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A Debate on Tax Fairness

May 11, 2009 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis & Craig Westover, Minnesota Free Market Institute
Editor's Note: Last week, we published another analysis of the state's tax incidence study. The original piece is available here. Shortly thereafter, Minnesota Free Market Institute Fellow Craig Westover sent us a response via Your Take. Below is his message and Jeff Van Wychen's fact-based reply:

By Craig Westover
Fellow, Minnesota Free Market Institute

Come on, guys. Can you at least make an attempt to be honest? I can live with you ignoring income mobility in your MTIS analysis - I understand, it hurts your argument. And not noting that using the broadest possible measure of income to compute ability to pay state and local taxes skews the data - I can construe that as your "spin." I don't expect you to understand that no matter how you tweak the tax code, capital will flow where it is most productive and to compete for mobile workers Minnesota employers must compete with low tax states on net income, not gross, which increases the income gap not reduces it. But I do expect basic honesty.

The MTIS states in its assumptions and methodology "Because the information for the first decile includes data anomalies and measurement problems discussed in the box at the end of this section, effective tax rates for the first decile are not reliable." The report prints a box that takes up an entire page explaining why "effective tax rates in the first decile are overstated by an unknown, possibly significant amount." Yet you guys go right ahead and use first decile numbers in a chart, not for accuracy but for dramatic effect. Either you didn't read the whole report - it's tough to miss a whole page, especially when it's boxed -- or you simply didn't give a damn and used the first decile data anyway.

The irony is, you could have made the same point, albeit less dramatically, using second decile data like an honest economist, researcher, pundit would have. Given the parameters of the MTIS, the Minnesota Tax System is always going to appear regressive and more regressive than it actually is. And again, ironically, as the MTIS report states, the 2009 report appears even more regressive because the data reflects the booming economy when the data was collected.

If you guys really believe the data supports your position, you shouldn't have intentionally mislead people to make your point. You should be able to argue your position straight up. At least have some respect for the integrity of the people who put the MTIS together; by being honest about what their assumptions and methodology were, they tried to get it right.

Minnesota 2020's Response

By Jeff Van Wychen
Minnesota 2020 Fellow

Apart from a complete and unwarranted lack of civility, your critique is marred by a fundamental misunderstanding of the article, selective use of information, and poorly reasoned lines of analysis.  The analysis in the article is sound and consistent with information in the 2009 Minnesota Tax Incidence Study (MTIS).

Your comments about the data anomalies within the first decile are actually noted in the article itself.  That is why I do not emphasize the actual MTIS first decile effective tax rate (ETR) information in the article, nor do they appear in any of the graphs. It is only mentioned near the end of the article along with mention of the data anomalies.

In claiming that "Given the parameters of the MTIS, the Minnesota Tax System is always going to appear regressive and more regressive than it actually is," you are making a classic fallacy of omission by only citing arguments that support your point.  In some regards, the MTIS understates regressivity by:

  • Emphasizing the "population decile" Suits index above the "full sample" Suits index.  The full sample Suits index is more accurate than the population decile Suits and almost always indicates a higher degree of regressivity.
  • By excluding the highly regressive "health impact fee" (which is really a cigarette tax), from the calculation of the Suits index.
According to the Department of Revenue, the full-sample Suits with the "health impact fee" included would show greater regressivity than the published results even if the first decile was completely ignored!

Given the facts stated above, I don't think the use of the population decile Suits index without the HIF is misleading.  The article explains the significance of that number. The Suits index is unfamiliar to the public.  It is a difficult measure to understand.  To help explain how regressive a Suits index of -0.053 is, my article uses an approach developed by Revenue Department staff that identifies a set of ETRs for each decile that decline at a constant rate and has both the same Suits index and the same average ETR as the results reported in the MTIS.  This makes it easier to understand the significance of a particular Suits index (or a particular change in the Suits index). 

My responses to your other observations (in no particular order) are listed below:

  • The measures of income used in the Minnesota 2020 analysis are the same ones used by the Revenue Department experts who prepared the 2009 MTIS, who understand the issues involved in income measurement far better than you or I.  If you are uncomfortable with their measurement of income, I suggest you contact them directly.  On my part, I have no intention of altering the Department's income data to pacify ideologues on the left or right.
  • Your claim that the MTIS is always going to make Minnesota's tax system appear regressive is difficult to gibe with the fact that the first MTIS reported that the system was "roughly proportional" with a Suits index at almost zero.  In addition, the MTIS notes that a similar analysis of other states has shown five to be progressive and one to be proportional.  (See pages 67-71 of the report.)
  • The focus of the article was not on ways to stimulate economic growth, so of course I did not address issues of mobile capital.  Nor does the article address the benefits of public investment.  The article is simply designed to illustrate the degree of regressivity associated with Suits indices of varying values, something which it does in a fair and defensible manner.
  • However, since you raise the subject of mobile capital, it is certainly true that low taxes are better than high taxes, all other things being equal.  However, all other things are not equal.  The benefits of low taxation must be weighed against the consequences of low taxation, such as lower quality infrastructure, an inferior education system, a less skilled work force, and lower quality public services in general.  If you are going to tout the advantages of low taxation, in the interest of intellectual honesty you should also acknowledge the disadvantages of low public investment.
  • You might also want to keep in mind that regressive taxation can be more damaging to a state's economy (certainly in the near term) than progressive taxation, since low income households tend to spend a larger portion of their income (as opposed to saving it) than high income households, thereby providing greater stimulus per dollar of income.  In addition, since low income households tend to spend a larger portion of their income locally, regressive taxation can have an additional detrimental impact on the state and local economy.  For more on this, I refer you to the work of Nobel laureate economist Joseph Stiglitz.
  • I understand your argument about the "booming economy" contributing to greater regressivity.  However, note that the 2011 Suits projections in the 2009 MTIS take into account the economic deterioration that has occurred since 2006 as projected in the November 2008 forecast.  The projected 2011 Suits indices show no significant reduction in regressivity relative to 2006.
You claim that Minnesota 2020's analysis "intentionally misled people," was "dishonest" in assumption and methodology, and was disrespecting "the integrity of the people who put the MTIS together."  For your information, prior to publication the article was submitted to the Revenue Department staff who prepared the MTIS.  Staff expressed no objections with the data or methodology used in the article.  They did suggest some minor changes, all of which were incorporated into the final version of the article.  If the article had been guilty of sins as serious as those you list, Department staff would certainly have let me know.  In light of this, I am sure you now realize that your comments in this regard were completely off base.

In summary, the article successfully demonstrates that (1) Minnesota's tax system is significantly regressive and (2) the drift toward regressivity accelerated dramatically from 2004 to 2006.  This drift toward regressivity shows no sign of abating on its own.  In light of this, state policymakers should make policy changes to reduce tax regressivity in Minnesota.
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