Wealthy North Carolinians pay a higher share of their incomes in taxes than do middle-income North Carolinians, who in turn have a higher effective tax rate than the poor.
This is a factual statement. Yet its implications are intensely disputed, which ought to disabuse you of the notion that most disagreements are just misunderstandings or the result of “fake news.”
By no means am I suggesting most people have a firm grasp of tax facts. Far from it. Politicians, commentators, and activists of varying political persuasions frequently misunderstand or misstate the realities of taxation. My point is that even if they didn’t — even if they accepted a common set of facts, stated plainly — they’d continue to disagree on tax policy, because of fundamental differences in values and priorities.
First, I guess I better defend my initial statement as factual. Notice that I didn’t say the wealthy paid more as a share of income than other North Carolinians in state and local taxes. They don’t.
For the sake of argument, I’m using calculations from the Institute for Taxation and Economic Policy (ITEP), a left-wing group. They show that the poorest 20 percent of North Carolina families pay 9.2 percent of their incomes in state and local taxes. The second-lowest quintile also pays 9.2 percent, the middle quintile pays 9.5 percent, and the next quintile pays 9.3 percent.
As for the highest-income quintile of families, their effective tax burden averages about 8.5 percent. Leaving federal taxes out of the picture, then, North Carolina’s tax code is roughly proportional across most income levels, but dips somewhat regressive at the upper end.
That’s not the end of the story, however — not by any means. We are all federal taxpayers, too, directly or indirectly. Even if we set aside federal spending for the moment, federal revenues funded about 28 percent of our state budget last year. It would be silly to talk about tax fairness in North Carolina while ignoring federal taxes.
I’ll use ITEP as my source, again. According to its latest estimates, which include the effects of the 2017 federal tax bill, the poorest quintile of American households will pay 4.1 percent of their incomes in federal taxes (remember that payroll, excise, and other federal taxes hit the poor even if they have no income-tax liability). Effective federal tax burdens will be 9.2 percent for the next-lowest quintile, 14.2 percent for middle-income households, 17.8 percent for the fourth quintile, and 19.7 percent for the highest-income-earners.
Although the data on North Carolina’s state and local tax burdens aren’t of such a recent vintage, we can reasonably estimate that when all taxes are combined, our effective tax rates would look something like this, from lowest to highest quintile by income: 13.3 percent, 18.4 percent, 23.7 percent, 27.1 percent, and 28.2 percent.
These estimates are debatable. Remember that I’m citing a left-wing source! Right-leaning analysts disagree with some of ITEP’s methodological choices, and tend to estimate higher tax burdens for upper-income households.
No matter whose numbers you use, you can’t depict our tax system as regressive. But how progressive should it be? Some conservatives think taxes ought to be roughly proportional — if your income or standard-of-living is two times that of mine, you ought to pay about two times as much in taxes. Other conservatives favor exempting a certain amount of every household’s income from tax — through standard deductions by household or per-person tax breaks or both — which will naturally result in a modestly progressive distribution of tax burdens.
On the Left, the assumption is that the tax code ought to be much more steeply progressive. They want not just to distribute the cost of public goods broadly or fairly but to use the tax code to redistribute income.
This reflects a difference in political values, in fundamental assumptions about what government is and what it is supposed to do. We can and should talk about it. We can’t make it go away by publishing more charts.