Sunday, January 02, 2005

NY Times and top Democrats rally to defend tax break for the rich.

It seems there's one big tax break for the rich that top Democratic politicians really like. And when the Bush Administration talks about killing it, they and the New York Times suddenly reverse the spin mode they've been in for the last four years regarding such tax breaks, to defend it...

Bush Plan Could Imperil Tax Write-Off for New York

As the Bush administration looks to revamp the tax code, New York officials say they are particularly worried about one idea being considered: eliminating the federal deduction for state and local taxes....

The change would affect about 3.2 million households in New York, three-quarters of which are middle- and low-income, tax records indicate.

".... if they take this route they can expect a serious fight" [said] Senator Charles E. Schumer....

"We'll fight this to the death," said Representative Charles B. Rangel of New York, the senior Democrat on the Ways and Means Committee...

"Gov. Mario Cuomo practically camped out in front of the White House on this issue last time," Senator Hillary Rodham Clinton said. "We did it before and we'll do it again."...

Around 2.5 million New York households with incomes under $100,000 take federal deductions for state and local taxes. On average, these households would lose the ability to deduct about $5,600 per year.

People in the highest income brackets would also shoulder a significant burden. About 219,000 households in the state with income of more than $200,000 take federal deductions for state and local taxes. These households would lose the ability to deduct about $67,400 on average per year...
Well, as long as "three-quarters" of the beneficiaries of this tax break are "middle- and low-income" liberal Democrats have a progressive duty to defend it, of course.

But let's take just a little closer peek at the numbers.

Taking a quick look at the IRS Statistics of Income web site, the most recent readily available numbers for this deduction as taken by New York taxpayers seem to be here (.xls). These are for returns processed in 2002, but there's no reason to believe the general picture should be much different for later years.

The Times says that three quarters of the New Yorkers who take this deduction are "middle- and- low income." On the IRS table that quite closely matches with taxpayers having up to $100,000 of adjusted gross income. Yes, about 75% of those who take this deduction report income under $100,000.

But what the Times story doesn't say is that these 75% represent only 30% of all taxpayers with income under $100,000 -- 70% of "middle- and low-income" taxpayers do not take this deduction.

In contrast, among taxpayers with over $100,000 income, 96% do take the deduction.

In addition, taxpayers with under $100,000 of income who do take the deduction take a much smaller deduction on average, $3,245, than those with more income, who deducted an average $25,300.

And taxpayers with income under $100,000 who took the deduction were in a lower average marginal tax bracket, about 25%, than those with income over $100,000, who had an average marginal rate near 33%. So the former's average deduction was worth proportionately less in cash.

After working through all the numbers we see a picture like this: all amounts claimed for this deduction by taxpayers with adjusted gross income under $100,000 divided over all the taxpayers with income in that range work out to an average cash value of about $246 each -- while all the deductions claimed by taxpayers with income over $100,000 divided by all taxpayers in that income range work out to a cash value of about $8,045 each.

Or to put it more simply -- in terms Democrats themselves typically use to bash Republican tax cuts -- 78% of the cash value of the tax deduction went to the 9.8% of highest-income taxpayers, those with incomes over $100,000.

And even this overstates tax savings from the deduction to those with low income, because there's a "standard deduction" of $10,000 for married couples and $5,000 for single persons that can be claimed even if one doesn't claim any itemized deductions -- such as the one for state and local income taxes.

This means that if a couple paid $10,050 in New York taxes and the deduction for state taxes was then revoked, the resulting reduction in their deductions needn't be $10,050 -- it could be as little as $50, because they'd take the standard deduction instead. But the standard deduction obviously has proportionately very much less value in saving repealed deductions for "the rich".

So one can quite safely say that more than 80% of the benefit of the deduction for state and local income taxes goes to only the highest-income 10% of taxpayers, at least in New York.

Now isn't this exactly the grounds upon which the Times and these very same named Democrats have bashed the Bush tax cuts for the last four years -- that they disproportionately favor the rich?

And isn't the implicit grounds for justifying the deduction that the Times throws up here -- that a lot of lower-income people benefit from it, as well as the rich -- the exact same argument that the Times editorialists and these same Democrats have mocked when made to justify the Bush tax cuts, by pointing out how little benefit went to lower-income people?

Yet this deduction that they are defending here clearly is even worse by this measure, even more favorable to the rich than the Bush cuts. The Bush cuts reduced everybody's tax bracket rate, and produced the highest-dollar savings for those with the highest income simply because they paid by far the most tax to begin with.

But the deduction for state and local taxes that the Democrats are willing to go to the mat to defend produced all of exactly $0 in tax savings for 70% of taxpayers with income under $100,000.

So if Bush really wants to repeal this regressive deduction, why does Hillary Rodham Clinton say she will "camp out in front of the White House" to save it, and why does Charles Rangel say he will fight repeal "to the death"?

The answer is found way, way, down at the very end of the story, in the third-from last sentence...
New York officials also worry that the change could lead taxpayers, newly burdened with the added expense of lost deductions, to demand lower local and state taxes.
Ah ... If the 30+% reimbursement received by the rich from the federal government for the cost of their state taxes disappears, they might become less happy about paying so much in state taxes, or expect greater value received from government in return, or might even leave the state altogether and take their taxable incomes with them.

As the final two sentences put it:

For some, that is just the point. "If you believe, as I do, that the state and local deductions encourage higher spending in states," said Bruce Bartlett, a domestic policy adviser to Ronald Reagan and a treasury official for the first President Bush, "then abolishing the deduction will help bring this spending down and will also cause people to demand lower taxation."
And clearly, if you are a Democrat or the New York Times, and you face a choice of that or of giving a big tax break to the rich, you know where your priorities lie!