Opinion: Daily Journal

Misuse of Language in the Tax Reform Debate

“Ha! That’s it! Hold it right there! Pronoun trouble.” If you remember those words, then you’re likely chuckling at the mental image of Daffy Duck’s epiphany. In trying to foil his nemesis, Bugs Bunny, in the famous cartoon “Rabbit Seasoning,” the hapless duck ends up at the end of a hunter’s rifle because of the rabbit’s verbal gamesmanship.

Even after Daffy realizes the way in which Bugs is misusing language intentionally, the “wascally wabbit” continues to best his feathered foe. In the end, Daffy accepts defeat — opting to put off the final shooting until the befuddled Elmer Fudd takes him home.

It’s a reminder that imprecise use of language — willful or otherwise — can have a dramatic impact on the outcome of a discussion or debate. While none of us is likely to end up as the main course on the Fudd dinner table, there’s a good chance that we can end up paying more taxes or higher electricity rates, face more regulatory hurdles, or see fewer options in the products and services we buy, if the terms of a particular political or policy debate are ill-defined.

Daffy’s frustration has come to mind frequently in recent weeks as critics have fired their verbal arrows at the General Assembly’s tax reform ideas. Some shots have targeted legitimate areas of debate, but others have mischaracterized both the intent and the likely outcome of proposed tax changes that factored into a final compromise plan approved Wednesday.

Ignoring criticism from those who make their livelihood bashing conservative or Republican ideas, the rest of this column will focus instead on comments from those whose commitment to public service ought to make them feel some degree of embarrassment when they willfully ignore facts in pursuit of a rhetorical point.

Consider the continual attempts to misstate the impact of a flat-rate tax. Back in May, as the N.C. House was debating its initial tax plan, the News & Observer reported the following:

Democrat Rep. Paul Luebke of Durham opposes eliminating the state’s current tiered income structure, which levies higher taxes on the more wealthy. “Those couples who have more than $100,000 taxable (income) really ought to pay more than a family making $30,000,” he said. “Flattening the income tax is not fair to the majority of North Carolinians.”

Several items within that paragraph merit closer scrutiny. First, the description of the “current tiered income structure,” also known as a progressive tax structure, lacks proper clarity in two important respects. The current structure does not levy higher taxes; it levies higher tax rates. Those targeted by the higher rates are high-income earners, not “the more wealthy.”

These are important distinctions. Both the current system and the flat-rate tax included in the reform plan levy higher taxes on those who earn more income. The difference lies in the degree to which those high-income earners are taxed more than those with lower incomes.

It’s also important to distinguish high-income earners from the “wealthy.” A high-income earner might not have much wealth. She might fit the profile of those dubbed HENRYs (high earners, not rich yet).

Even those with some wealth might not fit the standard conception of “the more wealthy.” Consider the small business owner who struggles from year to year to keep his company afloat, taking a modest paycheck while plowing most business proceeds — his wealth — back into the business. Upon retiring, he sells his company and finds himself among the high-income earners for a single year. The same situation is likely for a person who collects a one-time inheritance, such as a family farm.

Look at these people’s lives in all but one high-income year, and few of us would consider them to be “the more wealthy” people Rep. Luebke wants to target for a higher tax burden. Focus inordinate attention on a single snapshot of one year of tax data, though, and one might be tempted to lump these folks into the same class as those who grew up in fancy mansions with butlers and maids.

In Rep. Luebke’s defense, he didn’t write the first sentence in the paragraph cited above, and it’s not clear that he would describe North Carolina’s progressive tax structure exactly as the N&O did.

But that does not excuse the clearly misleading characterization the Durham representative offered in the direct quotation. Let’s examine his statement closely. First, note the distinction between “couples” and a “family.” Rather than set up an apples-to-apples comparison of households at different income levels, Luebke’s example pits higher-earning couples against a lower-earning family. The implication: Those hard-working families “need” their money more than the childless couples.

Once again, let’s give Luebke the benefit of the doubt. In the heat of debate, perhaps, he didn’t really mean to pit higher-earning childless couples against lower-earning families. He employed a poor choice of words.

What’s more objectionable, and what is unlikely to have been a slip of the tongue, is the statement that those high earners “really ought to pay more.” Why is that objectionable? Because Luebke clearly implies that under a flat-rate tax, those high earners will not pay more.

A veteran legislator with years of service and leadership on the House’s tax-writing Finance Committee must know that under a flat-rate tax, high-income earners pay more than low-income earners. In the example cited, one household ($100,000) making 3.3 times as much taxable income as another ($30,000) would pay at least 3.3 times as much in income taxes.

Why add “at least”? Because Luebke, though he uses the word “taxable,” refuses to acknowledge that the calculation of taxable income already incorporates deductions designed to ease the burden for those at the lower end of the income scale.

By the time a household has “taxable” income of $100,000 or $30,000, the household already has cleared a threshold of a standard deduction — or zero tax bracket — designed to insulate the lowest-earning households from taxation on the money needed to address their basic needs. In other words, a family with an actual income of $30,000 will face a much lower “taxable” income.

At the time Luebke offered his comments, the N&O reported:

The legislation would double the current standard deduction, making it the largest in the Southeast, [Harnett County Republican Rep. David] Lewis said. Married couples filing jointly could claim a $12,000 deduction, while a head of household could qualify for $9,600, and a single taxpayer could get $6,000.

In the two months since that article’s publication, those deductions increased to $15,000, $12,000, and $7,500 for the different types of taxpayers. In other words, lawmakers decided to shield more money from the tax man.

Luebke also omitted the important fact that after calculation of taxable income, child tax credits would offer lower-income households even more of a buffer. Current law allows a credit of $100 for households making up to $100,000. The new law boosts that figure to $125 for households with incomes of less than $40,000.

Put all of these factors together, and the higher-earning taxpayers in Luebke’s example continue to pay more — much more — under a flat-rate tax than lower-earning taxpayers. He should feel free to argue that “flattening” the tax isn’t fair, as long as he states correctly what “flattening” the tax really means.

What “flattening” the tax really means is that North Carolina lowers its top marginal income tax rate to a level more competitive with neighboring states. It also means removing the disincentive in the current tax structure for people to engage in wealth-creating activity that helps them earn their next dollar.

That means more likelihood for economic growth, which means more jobs, which means more opportunities for families earning taxable incomes of $30,000 a year to move up more quickly to higher income levels, which means a greater likelihood that they will pay more taxes, as Rep. Luebke thinks they ought to do.

Mitch Kokai is an associate editor of Carolina Journal.