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Making the Rich Evil and Taxing the Poor

Talk about killing two birds with one stone, that’s exactly what State Representative Brian Egolf attempts to do in a guest commentary over at Heath Haussamen’s blog:

Prepare to be shocked: Did you know that in New Mexico a family of four with taxable income of just $16,001 pays the same personal income tax rate as a family making $100,000, $250,000 or even $1 million?

Under our state’s tax structure, the highest tax rate kicks in at $16,001. This means that a family of four living at or near the federal poverty level pays income tax at the highest New Mexico rate. This must change, for reasons of both fairness and fiscal soundness.

In New Mexico, our tax system is extremely regressive, which means that it requires low-income earners to pay a higher percentage of their disposable income than high-income earners. The effect of a regressive system is that low-income earners feel the pinch of a tax bill far more than high-income earners, and low-income earners have far less money available for savings as a percentage of their income.

The two birds in this case are the “evil rich people” and making the case for a tax increase. Of course, there are more than a couple of problems with Representative Egolf’s positions. First, let’s look at the basic premise that the “rich” don’t pay enough of their income in taxes. Representative Egolf is right that anyone making over $16,001 is in the same tax bracket.

How New Mexico State income tax rates are structured
The tax table below will show in detail the New Mexico state income tax rates by income tax bracket(s). There are 4 income tax brackets for New Mexico.
If your income range is between $0 and $5,500, your tax rate on every dollar of income earned is 1.7%.
If your income range is between $5,501 and $11,000, your tax rate on every dollar of income earned is 3.2%.
If your income range is between $11,001 and $16,000, your tax rate on every dollar of income earned is 4.7%.
If your income range is $16,001 and over, your tax rate on every dollar of income earned is 4.9%.
Income tax brackets data last updated March 3rd, 2009.

That sounds terrible, right. Wrong. Let’s look at the hard numbers. What does this really mean? Well, let’s say you define someone as being a member of “evil rich” if they make over $250,000 per year. Under the current state tax system, a person would be paying $12,250 per year in state income taxes if they are at the bottom of the rich class. Whereas, a family of four making $16,001 would be paying $784.05. In other words, the rich person would be paying $11,465.95 more in taxes. How is that not enough? The disposable income part of the argument is moot. A family of four living on $16K has no disposable income.

Ok, back to the rich person. Remember that this rich person is also likely paying property tax; whereas, it is unlikely that the family of four living on $16,001 is paying property tax. The rich person is also likely purchasing more, and therefore paying more dollars in gross receipts tax than their lower income counterparts. The rich are also paying higher federal income taxes, which in turn comes back to the poor in New Mexico since the state historically receives about two dollars in federal spending for every dollar paid in taxes.

The low income family in this example doesn’t pay federal tax, they most likely qualify for the Earned Income Tax Credit (EITC) and actually get over $5,000 paid to them (money that comes from those rich folks). I could go on, but I think you get the idea. The bottom line, when the rich are done paying all of their taxes, they’re not really all that rich after all. Of course, they will have more money than the poor, but the alternative is a communist society.

Of course, that’s not the only fallacy in Representative Egolf’s argument. He makes the case that the $450 million budget shortfall is because the top income tax rate was cut. This is ridiculous. The year after the tax cut went into effect, the total dollars brought into the state went up, not down. The problem is that the state kept increasing spending like there was no tomorrow.

Well, tomorrow is here. Spending needs to be cut. Taxes do not need to be raised.