One of today’s biggest discussions is the idea of people “paying their fair share” in taxes. Fair is a subjective term, but income tax returns at both the federal and state level clearly demonstrate that Kansans face a progressive tax system, which means that higher earners see higher taxes and lower earners see lower taxes.
The most recent data on federal income tax returns comes from the IRS’s Tax Year 2018 report. This latest data shows that those in the Top 1% of Adjusted Gross Income had about 21% of all the AGI but they paid 40% of all the income tax. The Top 5% had 37% of AGI but paid 60% of income taxes. The pattern is the same for the Top 10%, the Top 25%, and the Top 50% – people paying a higher share of income tax than they have of adjusted gross income.
The IRS data also refutes claims that “the wealthy” have a lower effective income tax rate. The top 1% pay the highest effective tax of all income levels, at 25.4%. The effective tax rate for the bottom 50 half of incomes is just 3.4%.
The most recent data from the Kansas Department of Revenue also shows that those with the highest incomes pay a larger share of taxes. The K40 tax returns for Tax Year 2019 show those making over $250,000 had 27% of the adjusted gross income but paid 31% of all the income tax. Similarly, those making between $100,000 to $250,000 represented 32% of adjusted gross income but paid 36% of the total tax liability. The same pattern holds until AGI dips below $75,000; income brackets below that amount have a smaller share of tax liability than their share of total income.
Impact on economic growth
If discussions of “fair taxation” are misinterpreted and used as an excuse for more taxation or government oversight of finances, it would affect ordinary Kansans as well as the Jeff Bezos of the world. For instance, at the federal level, heavy taxation to pay off the Build Back Better plan is estimated to cause $3.7 trillion less in GDP growth over the next decade than baseline estimates because of high taxes on capital. A recent proposal from President Joe Biden would give the IRS the ability to view bank deposits over just $600 to clamp down on suspicious payments – which aside from economic impacts, raises SERIOUS civil liberty issues. Proposed unrealized capital gains taxes could aim for big investors but shoot new investors in the foot by forcing them to liquidate stocks to pay taxes, which makes it even harder for new people to break into the financial market. What’s more, tax creep often starts for “the wealthy” and then reaches further and further to working families.
Wealth inequality is an issue. But the solution isn’t “well-intended” taxes targeting the wealthy which eventually come around and hit the average person in the face. Instead, the state should focus on how it can best create growth and remove barriers to opportunity to allow people to create wealth for themselves and others. Because of increased globalization and the ability to do business digitally, firms are more likely to move to healthier business environments – especially when they don’t have much capital and can easily move. Instead of trying to tax people into prosperity, the state should focus more on removing barriers and thus creating new economic opportunities for the public to engage with. In practice, this means rethinking incentives around taxes and government spending to give new businesses a healthy and fair environment to start, grow, and stay. Furthermore, taxes placed on businesses are passed onto the owners and employees of the business as well as their customers. Inappropriate taxation could cause prices to go up and hurt the wage growth of workers.
And there’s a clear reason why businesses aren’t staying in Kansas: extremely high taxes on mature businesses. Kansas ranks number one in highest taxes on mature businesses in fields such as research and development firms, data centers, shared services centers, capital-intensive manufacturers, and labor-intensive manufacturers. At the same time, Kansas comparably has low taxes on new firms in these same industries – with the taxes on new capital-intensive and labor-intensive manufacturers being ranked 2nd and 3rd lowest nationwide. The building ground for future growth and economic success is there. It just requires the government to step back, stop subsidizing failed business ventures off the back of ordinary people, and move forward.
Kansas shouldn’t let the political conversation get stuck on the constant back and forth of the subjective idea of a “fair share.” Instead, the state should focus on reforming its business environment to create a space with more opportunities for everybody.