Washington Post: Tax Proposals in Maryland Click HERE to Bring Up Full Post

Washington Post, July 18, 2007:

Gov. Martin O'Malley (D) and leading lawmakers say they are giving serious consideration to overhauling the state's tax brackets, which are among the flattest in the nation. Everyone with taxable income of more than $3,000 a year pays the same rate.

O'Malley called the structure "patently unfair" this week, saying at a Democratic breakfast in Frederick that Peter Angelos, the wealthy trial lawyer who owns the Baltimore Orioles, should not pay the same rate as "the woman who cleans his office."

"I'm in favor of progressive taxation, where people who make a lot more pay more," O'Malley told reporters recently.

The article goes on to discuss, in an oversimplified manner, how the state's income tax brackets work in practice. One proposal is to create a 6 percent bracket for earners earning about $150K single, $250K jointly, in taxable income. The article does not go into the state's personal exemptions or mildly odd standard deduction calculation, and also fails to note the deductibility on Form 1040, Schedule A of most state income taxes for most high-income taxpayers, yielding reduced marginal net damage from a state income tax increase due to already high federal income taxation.
Click Here or at Permalink to Read More...
Governor O'Malley mischaracterized what progressive taxation (of income) is. It's not when "those who earn a lot more pay more," it's when those who earn more pay a lot more. I consider O'Malley's characterization disingenuous; it's sloppy beyond mere negligence.

All taxation is an invasion, a taking by force. The fact that cops rarely collect taxes at gunpoint (in the U.S.) does not make taxation anything other than a taking by force with some due process review. Non-compliance results in garnishments, levies, sales in execution and in very rare cases criminal prosecution for non-filers.

The question I have is whether the taxation of the marginal income that buys clothing and the staff of life should occur at a lower rate, directly or indirectly, than the taxation of the marginal income that, in practice, buys marble kitchen remodellings and vacations at Aspen - not because the latter are "bad" or out of some class envy but because the net damage to low-income workers of extracting tax money out of their survival staples bothers me. The current tax code provides for a small state earned income tax credit for many such workers to mitigate those concerns somewhat.

But providing relief to poor people is not what the main Democratic proposals are discussing. They are not talking about making it easy for Martin O'Malley's cleaning lady. They are discussing, instead, increasing the tax screw on the most successful people in every field while leaving the slightly lower tier of middle-high earners untouched. I would respect an across the board increase of the rate much more, even though my family and I would fare worse under a broader taxation than under the Democratic proposal. There's no fundamental reason why we should be exempt from such a proposed increase; my family's basic needs are covered and I would hate for Angelos to have his rates increased more due to Democratic lack of character and fear of taxpayers broadly on this issue. If they cannot raise taxes across the board for everyone above subsistence level, they should not do so at all.

Hong Kong is generally regarded one of the freest economies if not the freest on Earth despite having one of the world's least free economies only 20 minutes away by commuter train. Most Hong Kongers don't pay income tax. In effect, the income tax does not come into effect until around 220,000 HKD per annum, which is about $29,000 USD dollars or so. One of the biggest fears of the business community in Hong Kong is threat of democracy or, more precisely, full home rule and universal suffrage. The fear is that the tax system that allows workers to earn pretty much all of the income that they need for life's basics without taxation would be destroyed if a socialist, pro-tax party got elected. Higher income earners do often complain about the brutality of Hong Kong taxation and the high rate of 15% that they suffer. May such a rate smite us and may we never recover.

In a sense, however, the Hong Kong system is paradoxically both the flattest and the most progressive of all tax systems in the industrialized world. The rate jumps high from zero to the maximum rate in one arguably nasty progressive leap on middle income taxpayers. While such a system probably could not be implemented in Maryland practically, I would like to see a system where low-income workers are outside the tax system up to a subsistence level of income and that the rates stay flat thereafter.

Attila went hard on the proposed rates:

I'll tell you how it can be. Governor O'Malley's argument for progressive tax rates is a phony. It's a way of punishing wealthy people for having created wealth. It's a scheme based on ideology, not economics, and on envy, not fairness.

I don't think it's envy or bad faith when you are dealing with the lower end of the income spectrum. It's envy when you are doing what the Democrats are discussing: soaking the highest producers without helping the poor through relief and without demanding that all of the "non-subsistence poor" meet the same rate.

But O'Malley was smart in the examples he picked. Angelos is at the "bowel obstruction" level of popularity due to his decade of perceived baseball malpractice in Baltimore, and it's hard and cruel not to want to help somebody who earns a modest living holding a mop and toilet brush with her face near somebody's toilet. But perhaps a better example would be: should Ravens coach Brian Billick (after a GOOD year!) or a successful restaurant owner who works 70 hours a week get soaked on their taxes marginally worse than some non-disabled citizen hump who doesn't have steady (i.e, moderate and growing) income because he got fired for screwing off or watching porn on the job or not showing up to the job?

Governor, if you tax Brian Billick, you owe it to all of us to tax all of us the same way, exempting people's subsistence survival money. Tax me right here.

UPDATE: Isaac Smith, unlike Martin O'Malley, puts forth some actual arguments for the creation of the sorts of income tax brackets O'Malley advocates in a well-written counterpoint at FSP.