ELDER PATRIOT – Americans may be more politically polarized than at any time since the civil war. Contributing to this is the growing divide between those that fund the government and those that happily feed from the trough that others have paid for. How did we get to this point and what have politicians done to encourage these divisions?
While doing research for an upcoming column I came across some interesting, facts about the correlation between political orientation, the importance of the way it influences tax policy, and how that determines fiscal responsibility.
Of the fifteen states determined to be in the worst fiscal condition by the Mercatus Center at George Mason University thirteen are solidly Blue States. The two Purple States are West Virginia and Kentucky.
Of the sixteen states ranked most fiscally fit by the study fourteen are solidly Red States. The other two states, Florida and Ohio are Purple States.
These sixteen states are the only states that have a positive financial position according to the Mercatus Center study that determined the fiscal condition index of each state based on the sum of the cash, budget, long-run, service-level, and trust fund solvency indexes weighted as follows: (0.35 × cash solvency score) + (0.35 × budget solvency score) + (0.1 × long-run solvency score) + (0.1 × service-level solvency score) + (0.1 × trust fund solvency score).
The Mercatus Center study still issues this warning, “while these (16) states are considered fiscally healthy relative to other states because they have significant amounts of cash on hand and relatively low short-term debt obligations, each state faces substantial long-term challenges concerning its pension and health care benefits systems.”
Florida’s fiscal responsibility can be attributed to the Florida Constitution that prohibits the imposition of a state income tax. This leaves the state’s sales tax as Florida’s most significant source of generating revenue at just under 60% of all revenue collected. Because everyone is required to pay the 6% state sales tax everyone feels the burden of irresponsible spending and thus they have an incentive to vote to restrict spending accordingly.
This suggests that either a flat tax or a value added tax (national sales tax) in the place of our federal income tax would engender a much greater degree of fiscal responsibility in the electorate and constrain the ability of politicians from “buying” the votes of certain demographic groups at the expense of other demographic groups.
To test this hypothesis I compared the most fiscally responsible sixteen states with the fifteen states in the worst fiscal condition for the progressiveness of their state’s income taxes. In laymen’s terms that’s the difference between the highest and the lowest tax rates under each state’s tax laws and whether that spread had an impact on the top rates. Not surprisingly, it did. The greater the degree of shared responsibility for paying for government programs the less reckless the people allow their politicians to be.
The average top income tax rate of the sixteen most fiscally solvent states was 3.78%. The average difference between the top and bottom rates for those sixteen states was a mere 0.38%.
The opposite was true for the average top income tax rate of the fifteen most fiscally distressed states. That average was almost double at a whopping 7.21%. The average difference between the top and bottom rates for those fifteen states was 2.47%.
The nineteen states in the middle averaged as the hypothesis suggested falling between the best and worst scoring states for fiscal conditions. With a difference in the average marginal tax rates of 1.15% the interest of the majority of voters to allow increased income tax rates was less appealing than in states with a more progressive tax system. These middle nineteen states have an average top income tax rate of 5.72%.
Of course nothing rivals the leviathan that the federal government has become under graduated income tax rates that have reached as high as 91% in the past.
Today the highest rate sits at 39.6% while over 46% of earners pay no federal income taxes. This sizable disparity insulates almost half of all wage earners from having to pay for the government largesse from which they may or may not benefit. It’s always easiest to be generous with someone else’s money.
This has encouraged voters who experience little to no pain associated with reckless government spending to support politicians who spend freely. We have now reached the point were the top 1% of taxpayers are paying more for government programs than the bottom 90% pay.
What the government can’t fund off the backs of the top 1% they borrow sending us deeper into debt rather than allow the bottom 90% to share the pain in any meaningful way. This leaves very little incentive (pain) to make the structural changes to our tax system that would create the foundation for restoring fiscal solvency.
It is hard to refute that personal financial pain is the only thing that governs responsible spending in our personal and civic affairs. Until everyone is taxed in a more even manner politicians will continue spending in the most irresponsible ways.