Lecture 20 POLS 207 Outline of Last Lecture Income Inequality I Definitions of income A Pre tax B Post transfer C Money income II Increasing income inequality since the 1960s Outline of Current Lecture More About Income Inequality and Taxes I Income inequality among the states A Differences in economic development is no longer the simple answer B Poorer states have more income inequality than richer states do II Tax level v Tax burden A Elaboration on regressive tax systems Current Lecture Note on PowerPoint slide data Don t worry about the specific numbers as much as bigpicture patterns Recapping the previous lecture how do we account for income inequality There are a lot of explanations but there s no magical agreed upon answer Looking at income inequality AMONG the states Over the last 25 years the explanation for the inter state variation in inequality has become more complicated economic development is no longer the magic bullet explanation More inequality NY CT LA MA FL AL Less inequality ID IA NH WY UT TX is sort of in the middle There is a reasonable relationship between economic development and decreasing income inequality Poor states have more income inequality than richer states do POSTSCRIPT Because BOTH of these exercises on the PowerPoint slide use the Census Bureau s definition of income pre tax post transfer money income which excludes capital gains and in kind g s BOTH of them UNDERESTIMATE Degree of income inequality The standard of living measured by median household income of the different income classes o There are many sources of income that this statistic doesn t count things like food stamps capital gains insurance premiums 401k s etc Both of the above points mean that we are living better than we think we are but we are also living more unequally Now a bit about everyone s favorite subject TAXES Tax level v Tax burden Dollar amount being paid in taxes v Percentage of income that your taxes comprise Who bears the state local tax burden SEE PP SLIDE for lots of numbers and charts and such No matter how you look at it state and local taxes are regressive the taxes affect those in lower income brackets more because the taxes are a larger percentage of their income than they are of those in the higher income brackets Some conclusions Texas tax system is regressive It is more regressive than those of most other states Between 2002 and 2007 TX taxes became MORE regressive both compared to itself historically and compared to other states REMINDER 75 of TX state government revenue from sales taxes Tax burden in Texas is fairly low However Texas tax system is more regressive than most other states systems CAUTIONS None of this takes into account FEDERAL taxes e g personal income payroll etc Substantially progressive overall Does NOT include estimates of who benefits from government EXPENDITURES This is really complicated Reminder Tax fairness tax burden by income class You CANNOT classify degree of recessive system from bar graphs on page 477 MT and TX are similarly ranked in their overall AVERAGE tax burden BUT people within TX compared to MT pay significantly different percentages of their income in state and local taxes depending on their income class MT s tax system is LESS regressive than Texas We know this relative ranking by examining the right side bar graph on tax burden on page 477 MT 38th lowest in average tax burden as of 2007 fairly low as percentage of income TX 43rd lowest in average tax burden as of 2007 fairly low as percentage of income