organization. He is a student at Whitman College.

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