Okay I needed a catchy headline. And now that you’re here, this article’s content will be much less polarizing than you may expect. AND, I might add, much more insightful than you may expect:
Six-figure income earners in the United States are not paying their fair share of federal income taxes.
Don’t take this statement where your gut may first lead you. Sit tight on that resounding yes, or resounding no.
I will demonstrate quickly how complicated state income and property tax laws affect what the federal government receives in income tax revenue from you. And with this explanation I will demonstrate why an increased personal federal deduction, the removal of state income tax deductions, and a cap of property tax deductions (as proposed in Trump’s Tax Plan) is a major step towards a federal tax policy that resonates with core Democrat interests.
To best communicate my message, I need to speak through a hypothetical, though realistic scenario.
Tax talk is boring, and complicated. And there are squirrels running around everywhere to pull the conversation offsides. But in order to evaluate federal income tax mechanisms with intellectual integrity, we need to create a control scenario from which the outcome can be judged state by state.
Let’s imagine a young professional gets a job offer to work remotely from home for $100,000 per year. They can live anywhere in the U.S. they’d like. And based on their personal budget, they have enough cash to buy a $179k home (the median home value in the U.S. in 2015). That’s realistic enough.
Now let’s say this person believes strongly in the core value propositions of the federal government. They know enough about tax code variation to understand that depending what state they live in, their federal income taxes that literally get paid may differ from state to state, even though the federal income tax brackets don’t change based on state.
The young professional in this scenario feels obligated to pay their “fair share”. Which to them means, they at least want to pay as much to the federal government specifically as anyone else in their same situation.
Here are the results:
With the stated income and property tax assumptions, in forty-three states, our young professional pays less to the federal government than in seven others. The biggest discrepancy is in Oregon, where they pay $1,000 less to the federal government for their $100,000 gross income than in states like North Dakota or West Virginia.
Now again, squirrels love running around tax talk peripherals. Don’t get pull offsides by cost of living here or there, or total amount paid in taxes because someone makes more here or there.
The scientific method requires a control to test the impact of variables (in this case state tax deductions that Trump’s Tax Plan wants to significantly alter).
If you’re paying a membership fee for a service, like Spotify, or say the United States government, location based dues don’t make a lot of sense.
If I subscribed to Spotify in Cleveland, Ohio, or Eugene, Oregon they’re going to charge me the same price. Sure there are levels to their offering. If I can deal with a number of restrictions, Spotify won’t charge me anything. For unlimited use on my PC it’s $4.99/month. And if I want to have unlimited access on my phone the total due increases to $9.99/month.
If this logic resonates with you, and I hope it does, then we can agree that the federal government shouldn’t collect a different fee from me for their service based on where I live.
The disparity shown in the figure above decreases at lower income levels because less people are able to exceed the default federal personal deduction. If this personal deduction was higher, (say double, or triple the 2017 single filing deduction of $6,350) the disparity between what our young professional pays from state to state would shrink even smaller.
The disparity shown in the figure above amplifies at higher income levels. Let’s say for example, our young professional gets “The 1%” income offer and grosses $305,000 per year. Being modest, they keep their same personal budget of a $179k home:
We can see from the results above that our same young professional is getting a $7,000+ discount on the federal government’s services for living in states like California, Oregon, Minnesota, and Iowa.
This is a problem. Our young professional just doesn’t feel they can pay their fair share in those states and decides to move to Bellingham, Washington and contribute their fair share to Uncle Sam.
Or perhaps, they write their senators asking for support of Trump's Tax Plan.