Yeah but nothing stops states from raising their own taxes.
Second, a significant source of federal funds is newly printed money, which the states do not (currently) have the ability to do.
This is half-true, and to the extent that this is the case, the major political party that GP is attacking here has essentially made it its mission to reduce those high federal taxes.
But on the other side of the coin, itt's also worth mentioning that the US Federal taxes are some of the lowest among the OECD. Germany’s second-highest marginal income-tax rate of 42% kicks in for married households earning around €112,000 ($124,000). An American couple with that income pays a marginal rate of only 22% and would need to earn $612,350 before paying the top marginal rate of 37%[1]. If there's a state that wants this kind of a couple to pay taxes that are comparable to Germany's, they have a LOT of room to work with.
> Second, a significant source of federal funds is newly printed money, which the states do not (currently) have the ability to do.
1. This is true of the EU as well. Each member state has to get approval from the ECB to print new money.
2. the numbers I've cited are the spending numbers, that's downstream of taxes and money printing.
[1] https://www.wsj.com/articles/the-middle-class-always-pays-11...
Talking about EU/ECB is a red herring as the system hasn't been in existence long enough to collapse under its own incentives.
But sure, another answer to your question is "nothing". As in, various states might be raising taxes after this is all said and done. The Covid crisis and this orchestrated destruction of the federal government could usher in a return to more localism. It's hard to say what's around the corner from this point.
That's because US federal tax-base is extremely narrow. Ironically the US has the most progressive tax system in the developed world; the top 1% pay ~45% of the Fed budget, but there's only so much we can raise by targeting the rich, since by definition the base is so small. In contrast, in EU countries the tax bases is broad, it's a large number of middle-class taxpayers that pay high income taxes and high consumption taxes (VAT). While the funding is more regressive, it raises more revenue which enables more progressive spending. The net result is that, after taxes and transfers, the higher middle-class tax nations are more progressive.
> This creates a general anti-tax sentiment, fueled by a focus on individual states' taxes rather than the bulk tax of the federal government.
That's a feature, and not a bug — States competing with each other on tax rates creates a downward pressure on taxes in the same way that enterprise competition creates a downward pressure on prices. I already mentioned the EU, but Switzerland works exactly like this too. The top marginal Federal tax rate in Switzerland is ~10%, while the Cantonal tax rates vary wildly between 16-30%. The net result is that the Swiss enjoy some of the lowest taxes in the developed world while enjoying one of the highest standards of living and superior services. Much like the rest of the OECD, Swiss taxes are broad-based middle class taxes as opposed to top-heavy progressive taxes like the US.
https://en.wikipedia.org/wiki/Disposable_household_and_per_c...
You're absolutely correct about that, and the linked article I showed does exactly that. It computes the multiple of the average wage at which the top marginal rate kicks in. The U.S. top marginal rate applies only to taxpayers whose wages are 9.3 times the average wage. In Belgium the top marginal rate ensnares workers earning 1.1 times the average, and in the Netherlands 1.4 times. This pattern persists across all peer OECD nations. The US is an outlier in its progressivity.
First, the distribution of tax payers to different marginal tax rate brackets differ. That is, how many percent of US tax payers actually pay top marginal rate vs how many in Belgium do.
Second, the differences in purchasing power. What does the average income (or the top income for that matter) actually get you in different countries.
By definition, the the metric takes into account the median. Because the top marginal rate kicks in at 1.1x the median (in Belgium), it is the middle of the distribution bears the top marginal burden. Likewise, in the US, 9.3x the median is at the top end of the distribution.
> Second, the differences in purchasing power. What does the average income (or the top income for that matter) actually get you in different countries.
https://en.wikipedia.org/wiki/Disposable_household_and_per_c...
In fact, the median disposable income after adjusting for purchasing power in the US is higher than that of Belgium as well as Germany. That means that the median person in the US has a higher purchasing power AND pays much less in taxes than the median Belgian, who pays the top marginal rate (well, 1.1x the median, but that's basically the same).
If California would hold the money that it is sending to subsidize red states it would be doing perfectly fine.
BTW in 2025 the tax cuts on middle class will expire completely, and unless you make $200k or more you will be affected. Meantime Bezos is now worth $200 billion thanks to the wonderful tax cuts.
Oh and one interesting thing, the 2018 tax cuts also made it even more beneficial to outsource jobs to other countries, I suspect that was the primarily reason trump started trade war to mask it.
> BTW in 2025 the tax cuts on middle class will expire completely, and unless you make $200k or more you will be affected.
This is not because "party B" wants to raise taxes on the middle class. It's because Senate budget reconciliation rules require a revote after 8 years for certain revenue changes. It's a parliamentarian technicality. There's almost no doubt that, if they were in power in 2025, they will vote to continue those cuts. If it was up to them, they would reduce taxes to 0 across the board.
> Oh and one interesting thing, the 2018 tax cuts also made it even more beneficial to outsource jobs to other countries, I suspect that was the primarily reason trump started trade war to mask it.
None of this is relevant to the discussion at hand: almost everyone got a Federal tax cut in 2017 (https://www.nytimes.com/2019/04/14/business/economy/income-t...), which means that there's room for tax increases at the State level.
Yep, they didn't even get it down to 0 and already increased our debt by 2 trillion (more than Obama). Is their plan just start printing money when needed, because some countries already tried that.
> None of this is relevant to the discussion at hand: almost everyone got a Federal tax cut in 2017 (https://www.nytimes.com/2019/04/14/business/economy/income-t...), which means that there's room for tax increases at the State level.
This is exactly what Democrats were complaining about look at the income and how many god tax cut, realize that ones who didn't got it either they got the same amount of tax or (more likely) paid more.
Compare that to a median income, also be aware that the individual tax cuts for middle class gradually expire every year.
Just FYI, the debt didn't increase as a result of the tax cut, it increased as a result of spending. The Federal government's tax revenue actually increased after the tax cut, which means that the deficit is being driven by spending increases, not tax decreases.
https://www.taxpolicycenter.org/statistics/federal-receipt-a...
We’ve just been spending more on Medicare and Social Security YoY.
Also, the SALT deduction overwhelmingly benefited the rich, who arguably don't pay enough in taxes.
1. Not true of all low tax states (Nevada, Washington, New Hampshire, South Dakota, etc)
2. More representative of which states have the most senior citizens and military bases, because most of the Federal budget goes into Medicare, Social Security, and the military.
3. Better alleviated by directly targeting net-takers rather than trying to approximate which states are net givers and takers based on the state and local tax rates, which is ham-fisted
Even many of the military bases are just unneeded make-work facilities for civilians. The military leadership has constantly been blocked from closing bases that it said it didn’t need by Congress. There are many military bases that are really just poorly disguised subsidies.
And just so I can’t be accused of quoting sources from the “liberal media”
https://www.militarytimes.com/news/pentagon-congress/2019/08...
Social security and Medicare are also just another form of government subsidizing people.
No, what they paid in doesn’t come close to paying for what they received.
https://www.politifact.com/article/2013/feb/01/medicare-and-...
That...wasn't the argument. On average the pattern of "net-takers" and "net-contributors" is a proxy for where senior citizens live because Social Security and Medicare account for over half of the Federal budget. Yes, there are outliers (like Mississippi, Alabama, Kentucky), but there are outliers in the other direction as I pointed out (Washington, Utah, South Dakota, New Hampshire). I addressed this in the final point, that the disparity is:
"3. Better alleviated by directly targeting net-takers rather than trying to approximate which states are net givers and takers based on the state and local tax rates, which is ham-fisted"
> No, what they paid in doesn’t come close to paying for what they received.
None of your sources actually adjust for Medicare/SS/military expenditure.
Social Security especially is a method to redistribute taxes. The amount most senior citizens get from SS is much less they put in - even if you account for inflation.
In fact, research shows that accounting for Social Security essentially cancels out the recent increase in inequality: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3546668
https://www.politifact.com/article/2013/feb/01/medicare-and-...
According to the institute’s data, a two-earner couple receiving an average wage — $44,600 per spouse in 2012 dollars — and turning 65 in 2010 would have paid $722,000 into Social Security and Medicare and can be expected to take out $966,000 in benefits. So, this couple will be paid about one-third more in benefits than they paid in taxes.
> In fact, research shows that accounting for Social Security essentially cancels out the recent increase in inequality
Doesn’t that support my point that the higher tax states actually subsidize poorer states?
I’m a bleeding heart capitalist. I believe in the social safety net. But, the entire point of my post was arguing against the idea that states with high taxes and limiting SALT was unfair to states that pay less in taxes.
No, it doesn't, because your statement presupposes that Social Security payments disproportionately go to the poor. In practice, Social Security (and Medicare) represent welfare for the rich. Baby Boomers are the wealthiest cohort in the US[1][2]. (FTA) "For two-thirds of seniors, Social Security has detached from the program’s original mission — to eradicate senior poverty — and is now the world’s most expensive upgrade from Carnival to Royal Caribbean for Nana and PopPop."
While there are poor retirees that benefit from SS/Medicare, they represent the minority of their cohort. On average, retirees are among the richest people in the country owing to a lifetime of accrued earnings (unlike, say, college graduates). So programs like SS/Medicare that target retirees are about the furthest thing from "subsidizing the poor". Consider that Bill Gates, Ariana Huffington, and Warren Buffett all qualify for Medicare and receive SS checks.
SS/Medicare also represent about half of the Federal budget. This is exactly why you need to adjust for those programs, because when you say that the Federal budget overwhelmingly subsidizes "poor low tax States", half of that just goes to old people, who overwhelmingly live in Red, 0-tax states like Florida. It tells us nothing about the fiscal health of those states, nor their dependence on the Federal government. On the other hand, high tax blue states disproportionately suffer from poor fiscal health, owing to under-funded defined benefit pensions that are essentially insolvent.
> But, the entire point of my post was arguing against the idea that states with high taxes and limiting SALT was unfair to states that pay less in taxes.
But once you account for SS/Medicare, the distribution of net-contributors and net-takers does not cleanly correlate with high vs low state and local taxes. This means that it's an extremely inefficient way of handling the inequity. You think it's a problem that some states pay more than they take in? Then address that directly! Don't use state-and-local-taxes as a proxy for that. It's an extremely messy and ham-fisted way of solving that problem.
[1] https://www.bloomberg.com/news/articles/2016-07-12/the-riche...
[2] https://marker.medium.com/lessons-from-iowa-and-the-fallibil...
Then again, I'm in favor of removing all deductions. If government wants to incentivize some activity, then they should just pay for it. That way it can be properly accounted for.
Edit: I typo'd and wrote "I don't see why people would be against SALT deductions" instead of "I don't see why people would be for SALT deductions".
Why can the federal government tax money that can only possibly be in my pocket if I've committed tax fraud against my state?
If I make 100K and my state takes 5%, I now only have 95K. There's no option for me not to pay 5K to my state.
(and no, for most people uprooting yourself for tax purposes isn't a tenable option)
Now, I have to pay the federal government. Why should I be on the hook to pay taxes on 100K in income, when I truly only earned 95K?
With sales tax, you could theoretically not buy things subject to sales tax. With real estate tax, you could in theory just rent.
Yes, in practice it's not like taxes are so punitive that > 100% of my income will be demanded, but it seems unfair to levy such taxes.
This assumes, of course, that the state has the first dibs on a person's income. I'd be just as happy if the federal government amended the constitution saying that all states levying income tax must deduct federal taxes paid from taxable income amounts.
Edit: it's not really on the income taxed, it's on the money already spent to pay a seperate income tax.
Overall I believe the wealthy are not taxed enough, but I think that even though SALT deductions benefit the wealthy, a taxable base should still be calculated rationally and fairly. It's more of a principle-based than result-based argument.
Other OECD countries are able to fund more progressive spending by (counterintuitively) taxing more regressively via broad-tax-base middle class taxes and VAT.
In contrast, taxing the middle class raises more money, which allows the government to spend more progressively.
High federal brackets make sense.
A county (or city) pays for things, and they decide to setup a property tax, taxing some arbitrary "assessed" value of your property. It doesn't mean anything to me to say your same income is being taxed twice, thrice, or 4 times. You're just paying for services to n different organizations, in this case, government agencies.
If the taxes are too high, then they simply need to be lowered. But not via deductions or any other game. Let the true prices be easily visible. No one forces a state government to implement a % of income tax, and if it's too high, then voters in that state should demand the the percentage be reduced, or implement a flat amount. Same for federal, same for city.
Because states and cities provide services that federal government doesn't have to, so it benefits the federal government as well. If federal government would provide these services there wouldn't be need for SALT or local government taxes.
Anyway without SALT this is basically stealing from citizens. It's taxing money that citizens never see instead of taxing the money that they actually receive.
Say my tax rate is 10%. 10 = 5+5. Is that second 5% taxing money I never see?
My health insurance premium is deducted from my paycheck. Is that money I'm taxed on but never see?
I also get some employer paid health insurance. Is that unfair that I'm NOT taxes on that despite it helping me?
What if my rate is 51% + 51% = 102%? (Unrealistic, yes, but gets to the heart of the "fairness" argument)
How am I suppposed to pay 102% of my income? Is that sustainable?
But if my state taxes me 51% of 100k, and there is SALT deduction, my federal taxable base is 49K instead of 100K, and I am now actually paying 24.9K instead of an impossible 102K.
Taxes are NOT service payments, they are a legal obligation, a good portion of which (rightly) pays for things you may not directly benefit from. It's in a completely different category than for-service healthcare, at least in my opinion.
Its amount is not also directly tied to how much money you make. If you know your income you could theoretically budget for such expenses.
Also, I believe healthcare premiums are in some (most?) cases tax-deductible, though this is somewhat besides the point.
Pre-tax benefits for transportation are also not universal, and the State governments can deduct Federal taxes in their calculations if they want to follow that model.
With a deduction for state tax, it's a lot more cut and dried "hey I don't have this money anymore because the state whose laws you officially sanction by virtue of their being part of your union is going to throw me in jail if I don't pay them".
I'm not sure if that's more or less cut and dried than "hey I don't have this money anymore because I had to pay money to not be literally homeless".
Deductions are an approach to reducing tax burden, but ultimately we have to decide if more taxes or less taxes are the way to operate our societies. The federalized tax system allows different states to experiment with different approaches, and these kinds of deductions incentivize behavior in one direction.
Should someone living in a luxury penthouse suite at 15K+ a month get to deduct his rent at 100%, as well as closet-sized studio apartment? If not, where is the line drawn?
This is what I mean when I talk about value-based judgements based on variable rates.
Should I be able to deduct only what is literally the cheapest rent in my city? What if the cheapest apartment is full, and there's no way I could possibly get that rate? Should it be the cheapest AVAILABLE rate? Would this then impact prices knowing that the lowest rate drives tax-deductibility for all citizens?
This is the labyrinthine decision tree that opens up when deducting things like rent, food, clothing, etc.
Also, if SALT deductions truly incentivized punitive state taxes, why are so many states still charging 0% tax rates?
No, those are user fees.
> We don't deduct prices of other goods & services (food, clothing, rent, transportation) from our salaries before paying taxes on them, do we?
Yes, we do, with a choice to take a simplified default amount.
But with SALT, I think the better argument is that the absence of the deductions (or limitations on them, which work the same way at some point) causes federal taxation to artificially incentivize low-tax state policy since it can switch policies from net expected positive to net expected negative value before to after consideration of federal taxation, whereas with SALT deeuctibility federal income taxation does not have any effect on the direction, only the magnitude, of expected value of state tax and spending policy.
This is not double taxation.
https://www.investopedia.com/terms/d/double_taxation.asp
The federal government charges you x% for its services. The state government charges you y% for its services. The city government charges you z% for its services. The county government charges you a% of some arbitrary "assessed" property value. These are different entities who have the power to tax you.
>Why can the federal government tax money that can only possibly be in my pocket if I've committed tax fraud against my state?
What? This would only be the case if total taxes on your income exceed 100%. And typically, that would then be up to the courts to decide who is the senior creditor that deserves to get paid.
>Now, I have to pay the federal government. Why should I be on the hook to pay taxes on 100K in income, when I truly only earned 95K?
I disagree that you truly earned $95k. You earned $100k.
In theory, it could be problematic if all of your taxes add up to >100% of income, but I think that's more incentive for people to participate in their government and make sure that doesn't happen. But I don't see why a state that mismanages their defined benefit pensions and infrastructure, and hence has high taxes due to shifting costs from 30 years ago to today, should be getting a benefit for it.
> Double taxation is a tax principle referring to income taxes paid twice on the same source of income.
and later
> Double taxation also occurs in international trade or investment when the same income is taxed in two different countries.
This state/federal dichotomy for the purpose of taxation is really no different than two countries taxing the same source of income.
Two entities are taxing the same income, and both must be paid. This is double taxation by the definition of the source you brought into the discussion!
> What? This would only be the case if total taxes on your income exceed 100%. And typically, that would then be up to the courts to decide who is the senior creditor that deserves to get paid.
No, it's true regardless of how much I've paid to my state. The 5K is gone. I don't have it. It's deducted from my paycheck. It never hits my bank account. I'm being asked to pay taxes on money I've used to pay taxes.
> I disagree that you truly earned $95k. You earned $100k.
You're probably right that earned was an imprecise phrasing for this. Received, perhaps? Regardless, the point still stands.
And to be clear I'm arguing from the standpoint of what I believe the principles ought to be, not of what the law is. As you state, when asking for money that I truly don't have due to contradicting demands on my income, courts would decide who receives what. I'm just arguing that the law ought to define that hierarchy, and any money already used to pay taxes ought not be taxed again by the secondary payee.
Edit: after looking it up, I'm wrong, you can deduct most state and local taxes such as property, income, and sales, although you can only pick either income or sales so it does incentivize states to only use one.
It still encourages wasteful tax spending though as my comment below explains.
SALT is not a tax credit (you won't get $5,000 back), it is a deduction which means the $5,000 is not taxed, because it was already used to pay a tax.
As a hypothetical, imagine 1 state which has very low taxes, say 5k on 100k income and does not provide very many services requiring the citizens to use post income tax money on all the goods and services they require such as rent, food, and healthcare. Now imagine another state which has super high taxes, say 40k on 100k of income, but the state massively subsidies their rent, food, gives them completely free healthcare and such.
Why should the person in the high tax state get to deduct the state and local taxes used to pay for similar services as the low tax one who has to pay for it with post federal income tax money?
To put it in more economic terms, SALT deductions incentivize state and local governments to increase taxes and spending to the point that the marginal utility of $1 provided by the government to citizens to equal the marginal cost of citizens taxes which include the SALT deductions or (1 / (1 - citizens marginal federal income tax rate)).
That literally creates waste because it incentivizes states and local governments to increase taxes to the point where citizens are seeing equal benefits with overall tax burdens at the cost of reducing the federal governments budget which ironically then encourages them to increase taxes to make up for it which then lowers the denominator in the states marginal utility to overall tax burden calculation in a positive feedback loop.
They are complementing the federal government so it doesn't have to provide these services.
If federal government would take care of everything and this was some extra service then I would agree with you, but it isn't.
And citizens in high tax states with high benefits that only benefit the local population get to reduce their federal tax burden with SALT deductions that others in the country don't benefit from.
Apparently I have to get more hypothetical, imagine 49 states introduce a 100% income tax but with that tax revenue, they give free rent, free food, free healthcare, free netflix, the works. With unlimited SALT deductions all of their income would go to the state governments and the 1 last state would be covering basically the entire federal budget (they get some from other things like corporate taxes).
Obviously totally unrealistic but the point is that increases in state and local taxes with SALT deductions benefit the state and local population at the expense of the federal governments tax revenue.
You overestimate how difficult this would be for the vast majority of people.
> imagine 49 states introduce a 100% income tax...
So your solution is to ask the citizens of states with 100% tax rates to pay > 100% of their income in taxes? How would this work?
When the Federal government allows you to deduct certain line items from your taxable income, it's usually as an incentive for that thing (eg charitable donations deduction). It's really debatable if we really want to be incentivizing higher state taxes. While taxation is an important way to pay for necessary services, you need some downward pressure on it (just like prices) that ensures that we're spending every dollar as efficiently as possible.
If you have a more federalized tax structure where you pay more in state taxes than Federal taxes, you probably don't even need this kind of affirmative incentive anyway.
> If government wants to incentivize some activity, then they should just pay for it.
Agreed, and that's essentially what critics of the SALT deduction call it: the Federal government paying for, and as a result incentivizing states to increase their taxes.
The State and Local governments provide a basket of services, and taxation is the price of those services. It's no more double taxation to pay all of the different governments for their different basket of services as it is "double payment" to pay different service providers the price of their goods & services independent of one another.
A Spotify subscription is a price we pay for the benefit of unlimited music streaming.
Both represent an exchange of money for services.