Monday, January 26, 2004


Something is amiss in the world of California journalism. Inquisitive energy should distinguish real reporters from the hacks who collect press releases and paste them together, but so many of our state’s news writers have apparently never learned how to ask questions.

Daniel Weintraub’s recent foray into tax policy is a case in point. His January 18 column in the Sacramento Bee uses a peek at preliminary statistics from the Franchise Tax Board to argue that “when the rich aren't getting richer the state is in the poorhouse.” Weintraub bemoans the recent decline in the number of California tax returns showing incomes over $1 million: there were 44,000 income millionaires in year 2000, but only 25,000 of them two years later. While admitting that “normally, an unequal distribution of income is considered bad for society”, the column maintains that “California's skewed income distribution, combined with progressive tax rates, means that the people at the very top of the income heap pay a very high percentage of the personal income tax collected in this state.” Weintraub seems to believe that the super-rich should be pampered and cultivated like rare, fragile orchids, for “When they do well, their wealth is shared with the rest of us. When they do less well, we also pay the price.”

Now, it is true that California tax return data shows a very unequal distribution of income. In 2001 (the most recent year with final data, because the filing date can be extended until the next October, and verification takes time) only one out of every 500 taxpayers was an income millionaire, but these folks had 12.6% of the income and paid 25.5% of the total tax. Indeed, the tax on returns with income over $5 million came to over $3.9 billion. These top 3,347 taxpayers paid over a million dollars apiece but with average incomes over $14 million, it appears they could afford it. These folks at the top had the same total income as the five million taxpayers with income under $22,000.

It is also true that a dramatic increase in high income returns, and in state income tax receipts in years 1999 and 2000 was followed by an unprecedented collapse in 2001. The same FTB Report shows income tax receipts were:

1998 $26BB, 1999 $33 BB, 2000 $40 BB, 2001 $31BB

(Incidentally, this suggests that Governor Schwarzenegger's budget propaganda turns history upside down. The initial cause of California's current budget woes was not reckless spending but was instead the instability and unpredictability of the state income tax system.)

But Weintraub fails to ask three important questions. First, how much of the decline in high income returns is real, and how much is due to the spread of tax shelters? Sophisticated high income tax shelters create paper losses that offset real income, so it won't show up on tax returns in the first place.

The second key question is: how much of the result is due to progressive rates and how much is caused by the skewed distribution of income? How progressive is California's income tax in reality? The answer is: very progressive for low and middle incomes, but not at all progressive for high incomes. The tax as a percentage of income starts at 1% on the first $6K ($12K for a married couple) and rises rapidly to a maximum 9.3% on income above $39K ($78K for a couple). Above that the rates don’t change at all. California collects the same amount of tax on an additional $100 of income whether it is received by a single person making $40K, a couple making $80K, an income millionaire, or one of the 3,347 folks at the very top.

Suppose one million middle class taxpayers with incomes just above the 9.3% bracket point were to earn $1,000 more each. This $1 billion addition to middle class incomes would produce the same increase in State revenues as would an additional $1 billion spread among the income millionaires ($40,000 each) or an additional $300,000 each for those in the exclusive zone above $5 million. Because the marginal tax rate is the same 9.3%, there is no gain from a budget perspective from cherishing and coddling the super-rich at the expense of middle-income taxpayers. Indeed, something may be lost – the work ethic. Weintraub’s use of the phrase “high income earners” to describe the super-rich shows that he hasn’t looked at the tables from which his statistics are plucked. The data show that folks in the $80K to $100K range get more than 80% of their income as wages and salaries from work. However, the income millionaires get only 37% from salaries, with a third of their total coming from capital gains on asset sales and another 21% or so from partnerships and closely held corporations. Above $5 million in income, the return to capital dominates: total salaries are less than a third of total income, and even in a down market about 40% of the income in this range took the form of capital gains that averaged $6 million each.

The final unasked question: has it always been this way? No. Back in 1973, during Ronald Reagan's second term as governor, California added two additional income tax brackets at the top: 10% and 11%. These rates were in effect through 1986. From 1987 through 1990 the top rate was reduced to 9.3%, but the 10% and 11% rates were reinstated in 1991 in response to that year’s budget crisis and remained in effect through 1995. The current rate structure dates from 1996. As recently as 1995 a married couple paid 10%, not 9.3%, on income over $220,000 and 11%, not 9.3%, on income over $440,000. (FTB Report, App. A Table 1-A.)

A few thousand here, a few more there -- it all adds up. Our 29,000 or so income millionaires and the 50,000 wannabes in the $500,000+ range have a strong interest -- about $1.2 billion for each 1% change in the top rate – in having the public forget the past. Certain questions, it seems, should not be asked. Weintraub’s obliging failure to ask them forces an update to Humbert Wolfe’s cynical couplets.

“You cannot hope to bribe or twist
A California journalist.
But seeing what the press will do
Unbribed, there is no reason to.”

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