Sunday, February 06, 2005

The tax truth is uglier than my simple example

Life is more complicated and uglier than the simple example I posted about how Governor Pawlenty's defacto tax increases fall unfairly on the poor. It's been pointed out that someone making $150,000 is probably going to pay more in property tax than someone who makes $40,000 because they own a more expensive home. So a $200 increase for the $40,000 earner is likely to be a larger dollar increase for the $150,000 earner.

That's true if you assume that higher income = more expensive house, which is not always the case. Remember one of America’s wealthiest persons, Warren Buffet lives in the same modest Omaha, NE home that his parents did. (This is more common than you might think. See more in the p.s.)

In real life, property tax increases are even more unfair than my simple example.

The truth is the poorest Minnesotans (earning $10,235 and under) see 5.3% of their income go to property taxes. The top 1% (earning $402,294 and more) see just 0.8% of their income go to property taxes. So the people at the bottom are paying nearly seven times more of their income in property tax than those at the top. This is information from our own Minnesota Department of Revenue. These are real numbers and this is AFTER the "circuit breaker" that prevents the poorest Minnesotans from paying even more.

And total taxes? The MN Department of Revenue says the Effective Tax Rate (total of all state and local taxes as a percentage of income)shows the poorest (earning $10,235 and under) pay 17.4% while the richest (earning $402,294 or more) pay just 10.3%. How can anyone defend that as fair, or suggest doing something that skews it even more?

Not in the top or the bottom? You're still paying about 12% in total state and local taxes--that's more than the wealthiest.

p.s. The Warren Buffet example is much more common than you might think. Thomas J. Stanley has made a living helping companies market to the wealthiest Americans. He writes in his best selling book "The Millionaire Next Door" that roughly half of Millionaires don't live in expensive "high status" neighborhoods. And those that do NOT live in the expensive neighborhoods accumulate wealth about twice as fast as who do.

Also, Stanley's extensive survey shows that those Millionaires who live in the expensive neighborhoods tend to be the ones who have inherited their wealth.

Again, the point is the value of your house is only a very loose predictor of your ability to pay. Pushing up property taxes to pay for tax cuts for those making the most is very unfair.


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