Our Fair Share

January 19, 2020

by Steve Stofka

The holidays are over. This week our city picked up Christmas trees set by the curb. The sun set after 5 PM, the first time since the time change in the first week of November. The sun is returning to the Northern Hemisphere. Despite the variations in the amount of sunshine throughout the year, we all get the same amount of sunshine over the course of a year. Not so with our tax bills.

Estimated taxes were due this week. The self-employed, retired people and others who earn income with no taxes withheld must pay estimated taxes every quarter. This past year the IRS audited less than ½% of returns, a lifetime low. That sounds great because none of us wants to endure an audit. The very word strikes fear in the hearts of many taxpayers, but most of us have a small chance of being audited regardless. We don’t pay enough in taxes for the IRS to do much more than a paper audit, a request for supporting documentation.

The IRS is not a popular agency and became less popular when the agency discriminated against Tea Party and progressive groups during the 2010 election (Farhi, 2017). House Republicans repeatedly cut the agency’s budget, but that retribution has had serious budget consequences. The National Bureau of Economic Research estimated that the government could raise an additional $1 trillion in tax revenue – that’s about 20% of total revenue – with stricter enforcement of existing law (Heeb, 2019). In 2019, the Federal deficit, or budget shortfall, was $1.1 trillion (BPC, 2020). Stricter enforcement would have effectively erased that deficit.

The race for the Democratic Party’s nomination for President promises to center around several themes. The first is the horse race against President Trump, whose incumbency gives him a distinct advantage when running for re-election. The press often seems more concerned with the contest than the underlying issues of a campaign. Taxation is a recurring discussion in each election. More or less? What is a fair share? More, more, more social programs, taxation and regulation, or less, less, less social programs and taxation and more defense spending and power for large corporations?

What is fair? As children we have a keen sense of fairness – our “monkey brain.” We are social creatures who feel scorned at what we perceive as unequal treatment. Equal and fair are not the same thing. A fair share is not the same as an equal share. If I can afford to buy $50,000 worth of goods in a year, why should I have to pay more sales tax than someone who only buys $30,000? We make equal use of a city’s public services. Why should we be treated unequally? Well, we have become accustomed to paying an equal percentage of what we buy in the stores as a sales tax.

Why don’t we follow that same approach for income taxes? States like Colorado do charge the same rate of state income tax regardless of income. Is that fair? Some cities like Denver charge a head tax, a flat fee income tax for anyone who works within the district. Should we follow the same approach throughout the nation? Warren Buffett and I would pay the same amount in income taxes. Is that fair?

Should prices for public utilities be adjusted based on income? If my neighbor makes twice what I do, should they pay twice for the same amount of water? Currently, we are charged the same rate. The income and property taxes of those over 65 are often given a discount. In some districts, a person who reaches 65 finds that they can lower their property tax by 50%. Is that fair?

Elizabeth Warren, a candidate for the Democratic Party’s presidential nomination, proposed that all student debt be eliminated. Should students who went to more expensive private schools be rewarded more than students who borrowed less because they went to a state college? Should students who borrowed less because they worked part time while going to school be penalized? Is that fair?

In Matthew 20:1–16, Jesus tells a parable of the workers in the vineyard. Workers who came to work in the morning agreed to an amount of money for a day’s work. Workers who came to work later in the day were also promised the same amount of money for working the rest of the day. Jesus was making a point that each person will be rewarded equally in the kingdom of heaven no matter when in their lifetime they come to God’s love. No matter what your religious orientation, is that fair?

Each election we get to vote on what’s fair. Some people don’t vote because they say that their opinion doesn’t matter. It certainly doesn’t if they don’t vote so they have proved their case. If I vote and my neighbor doesn’t, my vote effectively counts double. In a few weeks, the Democratic primaries will start. The first two are in Iowa and New Hampshire, states with small populations and an even smaller number of people who participate in the caucus system. The votes of a few thousand people can make or break a candidate’s campaign. In a democratic nation of 320 million people, is that fair?



Bipartisan Policy Center (BPC). (2020, January 9). Deficit Tracker. [Web page]. Retrieved from https://bipartisanpolicy.org/report/deficit-tracker/

Farhi, P. (2017, October 5). Four years later, the IRS tea party scandal looks very different. It may not even be a scandal. Washington Post. [Web page]. https://www.washingtonpost.com/lifestyle/style/four-years-later-the-irs-tea-party-scandal-looks-very-different-it-may-not-even-be-a-scandal/2017/10/05/4e90c7ec-a9f7-11e7-850e-2bdd1236be5d_story.html

Heeb, G. (2019, November 19). The US could raise $1 trillion more in taxes through stricter IRS enforcement, according to a new study. Markets Insider. [Web page]. Retrieved from https://markets.businessinsider.com/news/stocks/us-could-raise-1-trillion-more-tighter-irs-enforcement-study-2019-11-1028700145

Photo by Maria Molinero on Unsplash

Minority Control

October 13, 2019

by Steve Stofka

On September 15, 2008 the trading firm Lehman Brothers declared bankruptcy. A small number of outstanding shares traded on the stock market that day. The SP500 lost almost 5% of its value. New Yorkers gathered in Times Square to watch the ticker tape display. A small number of people controlled the direction of the market and constructed a reality that they sold to the rest of us.

In politics, a few key people control the direction and fate of legislation. In the Senate, the Majority Leader decides whether to bring legislation up for a vote. Even if a bill makes it out of a Senate committee, the Majority Leader can stop it from reaching the full Senate.  Unlike the Majority Leader in the House, his position is practically impregnable. Legislation vetoed by the President can be overridden by Congress. There is no recourse to a veto by the Senate Majority Leader.

The current holder of the position is Sen. Mitch McConnell from Kentucky. He is up again for re-election next year. When Democrats held the Senate, Sen. Harry Reid ruled with a similar disregard for others in his own party as well as the minority.

In 2014, 800,000 voters chose McConnell. In effect, less than 1% of the country’s voters control the course of legislation in the U.S. Did the founders of this country intend that one person should control Congress? James Madison, the chief crafter of the Constitution, worried that a majority would overwhelm and take advantage of a minority (Feldman, 2017). Accordingly, the Constitution is structured so that a minority controls power. However, one person is a very small minority. What would the founders think of the current arrangement in Congress? If Americans wanted a king with veto-proof power, America would still be a colony of Britain.

Our method of electing a President is a 230-year-old compromise between republicanism and democracy. An electoral college composed of men not subject to the passions of the crowd would elect the leader of the country. It was an Enlightenment model of dispassionate rationality.

Even if they had Fox News and CNN on Election night at the time of the founding, all the thirteen states were in the same Eastern time zone. At a recent symposium on our election, former RNC chair Michael Steele pointed out the west coast states are mostly taken out of the Presidential election (C-Span.org, 2019). By 5 P.M. Pacific time, they are discouraged from voting because much of the action has already been called. The founders did not design a system for four time zones.

We have 50 states but the election for President takes place in eight to twelve battleground states. Most polling is done at the national level, not in the battleground states. Many polls do not accurately survey the sentiments of the critical minority of voters in the states that will decide the election.

A minority of people own and control much of the wealth of the world. They now pay a lower percentage of their income than the bottom 50%. That includes federal, state and local taxes. In the Triumph of Injustice, due to be released next week, authors Saez and Zucman (2019) tally up the tax bills for the rich and ultra-rich. The book is #1 bestseller at Amazon and it hasn’t been published yet.

In 1980, the top 1% paid 47% of their income in total taxes at all levels. Now they are down to 23% and below the rate paid by the bottom half of incomes. Two sets of rules – one set for the peasants and one for the castle royalty. The Constitution prohibits the granting of titles so the rich granted themselves the titles. This book is sure to get a lot of media attention. Like we need more controversy.


Feldman, N. (2017). Three Lives of James Madison: genius, partisan, president. [Print]. New York: Random House.

C-Span.org. (2019, October 7). National Popular Vote Election, Part 2. [Video]. Retrieved from https://www.c-span.org/video/?464997-2/national-popular-vote-election-part-2

Saez, E. & Zucman, G. (2019) Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay. [Print]. Available for pre-order at https://www.amazon.com/Triumph-Injustice-Rich-Dodge-Taxes/dp/1324002727

Effective tax rates: If you make $100,000 and you pay $25,000 in federal, social security, state, sales and property tax, then your total effective tax rate is 25%.

Photo: WyrdLight.com [CC BY-SA 3.0 (https://creativecommons.org/licenses/by-sa/3.0)%5D Page URL: https://commons.wikimedia.org/wiki/File:Bodiam-castle-10My8-1197.jpg

Unauthorized Tax Revenue

September 1, 2019

by Steve Stofka

This might be a sensitive subject for some – the amount of taxes that unauthorized immigrants pay. Homeland Security uses the term “unauthorized” (Note #1). Some people prefer the adjective “undocumented” but many immigrants have adequate documentation. Some prefer to use the adjective “illegal” but the only illegal act is being in the country without proper authorization. If someone is speeding but is obeying all other traffic laws, are they an illegal driver? In most cases, they are a legal driver committing an illegal act.

 Those who defend immigrants point out that they pay taxes, so they are contributing to our society. I was curious as to how much because I have not heard an immigrant advocate offer any data. I told my trusty hunting dog, Google, to go find them facts and bring them on back to me.

First the big picture. The total Federal, State and local taxes paid in 2016 was $5,300 billion, or $5.3 trillion (Note #3). What was the share that unauthorized immigrants paid? The Institute on Taxation and Tax Policy recently estimated that they paid almost $12 billion dollars in state and local taxes. The IRS says they paid $9 billion in payroll taxes (FICA) and almost $1 billion in income taxes (Note #4). The total is $22 billion.

How do they report? They get Federal ID numbers called ITINs. To encourage compliance with our tax laws, the IRS says they do not share this information with the immigration and naturalization folks in Homeland Security. I was amazed that unauthorized immigrants would file tax returns. They are not eligible for social security benefits or earned income credits available to low income families. They are not eligible for TANF – what most people call welfare. The only benefits they are entitled to are those directed toward children – free public education and school meals, child medical care and SNAP (food stamps).

So why file? If you follow that IRS link, you’ll find that an unauthorized immigrant who shows “good moral behavior” may have their deportation proceedings waived or be eligible to apply for citizenship after ten years of residence. What is one sign of good moral behavior? Paying taxes. What is a sign of bad moral behavior and might get someone deported? Not paying taxes. Good incentive to pay taxes.

Homeland Security estimated 12 million unauthorized immigrants in 2015. In the aftermath of the financial crisis, unauthorized immigration grew by a small 70,000 per year (Note #5). In the 2000s, the influx was almost 500,000 per year, and that was a decline from the record 1.4 million apprehended at the southern border in 2000. In 2019, the number of border apprehensions will approach one million (Note #6).

Numbers like these cause Americans to disagree strongly about policy choices related to immigration. In the 1980s, in the late 1990s and again in the 2000s, the numbers were high and we argued. This time is no different. These numbers don’t include visa overstays which make up 40 – 50% of the unauthorized immigrant population (Note #7). Let’s guesstimate the population at 15 million, about 4.6% of the population. That 4.6% is paying less than 1/2% of total taxes.

We can go look at unauthorized immigrants and say that they are leveraging their taxes – paying a small amount of tax to receive proportionately more in benefit. But that is the case for all low-income people, unauthorized or not. Low-income people buy less stuff, so they pay less in sales tax. They live in lower-valued properties, so they pay less property tax. They make less money, so they pay less income tax. Those are the three primary sources of tax revenue in the U.S.

When President Trump said he wanted higher quality immigrants, he meant that he is not anti-immigrant. He is anti-poor-immigrant. Like Trump, some say we don’t need more poor people; we already have too many poor people.  Some people anticipate that their taxes will go up to provide benefits for the growing number of poor people, documented or not. Few want higher taxes to pay for services to people who just arrived in the country.

When my grandfather came to this country more than a 100 years ago, there was no income tax, no social security tax and property taxes were relatively low. The only benefit for immigrant families was public education. There were no school lunches, no food stamps, no medical care for children. Despite that, anti-immigrant sentiment was strong enough to pass a bill in 1924 that cut off legal immigration for all except northern Europeans. Our grandparents and great-grandparents were far less tolerant of immigrants than we are today.

Let’s keep some perspective. People who are concerned that they will have to pay higher taxes for benefits are not evil or uncaring. Low-income people who are worried about competition for their jobs in the construction industry are not moral slugs. Whatever your occupation, imagine that the number of people available to do that kind of work doubled in your community. How would you feel? The more the merrier? Probably not. Those workers will compete for your job and that competition will hamper any future salary increases you can expect.

We all need to admit that immigration presents complicated moral, political and economic choices. History has taught us that we don’t know how to solve this problem in a way that satisfies most of us. Each time we have to choose which side of the rope tug we are on. Each side hurls insults and curses at the other side. This is not the new normal. This is the old normal. How about if we try the new normal, sit down and hash out the difficult details of a compromise?



  1. Homeland Security uses “unauthorized” to refer to those in the country without proper authorization
  2. Tax Policy Center calculation of total taxes paid to governments at all levels  
  3. Estimate of taxes paid by unauthorized immigrants – PDF
  4. IRS data on payroll and income tax paid by unauthorized immigrants- PDF
  5. Estimate of unauthorized immigrants – PDF
  6. Apprehensions at the border – CBP
  7. Visa overstays – Potitifact

Tax Brawl

Taxation with representation ain’t so hot either – Gerald Barzan

August 26, 2018

by Steve Stofka

The debate over taxes focuses on the size of national programs, and the Federal taxes collected for those programs. In the past fifty years, state and local government (SLG) taxes have risen to equal the burden of Federal taxes. Despite this rise, SLGs must increase tax revenues to meet obligations and historic growth rates. Republicans control most states and will turn to property and sales tax for the additional revenue.

Fifty years ago, SLG tax receipts were half of all Federal tax receipts, including Social Security. For every tax dollar a worker sent to Washington, he sent fifty cents to his SLG. During the past decade, the SLG tax share has averaged ninety cents.


In the engine model I first introduced in July, Federal taxes were drained from the economic engine. Because SLGs do not have super powers to create money, their taxes stay within the engine and grease the gears. 72% of SLG taxes are under the category of mandatory business production – they are levied on goods and services received by the taxpayers. These include property, sales and business taxes and a plethora of licensing fees. A family who cannot pay their property taxes loses their home. Sales taxes are mandatory at the time of purchase. When SLG taxes are high, households must work more hours or cut expenses to meet the burden. Unlike Federal taxes, higher SLG taxes can force families to work more and increase GDP (Note#1).

For the past thirty years, SLG taxes have grown 6.6% each year, 1-1/2% above the 5.2% annual growth in spending. In the past ten years, tax receipts have grown at half that rate – 3.2%, barely above the 3.0% growth in spending. SLGs have not saved enough to meet the pension benefits and medical care promised the Boomer generation. SLGs will need to raise revenues, cut spending or both.

23% of total SLG tax receipts are taxes collected on personal income. Taxes on business income make up an additional 5%. Sixty years ago, those personal and business shares of the SLG tax pie were 7% and 3%.


Republicans oppose raising taxes, especially income taxes, and they control the legislatures in 32 states. In 26 of those states, they control the governorship as well (Note #2).  Democrats have total control of only six states, one of them California, where income and sales tax make up a whopping 50% of state revenues (Note #3). Many SLGs will cut spending and raise additional revenue through higher property and sales taxes and licensing fees. This lowering of the income tax share will move the mix of income and production taxes to the model of sixty years ago when production taxes were 87% of total SLG tax receipts.

In 2017, single family homeowners averaged $3300 in property taxes. Some states like Colorado have low property taxes averaging only $2000 (Note #4). Personal property taxes have averaged almost 7% annual growth during the past thirty years. Expect 8 – 10% annual growth in the next decade and a population shift to those states which can curb the growth of their taxes. Angry homeowners and taxpayers are sure to kick up a ruckus at City Councils and State Legislatures around the country.


  1. In 2007, Christina and David Romer analyzed the effect of tax changes on GDP. They found that a 1% exogenous tax increase resulted in a 2 – 3% reduction in real GDP. They classified tax changes implemented for long-term growth as exogenous. Here is a one page summary of the PDF.
  2. One of several sources on Republican dominance of state legislatures. The Hill.
  3. Income and sales tax make up 50% of California’s tax revenues (CA Research Bureau)
  4. Denver Post article on property taxes



NYT had an article on senior scams this week. Because those older than 50 own 70% of deposit balances, they are prime targets of fraud. This was novel: a retired IT pro who thought he was working from home as an employee gave his new “employer” his bank information so that his paycheck could be direct deposited. Common scams: Check fraud is still common, as are overpayments and other excuses to get you to give up your bank account information. Only you should be initiating such a transaction.

Vanguard’s projections of expected returns for various asset classes over the next ten years. Domestic stocks 3.9%. Bonds 3.3%



The Political Battle

October 16, 2016

State and local governments provide the infrastructure of our daily lives, from the streets we drive on to the legal and judicial institutions that maintain a sense of order within our communities, yet we pay far more of our paychecks to a distant capital in Washington.  Why?  To understand we must look at a two century long battle of  opposing ideas, two ideological forces fighting for power.

We can judge the pervasive impact of state and local government by the amount of taxes that they collect to provide that infrastructure.  I’ll count the primary taxes –  sales, corporate and peronal income and property tax.  In the past four quarters, state and local governments collected $1.2 trillion, about 6.5% of the nation’s GDP.

On the other hand, Washington has a much reduced impact in our lives and, we might hope, an accordingly smaller tax bite.  Unfortunately, that is not the case.  In the past four quarters, the Federal Government collected almost three times the state and local amount, close to $3.6 trillion. (Chart link).  For the past eighty years, the Federal Government has assumed an ever larger role as a national insurance company. In the past year, the Federal Government collected $1.2 trillion – the same amount as primary state and local government taxes – in pension and medical insurance receipts alone. (Graph link)

The two major political parties in this country have different ideological approaches.  Democrats prefer to have the bulk of tax collections come into a central authority like the Federal Government, where a number of central committees decide on the allocation of those funds.  Republicans favor a system where the majority of tax collections come into the states.  Decisions over the allocation of those tax funds should be more responsive to the voters in that state.
In the Democratic system representatives from each state in both the Congress and Senate must vie with each other for access to tax funds under an ever growing number of programs that the Federal Government oversees.  States are administrative and geographical branches of the Federal Government and have limited autonomy. In the House, this competition exists within a system of seniority so that junior members must compete for favors from senior members who control committee assignments and access to discretionary funds.

The Republican system recognizes state borders and autonomy to a greater degree that promotes competition among states for the hearts, minds and pocketbooks of businesses and individuals.  Within each state, elected members of both parties should compete with each other for tax funds.  Because each state must adhere to a balanced budget by law, spending has more constraints than the Democratic system.

The responsibilities and powers of the Federal Government are more constrained under the Republican system.  When Article 1, Section 8 of the Constitution gives Congress the power to provide for the “general Welfare of the United States,” Republican politicians and conservative justices read the clause literally, that this provision applies to the states, not the people in the states.

Democratic politicians and liberal justices interpret the clause as meaning that the Federal Government has a direct responsibility for the welfare of each citizen within each state and gives the Federal government greater oversight of state and local communities, which are more easily influenced by local economic interests and disciminations. These two competing interpretations were hotly debated at the drafting and ratification of the Constitution so it is likely that the argument may never be resolved as long as this country exists.

Again let’s come back to that pot of money that makes our cities and counties go.  In the current system we take that same amount and give it to the Federal Government, which spends most of it on older people.  This massive transfer of resources from younger generations to an older generation is likely to permanently hobble our economic growth. Under a broader scope of social insurance programs, the people in European nations have reluctantly accepted the tradeoff of economic growth for increased sense of security in their personal lives – more health, job, educational and child rearing protections.  French people have become accustomed to a 10 – 12% unemployment rate.  In the U.S. such a high rate provokes political upheaval.

Do Americans want to follow the European model?  Half of the citizens of this country say yes, half say no.  What we do know from the European and Japanese models is that, as social insurance programs get larger, the transfer of money from the productive element of society to the less productive segment of society hampers growth.  This in turn makes it more difficult to fund those  insurance programs. There is a tried and true maxim that applies here – what can’t last forever, won’t.

Older Americans should understand that there is no social contract other than the informal contract of the ballot box.  Each generation pays into “the system” and waits until it is their time to collect.  Each generation relies on earlier generations to honor the promise but, just in case, the older generations vote far more than younger generations because they want to insure that pension (Social Security) and health (Medicare) benefit laws are protected.

Insurance companies must keep assets in order to pay future claims.  The Federal Government is not an insurance company and keeps no assets to pay future benefits.  Instead, it collects taxes under the Social Security system and puts those funds in the general pot of money, leaving a little slip of paper in the Social Security fund that says “We owe you.”  Really, it is little more than this – an accounting entry. From that big pot of money, benefits are paid.  This is a cash based system called “Pay Go” or “Pay As You Go.”  The lack of an asset base for future benefits means that it is extremely difficult to convert the current system to another type.  Former President George Bush learned this harsh lesson ten years ago when his political talk of privatizing Social Security ran into the harsh realities of actually making the transition. Oops.  Bush dropped the idea.

This election season is another episode in a continuing series, a battle between the forces who want the Federal Government to take an ever greater role in our individual lives, and those who want to roll back national control in favor of state, local and private solutions.  The election will take place shortly before the debut of the next Star Wars movie.  Some Republican voters see the Democratic vision of the political system as the Empire of rigid Federal oversight and conformity, where everyone must come under the authority of a central command.  Some Democratic voters may see themselves as part of the Rebel Alliance, fighters for the vision of the Old Republic, a constitutional democracy of worlds that is similar to the European Union, and, like the EU, was bogged down in bureaucracy.

On November 8th, 130 million people will unsheath their political swords and continue the battle. (Presidential election stats http://www.presidency.ucsb.edu/data/turnout.php).  Starting December 15th, more than 80 million people will fire up their light sabres at the coming Start Wars movie. (Star Wars box office stats).  En garde!

State Employees

As I noted over a year ago, the coming state budget deficits were going to bring both spending cuts and new taxes.  Budget battles are inherently bloody.  As state budgets are being reviewed, the spotlight is being shone on the pay, health care and pension benefits of government employees in some states. 

Here is an article highlighting some of the costs in several cash strapped states.  Some government employees will have to accustom themselves to pay and benefits that are more like the average wages and benefits of the taxpayers.

Oil Calvary To the Rescue

Many states are struggling with large budget deficits.  It surprised me to learn that the oil industry pays for almost 90% of Alaska’s state general fund.  By state law, the state sets aside 25 – 50% of certain oil and mineral tax revenues into a reserve fund.  Over the past twenty years the state has borrowed almost $4B from the reserve fund to balance their budget, repaying the loan during the past three years as oil prices increased. The state’s 2009 Fall Forecast shows a balance of over $8B remaining in the reserve fund.

Further south, California is struggling with a $6B budget shortfall for this year and over $14B for 2010- 2011.  Because the state relies so heavily on income taxes, a downturn in incomes, especially capital gains, has a severe impact on the state’s budget.  Like many states, California closed their budget imbalance with Federal stimulus funds.  California has been the largest recipient of these funds, totalling almost $7B by the end of 2009, with an additional $15 billion in awards to be paid to the state.  New York and Texas are the runner-ups in the stimulus contest but their awards total a bit more than half of what California has marked up.

Barring any further stimulus packages, the federal spigot to the states is scheduled to shut off this year, leaving state legislatures already battered by difficult choices to make even more unpopular choices.  California’s only choice may be to mount an army headed by a cigar chomping Gov. Schwarzenegger, invade Alaska and take over their oil fields and tax revenue.

State Tax Declines

There are many summer sounds to be heard on June nights but this year one of those sounds are the gnashing of teeth in state capitols throughout the U.S.

In a May report, the non-profit Rockefeller Institute summarized early state reporting of income tax for the first quarter. After adjusting for inflation, state income tax revenues declined an average of 14% compared to the first quarter of 2008. South Carolina’s drop was precipitous – over a third. The average decline in sales tax revenue was 7.6% but Georgia saw a drop of over 16%.

Many states start their fiscal year in July and must base their budgets on preliminary data. Personal income tax makes up an average of 40% of state revenues for the 41 states which have personal income tax. The Rockefeller Institute projected an even steeper decline in revenues in April revenues. Since most states must balance their budgets, there will continue to be hotly contested adjustments to state spending to meet the reduced revenue streams.