Is No Income Tax a Good Thing?

By - December 13, 2014

(Flickr photo by GotCredit)

Florida has no individual income tax, a situation my wife and I could appreciate when we first moved here. As our income dropped it became less relevant. But apart from our personal cost/benefit analysis, what does a lack of income tax mean to various groups of people, and specifically, what does it mean to the poor?

Logically, when compared to states that do tax income, Florida's lack of a personal income tax benefits those who have larger incomes. The poor don't have as much income to tax, so they can't benefit as much from such an arrangement. That's clear enough, right?

Of course the tinkle-down theory suggests that, when left untaxed, the wealthy will shower the poor with wonderful jobs cleaning their toilets, mowing their lawns, and picking the tomatoes they eat. But although there can be economic benefits to keeping tax rates low, that's a weak argument when specifics aren't included. For example, if no tax revenue is collected to fund roads, police, and criminal and civil courts, it's not likely the economy will do well, or that anyone will be happy with the outcome.

Most readers can probably agree to these three statements:

1. Taxation that is too heavy can hurt an economy, and so hurt people.
2. Taxation that is too minimal isn't ideal either.
3. A state needs to fund basic services, and so must collect taxes in some form.

If taxation is at a reasonable level and the revenue raised is spent wisely, the economy does fine, government provides the necessary services, and the majority of residents benefit from the arrangement. How much revenue should be collected is open to debate -- one which ideally is based more on cost/benefit evidence than politics. But meanwhile we are left with the questions surrounding the how of revenue collection. After all, if a government's necessary operating revenue doesn't come from one place, logically it must be collected elsewhere. So...

Who Pays for Government in Florida?

Here in Florida the ways chosen to raise revenue disproportionately affect the poor. Let's just consider one area: car ownership. It is tough to live anywhere in Florida without a car. If your income isn't high enough to live in a major city with a bus system you need a car to get to work, after all.

I'm looking at my registration form from when we first moved to Florida. We paid $353 in fees and taxes to move our little car here. My guess is that the few minutes spent entering things into a computer and handing me a plate cost the DMV less than $20, so this is nice source of revenue for the state government. And again, when you don't have an income tax you have to make up for it somewhere, right?

But think for a moment about what this means to a poor person versus a wealthy one. To make the example more concrete, assume the poor person moves here to take a job that pays $16,000 per year (more than my first job here paid), and the wealthy person makes $350,000 per year (there are thousands of them in Naples, Florida). What percentage of income does that $353 represent for each of them? Here's the math:

  • Poor person's car registration: 2.2% of annual income
  • Rich person's car registration: 0.1% of annual income

Yes, in this example the poor person pays 22 times as much as a proportion of income. If it seems like a small matter to some readers perhaps they haven't tried to pay a $353 expense while supporting a family on $16,000 per year. But to make it more clear how unfair this is, let's look a little closer and consider some "what ifs."

First, it's important to recognize that taxes and fees of this sort are arbitrarily implemented, or perhaps, to be either more realistic or cynical -- your choice, implemented in such a way as to raise revenue without angering the wealthy donors to political campaigns. In other words the fees do not represent the cost of registering a vehicle. Furthermore, it costs the state government very little additional money to have another car on the roads. Large trucks (semi-trailers) cause most road damage, and in any case the added costs may be covered by the additional gasoline taxes a new resident pays. So the large fees are an arbitrary way to raise revenue.

This is no big deal, some will say; the state has to collect taxes somewhere. Okay, what if a state lowered other taxes and in their place implemented a $15,000 annual registration fee per vehicle? Such a policy would effectively ban car ownership for the poor (and even many in the middle class).

Of course no state is going to go to this extreme, but if that scenario seems unfair then the current policies might also be considered unfair -- it's just a matter of degree. Why should we arrange taxes in such a way that the poor have a larger burden? The rich would still be rich if they paid more in taxes, but the poor are definitely held down by paying more. It seems likely that tax policies are part of the reason the gap between the rich and poor continues to widen.

What if our poor resident buys a car? Well, one way states without an individual income tax collect what they need to function is to have a higher-than-normal sales tax. The state rate is 6% in Florida and higher in many communities. So let's look at hypothetical poor and rich individuals again, this time assuming that the poor person saves up to buy a $5,000 car and the wealthy man buys a car for $45,000, and they buy it where I live (southern Florida), paying a 7% sales tax.

  • Poor person's sales tax on car as percentage of income: 2.19%
  • Rich person's sales tax on car as percentage of income: 0.9%

Yes, even here the poor person pays more than twice as much in taxes as a percentage of income, despite buying a car worth one-ninth that of the rich man. In general sales tax is the most regressive taxing scheme possible, since a poor person will almost always spend a higher percentage of income on taxable items. A higher sales tax is one way a state makes up for giving income tax breaks to the middle class and wealthier classes. Here in Florida, in one recent year, sales tax revenue was almost 47% of state revenue. And in case you're wondering, there is a small corporate income tax in Florida; it makes up just 2% to 3% of the state's revenue most years.

(The only thing that partly redeems this tax policy in terms of its effects on the poor and middle class is that it provides a way to raise revenue from the millions of tourists who come to Florida each year, thus reducing the amount that must be collected from residents.)

Of course, with or without bad tax policy, it just plain sucks to be poor. And normal purchases will always cost the poor a larger percentage of income. A new car might cost a poor person more than 100% of his annual income, for example. But the costs to make things or provide services have to be covered by the sales price, and profiting from providing goods and services is not any more wrong than getting a paycheck for one's labor.

In a similar way, it probably makes sense to have some taxes that are essentially "user fees" in order to not pervert or distort a natural economy (to the extent that such a thing exists). Gasoline taxes are a good example. They should probably be higher -- high enough to totally fund road building and maintenance (they cover less than half now). Paying the true cost of things keeps us from making too many irrational decisions (which is a more subtle economic argument we won't get into here), and those costs have to covered somehow.

But again, the cost to a state to register a car isn't $353, and the way we fund governments is a choice. If gasoline taxes were 20 cents-per-gallon higher, those with less income could at least cut their gas usage a bit. But they can't avoid registering their cars.

Who Benefits the Most From Government?

An important point here is that government disproportionately benefits the wealthy, so it is fair to pass most of the cost on to them. That claim could be backed up in detail, but a simple example should make it clear enough...

Microsoft sells Windows 8 for $120 at the moment. If they didn't have patent protection anyone could copy it and sell it profitably for $10. In other words, without government protection of contracts and patents and such (at state and federal levels), Bill Gates would not be nearly so rich. He probably wouldn't have even 1% of his current wealth. So he benefits from government a little more than the average ditch digger or dish washer, doesn't he?

If government services are worth billions of dollars more to Bill Gates than to the average person, is it perhaps fair that he pays more to support those services? I think so. He agrees, by the way. On the issue of raising taxes on the wealthy Gates says, "That's just justice."

Disproportionate taxation based on owning a car makes for an easy-to-understand example. But it could also be shown that a busboy -- one of the 47% that Mitt Romney says "pay no taxes" because they don't pay one particular tax (federal income tax) -- pays out a higher percentage of his income to governments than billionaire Romney does.

It's true that income taxes aren't popular. For example, polls show that Georgia residents favor plans to get rid of their income tax. Perhaps they don't fully understand the effects of increasing taxation in other areas to replace the loss of income tax revenue. But it's also true that the highest rate (6%) kicks in at just $7,000 of income -- a choice that could be changed. If incomes up to 40,000 were taxed at the lowest rate (currently 1%), and the effects of a higher sales tax were fully explained, those polls might have different results.

Perhaps everybody looks for their own advantages politically. But wealth buys political power. The result here in Florida is higher taxes and fees in various areas instead of an income tax -- a nifty trick for reducing what the wealthy pay while making the poor shoulder more of the burden of government.

A Final Note: Some of my conservative friends may claim that any additional tax burden on the poor is offset by the welfare they receive. Of course not all poor people collect welfare (it's very difficult to qualify here in Florida), so this argument is essentially saying that because some poor people get benefits all poor people should be penalized with higher taxes -- not a very compassionate thought, to say the least.

Other Pages

Falling Wages

My Accidental Participation in Democracy

No Income Tax