Taxing the Poor: Doing Damage to the Truly Disadvantaged
Katherine Newman and Rourke O'Brien's new book, Taxing the Poor, takes an in depth look at the way state and local tax structures impact the poor. They provide in-depth analysis of how systemic inequality in the American South has institutionalized certain regressive tax policies—like high sales taxes and low property taxes—that disproportionately disadvantage the poor.
On March 30th, Newman and Rourke delivered a compelling presentation based their research at the New America Foundation. Newman skillfully illustrated the evolution of American tax policy, and the story of how it developed in the American South is especially remarkable: prior to the Civil War, the tax code was designed to treat property owners most favorably. During Reconstruction, however, property taxes were increased to address the need to serve a larger population—white and black—with public services paid for through tax revenue. After Reconstruction, when the federal government moved its forces out of the South, the conservative legislators who regained power took major steps to institutionalize limitations on blacks' rights through systemic barriers like Jim Crow. Another tactic they employed still defines southern states' tax codes today: provisions in state constitutions that make it nearly impossible for states to increase property taxes.
Those constitutional limitations forced southern states to adopt regressive tax structures For example, most southern states require a supermajority of legislators to support property tax increases, but only a simple majority to increase sales taxes. Other states require every property tax increase proposal to be approved through voter referendum. Federal programs that require state matches in revenue require states to raise funds and sales taxes are often the only feasible way to do so. Newman and O'Brien mapped changes over time in certain features of tax policy and found that the total tax liability of the poor has increased in the south as it decreased in the northeast.
Why does this all matter? The crux of Newman and O'Brien's hypothesis relies on the assumption that the more low-income households pay in taxes, the less money they have to spend on necessities such as like healthy foods, housing, health care and medications, education, and so on. Newman and O'Brien used fixed effects regression models to control for broad, macroeconomic conditions and found strong causal relationships between the tax structures affecting poor families and the incidence of poverty related outcomes like mortality, crime, violent crime, high school completion, births to unwed mothers, and obesity.
Panelist Ezra Klein, a Washington Post journalist, expressed reservations about the causal nature of the relationship between those social outcomes and taxation. How, he asked, can we rule out other causal factors that might be impacting those outcomes? The authors argued that in the course of their research, they came across several studies that accidentally observed the effects of injections of income into households where no other factors had changed—like a study on a Native American population in the Great Smoky Mountains, whose social outcomes improved dramatically over time as a result of one-time income injections from lottery rebates distributed to every family living on a reservation. In this situation, all other factors had remained constant—there was no broad based political change, cultural factors had remained constant, and other hard-to-capture macro conditions had not changed. It was clear in the case of this natural experiment that the improvements in social outcomes had been the direct result of increased disposable income. Newman and O'Brien argued that their research demonstrated the same principles in action: as southern states adopted more regressive tax structures, poor people's disposable income diminished, and a variety of measures of social wellbeing also decreased.
What now? The authors noted that this is not just a southern problem—the fiscal consequences at the federal level are also severe. Newman and O'Brien suggest that the Great Depression and New Deal offer a model for resolving some of the inequity in safety net funding and services that depend entirely upon a state's capacity to raise tax revenue. The New Deal permanently expanded the role of federal government in an unprecedented way, and the authors argue for similarly federalizing the safety net to eliminate some of the burden on states and regional differences in safety net provision. Panelist Michael Lind, of the New America Foundation, argued that Value Added Taxes might be another potential means of mitigating the issues uncovered in Taxing the Poor. A Value Added Tax is a type of consumption tax assessed on a good at each stage of production and distribution, and has been found to be highly efficient and self-enforcing. Newman agreed that Value Added Taxes might work, but only with strict limits in place to counteract their intrinsically regressive nature. Because of concerns that such a tax would never be introduced to the political arena with those necessary safeguards, she wouldn't submit it as a potential solution.
Overall, Newman and O'Brien presented an incredibly insightful look at the ways that institutional barriers placed into southern states' tax codes during an era when Jim Crow ruled the American South have lived on to rule the lives and financial futures of poor families in that region. Panelists Klein and Lind brought fresh inquiry to the discussion, and provoked consideration of possible solutions to the lack of parity in the American tax system. It is painfully clear that the tax system is in dire need of reform, although more work needs to be done to determine exactly what changes can resolve issues like the ones presented by Newman and O'Brien. Any ideas?