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Friday, October 13, 2017

Taxes vs. Personal Income

There is some interesting data on its way out in the next couple of weeks, both from the Census Bureau and the Bureau of Economic analysis. With those numbers in hand, we will be able to make more predictions about where the Wyoming economy is heading.

Until then, let us continue the exploration of the relationship between personal income and taxes in Wyoming. We will do this in two steps: today's article looks at how much taxes we really pay in our state, compared to personal income; a second installment will compare our tax burden to other states. 

First, though, let us note the obvious, namely that not all taxes are paid out of personal income. This is a fact that pro-tax-onists of more government spending explore at every turn, such as in the Economic Analysis Division's infamous - and solidly inaccurate - "funding gap" chart. However, the idea that individuals do not pay taxes because the formal taxpayer is a business, is echoing of economic ignorance. We the individuals are end users of the products that businesses produce; even raw materials end up being consumed by us individuals, in the form of electric power in our homes or nuclear warheads protecting our liberty. As end users we have to pay all the costs of producing that end product.

Those costs include all taxes levied on everything from the severance of raw materials from the ground to the costs of changing oil in the trucks that service crews use when they maintain our infrastructure. Every dime goes into the same pile - which we pay for. 

A usual objection to this is that if we export our products - such as coal - overseas, then someone else will pay the taxes. This is, however, incorrect. In order to compete on the global market, our products must have a combination of quality and price that matches what is otherwise available. The price set by the global market is for the most part a given for us; not even a market-dominant exporter such as Microsoft can fully dictate its prices, because at some point the end user will say "it's not worth it" or "I can't afford it", even if there is no alternative product. 

With a given global market price, our taxes can make or break our exports. The only way for an export business to deal with taxes at home is to vary their other production costs; the cost of capital - everything from raw materials to cargo ships - is given in the short term, and somewhat rigid over time.* Therefore, the only really flexible production cost is labor, which ends up taking the beating from higher taxes in the form of fewer hours worked (including losing one's job) or in the form of lower compensation.

Even if businesses lower shareholder compensation, the buck still stops with individuals, either in the form of direct shareholders or as investors on the stock market, in mutual funds, with retirement savings, etc. Long story short: ultimately, we all pay all taxes, one way or the other. 

Obviously, this does not mean that all taxes harm households equally. Some forms of taxation are less harmful than others, a fact that deserves its own article; for now, let us compare the taxes levied on the Wyoming economy to the personal income that Wyomingites make.

Over the past four years, the total collection of taxes - which is only part of government revenue - for the state and for local governments in Wyoming, has been as follows:** 

2013: $3.42 billion
2014: $3.64 billion
2015: $3.73 billion
2016: $3.03 billion

In these years, all wages and salaries, capital income (dividends, interest, rent) and entitlements received by Wyomingites, tallied up to:

2013: $26.2 billion 
2014: $28.0 billion
2015: $28.3 billion
2016: $27.6 billion

Wages and salaries plus capital income comes out to:

2013: $22.4 billion
2014: $24.1 billion
2015: $24.1 billion
2016: $23.3 billion

If we divide total taxes - which again includes severance taxes - by the total of work-based, capital-based and entitlement-based income, we get the following ratios:

2013: 13.1 percent
2014: 13.0 percent
2015: 13.2 percent
2016: 11.0 percent

If we remove entitlements, the percentages increase, of course: 

2013 15.3 percent
2014 15.1 percent
2015 15.2 percent
2016 13.0 percent

The point with these higher numbers is that they illustrate the toll that taxes take on the efforts to earn productive incomes, i.e., from work and investments. If we isolate work-based income alone, the tax rates reach 25 percent, a point worth returning to later on when we compare our taxes to other states. 

It is worth keeping in mind that these tax-collection numbers do not include federal taxes. Another, perhaps more important point to make is that the decline in the tax-to-income ratios in 2016 are not a sign of an alleviated tax burden. It is simply an illustration of the fact that tax revenue has fallen faster than personal income; in case anyone wants to study up on that phenomenon, I have a long list of articles ready.

This, admittedly short, first installment shows that taxes, even in a "low tax" state like Wyoming, are no small matter. The next installment - due early next week - will put these Wyoming numbers in the context of interstate comparison. 

Until then, enjoy the weekend.
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*) Economics nerds will point out that over the long run, every production input is fully flexible. I realize that this is what economic theory says, however I dare anyone making this point to find any business in the world that can sit around and wait with its business decisions until all its inputs are fully flexible in the true sense of Walrasian economics. If you find one, I'll buy you a nice steak dinner at The Albany in downtown Cheyenne. 
**) The Census Bureau, from which the tax revenue data is retrieved, is in the process of updating local-government revenue data. Therefore, the numbers for local government tax revenue for 2015 and 2016 are estimates based on historic trends, such as its proportionate relationship to state tax revenue. When the Census Bureau releases the final numbers, I will update this article. 

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