Tuesday, April 05, 2005

A Thousand Cuts

You are making lunch, and a stranger comes in the door and takes half your sandwich. That evening, your kid's birthday, the guy is back. He cleaves the cake down the middle and scoops it into a box, along with four bottles of Yoo Hoo before making an exit with a pint of ice cream.

The next morning, you're on the lookout as you prepare to scramble eggs. He slips in a side door, and before you can stop him, he pulls three uncracked eggs from the carton. "Don't bother fixing any for me," he says, pocketing an English muffin. "I prefer poached."

By the time lunch rolls around again, you're ready. The doors are locked, the windows fastened. You raise a glass of beer in celebration. But before you can tilt it to your lips, it's snatched away, and the stanger drains half in one gulp. "How did you get in here?" you hiss. "Oh, I never left. I was in your bedroom."

This is how a significant number of Americans see their government. Oh, they adore the President, love the troops and tolerate the police, but cannot abide paying taxes. They do not see a connection between their prosperity and a smoothly functioning state with a good public education system, efficient transportation system, protection of their private property, and on and on.

And yet, and yet...

Can't you imagine being just a teenie weenie bit po'd at the stranger who keeps showing up at your house and walking off with half the birthday cake?

Forget your own world for a moment. Forget the people who have no sandwich or only Ramen noodles. Just imagine a small business owner who is fortunate enough to end up in the 33% tax bracket. Add the employer Social Security tax contribution of 7.65% and the state income tax of 8%. We're darn close to half a sandwich disappearing from the table. Every day.

Now, most of us have our taxes withheld as we go, and our salary has never equaled our pay. We may prefer not to do the math, as long as we are reasonably comfortable. But other people do it.

So let's return to the self-employed entrepreneur for a moment. The revenue is in his possession, deposited in his bank account, and he has to write a check to the goverment every quarter. Writing checks with four zeroes on them will capture your attention in a way that steady withholdings won't — even paying the same tax rate.

And so the people writing those checks — and those who, like thousands of ghetto kids dreaming of the NBA, imagine themselves doing it some day — are pissed.

They do not, as some tax critics allege, reduce their productivity so they don't have to pay tax. These aren't folks who will go hungry. They simply make another sandwich, bake a bigger cake. They work harder — or press their employees harder — and meanwhile seek ways to avoid paying taxes, thus providing gainful employment for estate attorneys, tax accountants, insurance salesmen, hedge fund brokers and investment advisors. And enterprising district attorneys.

Plus, in their spare time, they try to bring down the government — by large "tax reforms" and a thousand tiny cuts.

Now that I have tried to build some empathy for the top brackets, let's look at taxes another way — the way the State of Minnesota Department of Revenue does, for example.

The Revenue Department tracks what it calls "tax incidence," a measure of all state and local taxes and government fees (including income taxes after deductions, property taxes, business taxes passed through in higher prices, sales taxes, gas and sin taxes, etc.) as a percent of income. You will be shocked to learn that Minnesota's wealthiest citizens have the lowest tax incidence. (You can trust me, or download the state report from Growth & Justice, see table 3-5.)

Taxes are not starving the wealthy or stealing ice cream from their babies. In fact, their income is advancing at a faster rate than for any other segment of society.

As tax time approaches, let's not deny the power of the single line on the tax return. But let's be sure to talk about the many ways the well-to-do benefit and the poor pay proportionately more to partake of the American dream.

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