This election, Americans will not only be choosing politicians for office but also whether to increase or decrease taxes in many places.

In Arizona, voters will decide on Proposition 208, which would raise income taxes by 3.5 percentage points on high earners. Polls are showing the proposition may pass.

In Illinois, voters will decide whether to amend the state constitution to convert the state’s flat individual income tax into a multi-rate system. The current income tax rate of 4.95% would be replaced by a six-rate system with a top rate of 7.99%.

The Illinois ballot measure was spearheaded by Governor J.B. Pritzker, who received an “F” on the new Cato Institute fiscal report card. According to Ballotpedia, billionaire Pritzker has personally contributed $56 million to the 2020 ballot campaign for passage.

Which side do voters usually take on income tax ballot questions? My intern, Hunter Brazal, looked through Ballotpedia over the 2010 to 2019 period to find statewide individual income tax measures. He found 20 including 13 aimed at increasing taxes and 7 aimed at cutting or limiting taxes.

To increase the appeal of tax-increase proposals, supporters often pair them with promised increases in specific spending. Arizona’s Proposition 208, for example, promises to increase education spending.

There is modestly good news: voters favored the small-government side on 12 of the 20 tax measures. Here are the results with vote percentages from Ballotpedia:

Wins for Bigger Government

• In 2016, California Proposition 55 would extend the Proposition 30 (2012) tax rate increases on high earners to fund education and healthcare. Passed 63.3 to 36.7.
• In 2016, Maine Question 2 would raise the income tax rate three percentage points on high earners to fund education. Passed 50.6 to 49.4. The governor and legislature subsequently repealed the increase.
• In 2014, an Illinois question would amend the constitution to increase the income tax rate by 3 percentage points on high earners to fund education. Passed 60.0 to 34.2 (with 5.8 not voting on this question). The question was advisory only and not implemented.
• In 2012, New Hampshire CACR 13 would amend the constitution to ban new taxes on personal income. Passed 57.1 to 42.9 but came short of the needed two-thirds vote.
• In 2012, California Proposition 30 would increase income tax rates on high earners including a new top rate of 13.3 percent. It would also raise the sales tax rate. Passed 55.4 to 44.6.
• In 2012, Michigan Proposal 5 would amend the constitution to require supermajorities in the legislature or statewide voter majorities to raise taxes. Failed 31 to 69.
• In 2010, Oregon Measure 66 would raise the top income tax rate. Passed 54.3 to 45.7.
• In 2010, Colorado Proposition 101 would cut the income tax rate, limit vehicle fees, and reduce other taxes and fees. Failed 32.3 to 67.7.

Wins for Smaller Government

• In 2019, Texas Proposition 4 would amend the state constitution to prohibit individual income taxes. Passed 74.4 to 25.7.
• In 2019, Washington Advisory Vote 20 would approve an 0.58 percent wage tax to fund healthcare services. Failed 37.1 to 62.9.
• In 2019, Colorado Proposition CC would retain tax revenue for spending rather than refund it to taxpayers under TABOR. Failed 46.3 to 53.7.
• In 2018, Maine Question 1 would raise wage and nonwage taxes on high earners to fund a home care program. Failed 37.1 to 62.9.
• In 2018, a North Carolina ballot question would amend the constitution to reduce the maximum allowable income tax rate from 10 percent to 7 percent. Passed 57.4 to 42.7.
• In 2018, Colorado Amendment 73 would raise income tax rates for high earners to fund education. The state’s flat-rate tax of 4.63 percent would be replaced by a multi-rate system with rates up to 8.25 percent. Failed 46.4 to 53.6.
• In 2014, Georgia Amendment A would amend the constitution to prohibit increases in the maximum income tax rate above 6 percent. Passed 73.9 to 26.1.
• In 2014, Tennessee Amendment 3 would prohibit the legislature from imposing any state or local tax on wages or earned income. Passed 66.2 to 33.8.
• In 2013, Colorado Amendment 66 would amend the constitution to replace the 4.63 percent income tax with a multi-rate system having rates of 5.0 percent and 5.9 percent. The higher revenues would fund education. Failed 35.5 to 64.5.
• In 2012, California Proposition 38 would increase income tax rates for nearly all households to fund education. Failed 28.7 to 71.3.
• In 2011, Colorado Proposition 103 would increase the income tax rate from 4.63 percent to 5.0 percent, as well as increase the sales tax rate to fund education. Failed 36.3 to 63.6.
• In 2010, Washington Initiative 1098 would impose an income tax on high earners. Failed 35.9 to 64.2.

I have discussed many of these ballot questions in current and past issues of Cato’s Fiscal Report Card on the Governors.

As my Cato colleague Chris Edwards mentioned last week, the Congressional Budget Office on Friday released its annual report on trends in U.S. household income, means-tested transfers, and federal taxes between 1979 and 2017 (the most recent year for which tax data were available). The CBO report is, as usual, chock-full of interesting information, but today I’d like to focus on three findings that challenge common claims regarding taxes, middle class incomes, and wealth redistribution in the United States.

First, and echoing Chris’ post from last week, the CBO shows that total annual federal taxes — income, payroll, corporate, and excise — paid by the richest Americans (households making around $300,000/year or more) have basically doubled since 1979. Over the same period, the middle classes have paid almost the same amount of federal taxes, and the poorest Americans’ federal tax burden has all but disappeared.

Second, the average value of means-tested transfers (cash payments and in-kind benefits from federal, state, and local governments) has increased for all income groups since 1979, but has grown dramatically for lower-income Americans:

According to the CBO, the significant growth in means-tested transfers between 1979 and 2017 has primarily been driven by (1) expanding eligibility for middle-income groups; and (2) spending on Medicaid (“the largest—and fastest growing—means-tested transfer program”) due to an almost-fivefold increase in enrollees (from about 20 million in 1979 to 94 million in 2017) and an increase in average per capita benefits from $1,700 to $5,500 (in 2017 dollars). This trend, of course, is consistent with other data showing the extent to which entitlements have increasingly consumed federal spending in recent years.

Third, the CBO report shows that both median household incomes and average group incomes have enjoyed real (inflation-adjusted) gains since the early 1980s, with the aforementioned progressivity of the United States’ tax/​transfer systems playing a big role.

As shown in Figure 3 above, real median household incomes after taxes and transfers saw a 61.1 percent increase between 1979 and 2017. Importantly, the taxes and transfers analyzed by the CBO once subtracted from middle class market incomes but began to supplement them in the mid-2000s — a trend my colleague Ryan Bourne noted here a few years ago. By 2017, these taxes and transfers added $3300 (7.7 percent) to median market incomes.

Similar trends apply to average incomes:

As Figure 4 shows (click on various groups to highlight or exclude them), the poorest American households’ average incomes bottom out in 1983 and then grow by approximately 95 percent through 2017, aided substantially and increasingly by taxes and transfers. By 2017, in fact, well over half of these households’ annual income comes from the government. Furthermore, an increasing number of American households (on average) became net recipients of government benefits: the bottom two quintiles paid less in federal taxes than they received in transfers every year since 1979 (with total net benefits increasing substantially through 2017), but they were joined in 2002 by third quintile households (with real market incomes starting around $60,000 per year). By 2017, taxes and transfers added $6,300 to this group’s average market income of $61,700 — a 10.2% gain. The net tax/​transfer burden in 2017 was also much lower — though still net negative — for the fourth quintile of households than it was in 1979, while the top income group saw only modest relief (paying a slightly smaller share, but larger amount, of income to the government on net) over the same period.

As Bourne noted back in 2017, the CBO data are imperfect — for example, excluding state and local taxes and showing only averages (which can hide costs and benefits that certain taxpayers face). Nevertheless, the CBO’s new report adds to the growing body of empirical literature refuting common myths about middle class incomes and the progressivity of the U.S. system. One can (and in my opinion should) question whether that system is delivering the optimal mix of total wage and non-wage compensation to American workers, or the whether the significant and increasing redistribution that we employ has proven effective. But those questions don’t change the underlying facts presented by the CBO — facts that are light-years away from much of the populist and anti-capitalist hysteria we hear right now.

The Cato Institute has released its 15th biennial Fiscal Report Card on America’s Governors. The report grades state governors on their tax and spending records since 2018. Governors who have restrained taxes and spending receive higher grades, while those who have substantially increased taxes and spending receive lower grades.

Four governors were awarded an A: Chris Sununu of New Hampshire, Kim Reynolds of Iowa, Pete Ricketts of Nebraska, and Mark Gordon of Wyoming.

Seven governors were awarded an F: Ralph Northam of Virginia, Andrew Cuomo of New York, Gretchen Whitmer of Michigan, Phil Murphy of New Jersey, J. B. Pritzker of Illinois, Kate Brown of Oregon, and Jay Inslee of Washington.

The report examines the tax and spending choices made by each governor. It also discusses current state budget issues, including rainy day funds, marijuana taxation, revenue stability, and labor union policies.

Governors across the nation are facing tough fiscal choices, but the need for restraint and recovery is an opportunity to prune low-value spending and pursue pro-growth tax reforms.

The report on the governors is here.

Today at 11am, Cato’s Peter Goettler and Chris Edwards welcome New Hampshire Governor Chris Sununu for an online discussion about state fiscal policy. Edwards and the governor will discuss the advantages of the unique and restrained structure of New Hampshire government.

The Congressional Budget Office released a report today on changes in income, benefit payments, and federal taxes by income group since 1979. The following are three tax charts from the report. The CBO included individual income taxes, corporate income taxes, payroll taxes, and excise taxes.

The first chart shows that tax rates have fallen the most at the bottom end. Average tax rates are total taxes paid by each income group divided by that group’s income as defined by CBO. CBO says, “Average federal tax rates declined most sharply among households in the lowest quintile, falling from a peak of 12.1 percent in 1984 to 1.3 percent in 2017.” The tax rate on the top 1 percent has varied, but by 2017 was roughly where it was almost 40 years earlier. Since then, the 2017 GOP tax bill cut income taxes for all groups.

The second chart shows that individual income taxes are highly skewed. Payroll taxes are proportional across the bottom and middle groups but drop at the top end. Note, however, that payroll taxes fund Social Security, and that program’s benefits are calculated in a progressive manner.

The third chart shows that the share of overall federal taxes paid by high earners has increased over time. CBO says, “The share of federal taxes paid by households in the highest quintile increased from 55 percent in 1979 to 69 percent in 2017.” The share of taxes paid by the top 1 percent increased from 14 percent in 1979 to 25 percent in 2017.

Bloomberg today (emphasis mine):

Midwest prices for diammonium phosphate, or DAP, jumped 29% in the third quarter, the most since 2010, according to a Green Markets index. Prices for a lower concentration phosphate fertilizer also surged the most in a decade, by 34%. The two chemicals make up the primary component for many phosphate-based fertilizers used by American crop farmers.

Prices spiked after U.S. fertilizer firm Mosaic Co. petitioned the U.S. Department of Commerce and U.S. International Trade Commission in June, saying that fertilizer imports from Morocco and Russia were unfairly subsidized. That prompted an investigation and raised the prospect of countervailing duties. The two countries are the largest sources of the commodity for the U.S. in the most recent crop year, through June.

Politico in July:

Government payments to farmers have surged to historic levels under President Donald Trump as the Agriculture Department floods the industry with cash to stem the financial losses from Trump’s tariff fights and the coronavirus pandemic.

But as agriculture grows more reliant on unprecedented taxpayer support, farm policy experts and watchdog groups warn the subsidies are growing too big and too fast, with no strings attached and little oversight from Congress—and that Washington could have a difficult time shutting off the spigot.

No word yet on whether other foreign producers are on Double Secret Probation. 

(Chart via IFPRI’s Joe Glauber.)

Penn-Wharton’s budget team has produced new estimates of the effects of Joe Biden’s fiscal proposals. This post looks at PW’s tax distribution estimates.

PW presents estimated effective tax rates by income group, including individual income taxes, corporate income taxes, and payroll taxes. The estimates assume that corporate taxes land partly on capital income and partly on labor income. Effective tax rates are taxes paid by an income group divided by the group’s income.

Joe Biden’s campaign site says, “President Trump spent the remainder of his first year in office fighting for a $1.5 trillion tax giveaway primarily for large corporations and the wealthy … But middle-class Americans were largely left out.” This refers to the Tax Cuts and Jobs Act (TCJA) signed into law by Trump in 2017.

Related Event

Focus on Fiscal Leadership: Release of the 2020 Fiscal Report Card on Americas Governors

Going into 2020, the United States was in its 11th year of economic expansion and state governments were enjoying robust revenue and spending growth. Then COVID-19 hit and triggered a deep recession, which has created new budget challenges for the nation’s governors. That is the backdrop to this year’s 15th biennial Fiscal Report Card on America’s Governors, which grades them based on their tax and spending policies. Please join us for a conversation with New Hampshire Governor Chris Sununu about this year’s report and the importance of fiscal restraint in state government.

In my view, the PW estimates show that this Biden claim is not correct. The table below shows the PW estimates of effective tax rates in 2021 with and without the TCJA. I added a column showing the percentage tax cut for each group. For the bottom group, for example, the law cut the tax rate from 2.5 percent to 1.1 percent, which is a 56 percent tax cut.

The TCJA provided the largest percentage tax cuts to the bottom two quintiles—that is, the bottom 40 percent of U.S. households. All other groups received roughly similar percentage cuts ranging from 8 to 13 percent. It is not true that middle- or lower-income groups were “largely left out” of the Trump tax cuts.

Biden talks a lot about fairness in tax policy. His campaign site says, “As President, Biden will require corporations and the wealthiest Americans to finally pay their fair share.” At the Democratic convention, Biden said “it’s long past time the wealthiest people and the biggest corporations in this country paid their fair share.” Leftist politicians never say what that fair share is exactly. Fairness seems to be whatever the wealthy are paying now plus a lot more.

The chart below shows the PW estimates of effective tax rates in 2021 under current law and the Biden plan. Fairness is an opinion, but it seems far left to not perceive today’s highly slanted tax distribution as insufficiently progressive. Under current law, households at the top pay an 81 percent higher tax rate than households in the middle quintile. They pay three times the rate as those in the second quintile and more than 20 times the rate as those in the bottom quintile.

Households at the bottom pay virtually nothing, while households at the top pay almost a third of their incomes in federal taxes, on average. The New York Times reports that Donald Trump pays little in income taxes. If true, Trump’s taxes are a rare exception to the heavy burden that most high earners face, as reflected in the overall statistics.

What is tax fairness? My starting point would be the simplest possible system with a single rate and equal treatment of individuals and industries. The simpler the system, the easier it would be for the IRS to collect taxes on high earners such as Trump. Unfortunately, both parties in Congress have conspired to impose a tax system of ghastly complexity, which has made it easier for some high earners to slip through the cracks.

Note: in its appendix, PW presents estimates of the Biden plan including proposed changes to tax credits, which makes the Biden plan’s distribution even more progressive than shown here.

Spending and deficits used to be a battleground in federal elections as each party suggested reforms and blamed the other for fiscal irresponsibility. Candidates proposed tax and spending plans, and reporters examined whether the figures added up and what the impact might be.

These days, the leaders of both parties are ignoring the fiscal hurricane heading for landfall on our economy, while reporters rarely probe the politicians about the coming storm.

The Congressional Budget Office has released its latest outlook showing where the budget and economy may be headed. Without reforms, debt held by the public is projected to rise from 98 percent of GDP today to 195 percent by 2050. If Congress expands programs or the nation gets hit with new crises, debt will rise even faster. Americans in the future will face their own costly health, military, and other challenges, and they will have to bear those new costs plus the costs of our excess spending imposed on them through debt.

In its usual understated way, the CBO summarizes the threat:

High and rising federal debt makes the economy more vulnerable to rising interest rates and, depending on how that debt is financed, rising inflation. The growing debt burden also raises borrowing costs, slowing the growth of the economy and national income, and it increases the risk of a fiscal crisis or a gradual decline in the value of Treasury securities.

Here are some charts from the CBO study:

The first chart shows that federal debt spiked in the past from wars and other crises, and that debt will soar to record levels in the future even under CBO’s smooth-sailing economic projections.

Washington has a spending problem, not a revenue problem. The next chart shows that, without law changes, tax revenues will remain a fairly stable share of the economy, while spending rises rapidly because large federal programs are on an auto-pilot growth path.

This next chart shows the growth of federal spending categories under CBO assumptions. The downward slope of the “discretionary” and “other mandatory” lines may be optimistic because Congress occasionally spikes spending on those categories and each of the programs within the categories have lobby groups pushing for more.

Tax revenues are expected to edge upward in coming years even without legislated increases. The next chart shows that real bracket creep and expiring tax breaks will boost the federal tax share of the economy.

The last chart shows the largest cost driver in the federal budget—health care. One of the presidential candidates plans to expand government health care, yet both parties have failed to tackle the ballooning costs of the health programs we already have.

How should we tackle the budget crisis? Downsizing Government proposes many spending cuts.