Brownback’s Tax Plan Illogical

It’s time to acknowledge an ugly fact: poor people use their money differently than rich people. Even if they are able, the poor don’t usually save their money. They spend it on luxuries they really don’t need or can’t afford.

To an extent, this is understandable. When life is hard, the natural inclination is to take pleasure where you can get it. Thus, buying little things for yourself or blowing extra cash on lottery tickets to pursue the fantasy of escaping your financial situation makes a certain kind of sense.

By way of contrast, the rich didn’t get that way by spending their money. They saved it and invested it wisely. Thus, they have plenty and spend some of it on pleasure and hold onto the rest.

A lifetime of these sorts of fiscal decisions are not unlearned easily or quickly, and dark financial times encourage the most conservative financial practices, not the most aggressive ones.

Why does this matter? Because to solve an economic crisis, you have to take people’s financial habits into account. In the U.S., consumer spending accounts for more than 60% of the gross domestic product. Thus, a healthy economy depends on people spending their income.

Here in Kansas, Governor Sam Brownback has proposed overhauling the tax code. If the governor’s plan is adopted, the poorest Kansans would see their taxes rise 5000%. That’s not a typo. All those zeros belong in that figure. Middle-income families would also see a significant rise in their tax burden, while the wealthiest Kansans — those earning $1M per year or more — would benefit from a $17,000 tax cut.

These cuts and raises will be accomplished by eliminating a lot of tax credits, many of which benefit the poor, such as the Earned Income Tax Credit (ironically, a highly touted tax reform created by the Reagan administration). The Brownback administration claims these losses will be offset by investing more dollars in programs that benefit the poor, but they have so far been vague on what these programs are or how much money will be allocated to them.

Meanwhile, the governor contends the tax cuts on the wealthy are needed to stimulate the economy. After all, it is the rich who own companies and can thus afford to hire more people.

But let’s go back to that ugly fact; poor people and rich people use money differently. Poor people spend just about everything they have. Rich people save most of theirs.

Therefore, if the purpose of overhauling the Kansas tax code is to stimulate the economy, raising taxes on the poor and cutting them for the rich is not only the wonrg way to do it, it’s absolutely backwards. The governor’s plan takes money out of the hands of the people who spend it and puts it in the wallets of those who don’t. And, since consumer spending is the engine of the modern American economy, that approach will slow the recovery instead of speeding it up.

Forget any moral/ethical implications of where the tax burden is being laid. The Brownback plan is just illogical from an economic point of view.

Now, it is true that the rich invest their funds, and investments are another key component of a healthy economy. Giving the wealthy more money to invest does offer some economic stimulus. But the companies they invest in won’t be worth much if they can’t sell their goods, and they layoff their employees, creating more drag on the state’s financial status.

From a logic standpoint, it makes sense to cut corporate taxes. In theory, companies could hire more workers and pay existing employees more if they had a lower tax liability. Of course, they’d actually have to follow through on that, but that type of policy could actually stimulate the economy.

Nationwide, the GOP is advocating for reduced taxes on the wealthiest Americans to stimulate the economy. Simple logic defies this idea as good policy. For better or worse, we’ve transformed our economy into one that runs on consumerism. To get things going again, we’ve got to put money in the hands of the spenders.

That isn’t accomplished by raising their taxes.

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8 thoughts on “Brownback’s Tax Plan Illogical

  1. More than cutting corporate taxes, they should be eliminated completely. The economy is no longer local it is global and the solution needs to be global. Corporate taxes make american companies uncompetitive in the global marketplace. If these companies become more competitive through the reduction of product pricing they will begin to rehire the workforce.

  2. Agreed, the Kansas Income Tax makes up about 20% of the State General Fund each year. Eliminating it means a combination of cuts and increases in other forms of revenue like sales and property taxes. Cuts will likely shift the burden for programming to local government meaning more local sales and property taxes. Brownback’s plan already makes permanent a statewide 1% sales tax that was due to expire next year. Taxing spending and not income, promotes saving, not spending.

  3. “They spend it on luxuries they really don’t need or can’t afford.”

    I think that’s a rather offensive generalization — when I was officially impoverished, I paid my rent, my bills, and used what money was left over to buy food. I couldn’t even afford a car. Luxuries were few and far between. Sometimes even the food items were few and far between…I had to pawn or sell belongings to afford bread, milk and peanut butter.

    Most people I knew that were in my boat did the same thing…no luxuries. And by the time the necessities were paid for, there was no money left for savings. It was a hand-to-mouth, very grinding, very pleasureless existence.

    I do know there are people who blow their money as soon as they get it on alcohol, cigs, electronic gadgets, etc., but that seems to cut across socio-economic boundaries. To paint a picture where the poor across the board are foolhardy/self-indulgent and the rich are wise/virtuous is just ridiculous and offensive.

    • Hi, Jill!

      I think you’re reading something into the comment that wasn’t there. I wasn’t attempting to besmirch the poor as being foolhardy and responsible for their own poverty. Many, many people are poor through no fault of their own.

      However, the reason consumer spending drives our economy is we’ve been taught to buy everything we want or need. We are not a culture of saving, by and large. We revere acquisition.

      The very poorest are trapped and have to spend all their income on needs. The rest of us have means to save, if only a little. The vast majority of us don’t save in any meaningful way.

      And it is hard to resist buying a little pleasure for oneself, especially when life if so hard. I am not suggesting spending instead of saving makes one a bad person. I am only noting that the spending-vs.-saving habits of lower income people are different from upper income people.

      And if you are going to write a tax plan whose purpose is to stimulate an economy driven by consumerism, it has to put money in the hands of the people who do the most spending. There are all kinds of moral/ethical issues to be raised when considering income/resource disparity in American culture, but the thrust of this blog entry was not to raise or debate any of those. I was only suggesting the governor’s plan will fail to accomplish its stated purpose based on the ugly truth of how people spend versus save.

      You can draw your own conclusions as to whether Governor Brownback is simply ignorant of basic economic facts or if he has other motivations for raising taxes on the poor and cutting them for the rich. 😉

      As always, thanks for reading and for the comment!

  4. I disagree with the ideas that poor people do not save because they choose not to and that the rich started poor and became rich because they are better at saving.

    Poor people spend most or all of their income because they have to. Middle class people have some excess income and they tend to save – primarily for retirement, for future large ticket purchases, or for college for their child(ren). The rich save quite simply because they can – they can have more than one large home, vacations every year, luxury vehicles and still have money left over to save and invest.

    So how did they become rich if it wasn’t through a frugal nature? Studies show that the vast majority of the rich are rich because they inherited it, they have a high income due to their profession, or they are successful entrepeneurs (self-employed). Once a person or family reaches a threshold of income where they can save and invest large amounts annually, the returns compound and their wealth grows even if their income remains stagnant or even declines.

    Why should a family making $40,000/year invest their discretionary $4000 a year (10%) for a gain of $200/year at 5% gain? They are more likely to spend most of that money on “fun” because that will make them happier. If they invested it for 10 years, they would have about $50,000 saved. If not, they would have saved $0 and spent $400,000.
    A family making $250,000 can invest $50,000/year (20%) and still spend 5 times as much as the poor family. At the same 5% they will have saved $628,000 across 10 years while spending two million dollars. That is how they become rich – pure income disparity.

    All that being said, your idea that it is better to increase the income of poorer people because they will spend their income is correct. The economy needs additional demand – there is an excess of business capital (supply) in the world so additional money added to that side will have negligible returns. Better to boost demand and nobody is going to spend faster than the poor – because they have more unmet needs than the middle class or rich.

    • Joe,

      I don’t disagree that the poor spend most to all of their income because they have to. I also don’t disagree that income disparity is a major contributing factor to being rich versus being poor.

      However, I maintain that the poor and the rich use their disposable income differently and that saving versus spending is learned behavior that makes a difference.

      My point, which you summarize in your last paragraph, is that the Brownback tax plan shifts the tax burden from rich to poor and, by so doing, blunts the stated purpose of overhauling the tax code: stimulating the economy. The governor’s plan, which is in line with national GOP fiscal philosophy, raises taxes on the spenders instead of the savers, which will not create an economic stmulus.

      Your points are all well taken, and, as with everything on the economy, the situation is more complex than I make it out to be in a 500-word blog. That said, the basic principle of the tax overhaul proposal being illogical is sound, in my opinion.

      Thanks for reading and the comment!

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