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Flip It

by Miriam Axel-Lute on June 8, 2011

It is one of the quirks of the American psyche that an enormous majority of Americans identify as middle class—with the rich and working poor concocting phrases such as “upper middle class” and “lower middle class” to keep themselves in that orbit. Nonetheless, Americans also do tend to believe in fairness.

In fact, polls keep showing that we tend to peg both the actual and ideal distribution of wealth in this country at far more equal levels than the reality, which is inequality akin to that in Russia or Turkey. Since 1979, in what Paul Krugman calls the Great Divergence, the bottom 20 percent has had a 7 percent drop in real income, while the top 20 percent has had a 49 percent growth; top 5 percent, a 73 percent growth, and top 1 percent, a 224 percent growth.

Wall Street gambles; Main Street takes the hit.

Those same polls also show that Americans think that the tax structure is—and should be—far more progressive than it is. Perhaps that’s partly because the representatives of the wealthy are constantly (if inaccurately) bemoaning how much they are taxed.

Given this climate, I found United for a Fair Economy’s Flip it to Fix It report to be really exciting (http://www.faireconomy.org/flipitreport). As opposed to getting into the mud and arguing about which essential programs should be saved or cut, UFE puts forth a bold, complete solution to state budget deficits everywhere: Invert state tax structures.

What does that mean? It means the top 20 percent by income would pay the same percentage of their incomes in taxes as bottom 20 percent do now. (I’d like to see anyone try to get righteously indignant over that.) The 2nd and 4th quintiles would flip too, and the middle one would stay the same.

To understand why that works, you have to take all taxes—and tax deductions—into account. Sales, excise, and property taxes are all regressive, meaning that they fall most heavily on those with lower incomes. While income taxes are nominally progressive in most states that have them, many don’t, some have a flat tax, and most have enough deductions that primarily benefit higher income taxpayers that much or all of the progressive nature of the tax brackets is canceled out.

And so you have, in 2007, those making under $18,000 spending an average of 10.9 percent of their incomes in taxes, and those making over $476,000 spending just 5.2 percent. No wonder we have a revenue crisis. (Not to mention corporations, many of which have justly been getting media attention as egregious tax dodgers lately.)

Flipping the tax curves, the UFE report found, would raise $490 billion in new revenue—a few times more than our current, discussed-as-if-insurmountable state budget deficits. And it would stimulate the economy: “Low tax rates on income most likely to be spent maximizes consumer demand and the private investment geared to this demand, spurring greater economic activity. Progressively higher taxes on income most likely to remain idle ensures it is moved rapidly back into the economy in the form of economy-stimulating public investments—and jobs—in education, health care, transportation, public safety, and beyond.”

To execute this flip, states without income taxes would add them, and the others would increase reliance on them and make them more progressive (with more redistribution down to localities from the state); all states would reduce sales, property, and excise taxes.

Though UFE doesn’t mention this, I would add that reducing reliance on property taxes is also something that school equity reformers have long been advocating for, and it would also reduce the incentives for unsustainable growth patterns and competitiveness over cooperation within regions.

Most of the state-level charts about how this “Flip It” strategy would play out are impressive and unambiguous. In Washington state, for example, it would change the tax rate on those making under $20,000 per year from 17.3 percent to 4.7; over $99,000, from 4.7 to 17.3. And it would raise an additional $31.8 billion.

But there are a few states whose tax structures are already a bit more progressive, where flipping the lowest and highest quintiles would be useful, but flipping the 2nd and 4th quintiles would actually be a step backwards. New York is one of those.

This makes the theoretical charts less dramatic, but it doesn’t invalidate the whole premise; it just means we are partway there already. All the actual changes UFE suggests would work here too, shifting taxes fairly away from those least able to afford them, boosting the economy, and generating a few more billion dollars of breathing room within which to invest in the future.

Gov. Andrew-repeal-the-millionaire-tax-while-cutting-programs-that-keep-us-strong-Cuomo: Are you listening?