During his campaign for governor of the State of Minnesota, former professional wrestler Jesse "The Body" Ventura, promised to return to the taxpayers of Minnesota the budget surpluses that had been accumulating in the state. Upon assuming office, Ventura revealed that the budget surplus had been spent. Governor Ventura has vowed that future surpluses will be returned to the taxpayers and not be consumed by increases in government spending. There are three competing proposals that might be considered for dealing with the budget surpluses. Prior to discussing the issues surrounding both Governor Ventura's plan and the other's, some background information on income distribution, the nature of taxation, and related issues is important.
- Describe Governor Jesse Ventura's attempt to return Minnesota's budget surplus to its citizens.
- Describe and analyze the effects of progressive, proportional, and regressive taxes on the distribution of income.
- Identify and apply criteria for judging what constitutes a fair tax.
- Evaluate arguments for alternative means of using the surplus.
- Recognize the nature of philosophical differences among politicians and the difficulty of achieving a consensus on public policy.
During his campaign for governor of the State of Minnesota, former professional wrestler Jesse "The Body" Ventura (later to become Jesse "The Mind" Ventura) promised to return to the taxpayers of Minnesota the budget surpluses that had been accumulating in the state.
Upon assuming office, Jesse "The Gov" Ventura (another adopted name) revealed that the budget surplus (taxes being greater than government spending) had been spent. Economic forecasters, however, predict that other surpluses will occur in the near future.
The forecasters base their predictions of huge budget surpluses on a booming state economy and a tax system that generates large tax revenues. They assume, of course, that spending will not increase and wipe out the new surpluses. Governor Ventura has vowed that he will not allow this to happen and that new surpluses will be returned to the taxpayers. Not all legislators agree with governor's proposal; and even some that agree differ with the specifics of the proposal.
The governor's proposal is one of three proposals that might be considered for dealing with the budget surpluses. The first, and one that will not be dealt with directly in this "Economics Minute," concerns itself with unsolved problems in Minnesota. The argument is that surpluses present a unique opportunity to deal with problems of poverty, low agricultural prices, education, road construction, and other unmet needs in the state. Consequently, surpluses should not be returned, but used to meet these needs. At the start of the debate, this option was not considered in the Minnesota legislature. Recently, it has appeared in the form of tax reductions and rebates to particular groups.
The other proposals call for returning excess tax revenues to the public. One of these is Governor Ventura's proposal to give the taxpayers back their money. The other is to return the money to those most "needing" the money, without regard for the amount they paid in taxes. Both of these proposals raise issues concerning the distribution of income and the nature of taxation. Both are concerned with issues of "fairness." Prior to discussing the issues surrounding Governor Ventura's tax rebate plan, some background information on income distribution, the nature of taxation, and related issues is important.
Share of Aggregate Income Received by Each Fifth and Top 5 Percent of Households: This U.S. Census Bureau spreadsheet provides aggregate income information dispersed amongst all U.S. households.
Remarks by Chairman Alan Greenspan: This site provides the speech given by Alan Greenspan at a symposium sponsored by the Federal Reserve Bank of Kansas City, August 28, 1998.
The Tax Foundation: The Tax Foundation's web site provides information about who pays income taxes.
Understanding Taxes: This site provides information and lessons on taxes.
Minneapolis Star Tribune: This site provides articles related to Minnesota news releases.
For reasons such as differences in education, age, skills, workers' preferences, heredity, marital status, and luck, incomes among individuals and households differ. The Bureau of the Census periodically publishes data on income distribution. The Share of Aggregate Income Received by Each Fifth and Top 5 Percent of Households is shown in this PDF of Table H-2.
If all households were to receive exactly the same income, each 20 percent (one fifth or quintile) of households would receive 20 percent of the national income. This clearly is not the case. For example, in 1997 the proportion of income received by the lowest 20 percent of households was 3.6 percent; the proportion received by the top 20 percent of households was 49.4 percent. The richest 5 percent of households received 21.7 percent of the national income.
For teachers interested in exploring issues concerning income inequality, such as the causes of changes in the distribution of income, consequences of these changes, and economic efficiency and income equality, see the following website from the Federal Reserve Bank. It contains the Remarks Made by Chairman Alan Greenspan at their 1998 conference on Income Inequality: Issues and Policy Options.
Based on what they have learned about income inequality from this web site, students should answer the following questions.
Why is the distribution of income in the U.S. becoming more unequal? [Returns to education and occupation have changed. Computer skills, work-place training, and academic achievement have been important causal factors. The increase share of two income families, especially the tendency for high-income earners to marry high-income earners, contribute to this change.]
What are the consequences of these changes? [Some argue that greater inequality brings higher levels of entrepreneurial activity, work effort, and capital accumulation. All lead to higher rates of economic growth. Others argue that greater income inequality brings forth political activity leading to a redistribution of income, greater rent seeking, and more political decision making in society.]
- Is the U.S. experience different from that of other industrial countries? [The pattern is mixed with the United Kingdom and New Zealand also showing large increases in income inequality and Canada, Australia, Japan, and Sweden showing moderate increases in income inequality, France and Italy had a narrowing of the income gap in the 1980's; however, inequality expanded in both countries in the 1990's.]
It is interesting to note what it means to be rich in the United States, and who pays the taxes. Two web sites provide this information. Table H-1 on the Bureau of the Census web site shows the upper limit of income for each 20 percent of households. Note that you do not need an extremely high income to be in the top 20 percent of income earners. A 1997 income of just over $71,500 puts a household in the top 20 percent of all earners, while an income of $126,500 puts a household in the top 5 percent of all income earners.
The Tax Foundation 's web site provides information about who pays income taxes.
The Tax Foundation reports that Internal Revenue Service (IRS) data show that in 1985 the top one percent of income tax-filers earned 10 percent of the total reported income and paid 21.8 percent of the federal income tax. They had a tax rate of 29.9 percent. In 1995, the same group earned 14.6 percent of the total reported income, paid 30.2 percent of the federal income tax, and had a tax rate of 28.5 percent. The lowest 50 percent of income earners in 1985 earned 17.3 percent of the reported income, paid 7.2 percent of the tax, and had a tax rate of 5.7 percent; the 1995 figures for the lowest 50 percent were 14.5 percent, 4.6 percent, and 4.4 percent, respectively. Clearly, the wealthier pay more income taxes and face a higher tax rate.
Is the income tax a fair tax? What is a fair tax? A tax is classified as progressive, proportional, or regressive depending upon the taxpayer's income level and the taxpayer's tax rate. The federal income tax is a progressive tax; i.e., the tax rate increases as incomes increase. A proportional tax is one in which all income groups face the same tax rate. A regressive tax is one in which the tax rate declines as incomes increase. The IRS has a terrific web site on tax fairness, along with exercises about the nature of taxation. Students, access Understanding Taxes , read the discussion of the nature of taxation, and complete the multiple choice tests at the end of the lesson.
Scroll to the banner at the bottom of this site. Start learning about taxes at Outer Mongolia. Proceed through Dead Man's Gulch, and Hamalot City. Complete the Detective's Challenge, and end the lesson at Solving the Case. By now, students should have a good understanding of the nature of taxes. Another excellent source for learning about taxes and a discussion of the fairness issue is: John Morton, Advanced Placement Economics: Student Activities . "Activity 72: What is a Fair Tax?" Council for Economic Education, 1996, p. 257.
What does all of this have to do with Jesse Ventura's plan to give tax revenues back to the citizens of Minnesota? The debates raging over the plan revolve around fairness. Initially it was assumed that the budget surplus in Minnesota resulted from income tax collections being greater than projected. But increased sales tax collections also added to the surplus, as did a settlement with the tobacco industry. Philosophical differences among the liberal Democratic-Farm-Labor (DFL) party, the conservative Independent Republican (IR) party, and a governor belonging to neither party also have affected the debate.
Newspaper articles relating to the governor's tax rebate plan can be found on the Minneapolis Star Tribune 's web site.
Scroll to the SEARCH segment at the bottom of the home page and search the archives for "rebate." Of particular interest are five articles dealing with Governor Ventura's tax rebate plan.
March 5, 1999: Ventura's revised rebate plan
If progressive income taxes are ones in which the tax rate increases as income increases, then progressive tax rebates are those in which the rebate rate increases as income decreases. The March 5 article contains data on income levels and rebates under the governor's initial and revised rebate programs. Is the initial rebate progressive, proportional, or regressive? Provide evidence defending your position. (Hint: compute the rebate rate at the mid-point of each income category.) Is the revised rebate more progressive or less progressive than the initial rebate? Provide evidence defending your position. The revised rebate plan is more proportional because the dollar amounts rebated to lower income taxpayers (those with taxable income less than $40,000) increased while the dollar amounts rebated to higher income taxpayers remained the same. However, the total amount rebated to higher income taxpayers increased significantly more than to lower income taxpayers because more of the increased number of taxpayers that became eligible under the new plan and the wide disparity of income between the lower and higher income groups.
April 12, 1999: Editorial: Tax cuts: Working poor need permanent relief also
[NOTE: This editorial places in context the philosophical debate that is occurring in the state legislature. It emphasizes the progressive nature of Minnesota's income tax and the regressive nature of its sales tax. It notes the fact that while the poor pay no income tax, they do pay the sales tax. Finally, the Working Family Tax Credit is essentially a negative income tax. The editorial advocates an expansion of this program as part of the Minnesota tax cut, tax rebate debate. The editorial's importance is that it provides valuable background information.]
April 14,1999: House unites, overwhelmingly passes bill with tax cuts, rebate
April 15, 1999: New house tax-cut plan
From the April 14 article, students should recognize that the rebate debate has expanded to include tax cuts and reforms and that the two political parties differ with respect to who should receive the greatest benefit. The second article contains data relating to this issue. Is the sales tax rebate plan progressive or regressive? Have students compute the rebate as a percent of taxable income in various income groups (use the midpoint of the taxable income range). The sales tax rebate plan is progressive: the lowest income group receives on average a rebate of 3 percent of taxable income, the highest income group receives on average a rebate of .9 percent of taxable income.
Do married couples and heads of households benefit more than single individuals? No major difference. The percents rebated to singles is approximately identical to that for married taxpayers.
Have students determine whether the proposed reduction in income tax rates will benefit high, middle, or low income groups. Do the benefits of the proposed tax reductions affect married couples, single individuals, heads of households differently? The percent decreases in income tax rates are presented in this article. They are heavily weighted toward benefiting middle income groups while the highest and lowest income groups receive smaller reductions in their income tax rate. For example, married couples with a taxable income of $25,000 will have their income tax rate decline by 8.3 percent. Married couples with a taxable income of $500,000 will receive a 7.7 percent reduction in their tax rates. Married couples with taxable incomes of $50,000 and $100,000 will receive 11.3 percent and 14.1 percent decreases in tax rates, respectively.
April 28, 1999: Senate Democrats release tax plan
The IR party controls The Minnesota House of Representatives; the DFL party controls the Senate.
- Which political party has argued for more progressive tax and rebate programs? What evidence can you provide supporting your position? [The DFL party. They will decrease tax rates for the lowest and middle tax brackets and widen the brackets for these two groups of taxpayers. No relief is provided for higher income earners, although the DFL maintain it will give an income tax cut to every tax payer. There is no indication that the highest income groups of taxpayers get any tax rate reduction.]