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What’s The Maximum Anyone Should Pay in Taxes?

by Caitlin Peartree

By David Winston and Myra Miller

In the most recent survey for Winning the Issues (July 16-18) we asked voters what was the highest tax rate that any individual in the US should pay for all taxes combined, including federal, state, local, property, payroll and wealth taxes. According to the survey, the average combined tax rate that voters said should be the maximum total was about 24%. Even among self-identified liberals who favor higher taxes, the average combined rate was close to 30%. Most business owners or high income individuals would probably be ecstatic to pay 24% or even 30% of income in total taxes. But it appears that proposed tax increases from the federal, state and local levels will send the total far higher than 24%. 

A July 31 Wall Street Journal op-ed Read Joe Biden’s Lips: New Taxes listed new federal taxes under a potential Biden administration, with an estimated $3 trillion in tax increases over the next decade. As we pointed out in last week’s Discussion Points, many blue states are turning to tax increases as the solution to budget shortfalls. A proposal in the California legislature would impose additional surcharges on high income earners, resulting in a 54% tax rate in federal and state taxes. A proposal in the New York legislature would create a new capital gains tax on those with $1 billion+ in assets. These are only two examples of efforts currently underway, but in many cases, governors and local lawmakers are finding out their taxpayers may not be so compliant. New York Governor Andrew Cuomo has repeatedly tried to stave off wealth taxes with the argument that people will leave the state. Earlier this week, when discussing potential tax hikes in New York City, he offered to buy people a drink or even cook dinner if they would return to the city to pay local taxes: 

“I literally talk to people all day long who are now in their Hamptons house who also lived here, or in their Hudson Valley house or in their Connecticut weekend house, and I say, ‘You got to come back, when are you coming back?’” Cuomo said at a press conference Monday. ”’We’ll go to dinner, I’ll buy you a drink, come over, I’ll cook…’” “They’re not coming back right now. And you know what else they’re thinking? ‘If I stay there, I pay a lower income tax,’ because they don’t pay the New York City surcharge.”

In addition to the wealthy looking for the exits in high tax states, a recent New York Times article estimated that one-third of small businesses in New York City may already be gone as a result of COVID. According to the article, close to half of the closures are in Manhattan, resulting from people leaving the city and tourism plummeting, and that “while New York is home to more Fortune 500 headquarters than any city in the country, small businesses are the city’s backbone. They represent roughly 98 percent of the employers in the city and provide jobs to more than 3 million people, which is about half of its work force…” In this environment, voters do not react favorably to the idea of raising taxes of small businesses. From the survey for Winning the Issues: 

  • Two-thirds believe that raising any tax on small business right now is unacceptable (65-19 believe-do not believe).
  • A majority (56%) believes raising taxes on businesses would sink those businesses that are already struggling and cause them to go under (56-23 among voters overall).
  • In a direct contrast, by almost 3:1, voters agree that raising any tax on small business right now is unacceptable because this will cause more businesses to go under (62%) rather than we have no choice but to raise taxes in order to fund budget shortfalls and to avoid cutting government services (22%).

Proposed increases in individual rates at the federal and state levels, combined with other federal increases like raising the cap on Social Security taxes, will hit individually-owned and family-owned businesses particularly hard, given that they are taxed based on individual income. With the wealthy fleeing the premises and no appetite for raising taxes to an unreasonable level, this is an economic situation that no amount of Andrew Cuomo’s home cooked dinners can solve. The only way forward is to support surviving businesses so they can stay afloat and keep people employed, keep tax rates reasonable so that people aren’t leaving the states, and longer term, generating economic growth.