Tax policy: all about the wealthy

Paul LePage and Hillary Clinton see one thing the same when it comes to taxes. For the Maine governor and the defeated Democratic presidential candidate, it’s about the wealthy.

How you treat people with lots of income is essential to tax reform.

For all the politicians’ talk about corporate taxes being too high, they only account for about 11 percent of federal government revenues. Individual taxes, the largest source, contribute almost half.

In Maine, property taxes are the biggest contributor, followed by the sales tax. Individual taxes are important, coming in third and accounting for almost a quarter of government revenues. Corporate taxes matter relatively little.

Where this gets interesting is who pays the individual income tax. More than half of federal income tax is paid by people with taxable incomes of $250,000 and higher. These people file less than three percent of all returns.

Willie Sutton, the charming criminal, was famously, if incorrectly, quoted as explaining why he robbed banks, “That’s where the money is.” The same philosophy is true for taxation.

If you want to cut income taxes, as Gov. LePage does, the wealthy are the people to help. Their average tax rate is much higher than everybody else’s. In Clinton’s view, the way to raise more revenue to support her proposals for new spending was to raise the tax rates on the rich.

Going for where the money is makes sense. It’s also where the politics are. With the majority of income earners paying less than two percent of federal taxes, they contribute little and have little to complain about. They say their biggest concern is that other people are not paying their “fair share.”

This attitude is probably driven by the belief that the growing income gap between the top and bottom results from the use of tax breaks available only to the wealthy. In theory, if the tax code treated everybody the same, the rich would then be forced to pay their “fair share.”

Tax policy, at least as it relates to the income tax, is really about what constitutes a “fair share” of taxes to be paid by the wealthy.

Here is where LePage and Clinton part company. The governor, like many other Republicans, believes that if taxes are reduced on the wealthy, they will invest the untaxed money in new and existing enterprises, creating more jobs to be filled by new taxpayers.

Perhaps the wealthy will make more money and pay more taxes, even at their lower rate. There’s no question that when the stock market is booming, tax revenues climb thanks to the increased income that mostly goes to wealthy investors.

But given the lower rates on average working people, even if more of them found good jobs, the amount of the new taxes from them might fall short of the revenues lost from lower rates for the wealthy. If the rich pay less, there’s no certainty that everybody else can make up the lost revenue.

The loss of government income may be part of the plan. Not only will the rich get lower taxes, but government could take in less revenue and have to be cut back. If you think government has grown too large, cutting levies on the major tax contributors may force spending reductions.

Clinton’s view was the mirror image of this conservative approach. Not only would government revenues increase if taxes on the wealthy went up, but the income gap could be reduced. And there would be more money for more government action, including basic spending on roads and hospitals.

In talking about the wealthy paying their “fair share,” she used the notion of fairness to respond to the income gap issue. Her approach would have been to hit the gap squarely, while the tax cutting approach would depend on the benefits of lower taxes filtering through the economy.

Of course, not all federal government revenues come from taxes. It borrows every year it has a budget deficit – meaning just about every year. Debt repayment becomes an increasing part of the cost of the federal government.

Donald Trump seems to favor increased spending for public works financed by added public debt, an approach more closely associated with Democrats than Republicans. If he goes that direction, it will be difficult to cut taxes. Will the Republican Congress support him?

In Maine, income tax cuts almost certainly require state spending cuts, boosting the already overburdened property tax, especially for schools. Can LePage induce the Legislature to accept more tax cuts?

It should be an interesting year.