I received a prompt reply from Zach Schiller to the e-mail I sent to him yesterday as reported — Question For Policy Matters Ohio, Zach Schiller: Was Tax Data Used In Your DDN Article Incorrect?

Schiller had written in a DDN article that if Ohio’s 2005 Tax Reduction Law was modified, to reinstate the top income tax rate of 7.5% on incomes over $200,000, that Ohio would gain $375 million each year in additional revenue. I objected to this statement because I’ve been posting that that correct amount of additional revenue would much more than $375 million. I estimated the amount of reduction to be $572 million — if the top rate was applied to incomes over $340,000

I’ve written a number of posts that used the Ohio Policy statistic that incomes in excess of $340,000 received 26% of the total of tax reductions of $2.2 billion ($572 million).

Schiller pointed out my mistake. When the top rate of 7.5% is reinstated on incomes over $200,000, the Tax Reduction Act still applies to incomes less than $200,000 and these incomes will still get a 21% decrease in tax. Someone earning $250,000, for example, would pay additional tax only on the $50,000. Reinstating the top 7.5% rate would mean that for every $10,000 of income over $200,000 an additional tax of $157.50 would be required. If the 7.5% tax was reinstated, a taxable income of $250,000 would need to pay $788 in additional Ohio taxes.

In my new e-mail to Schiller, I ask for an explanation for how the $375 million was calculated. My estimate was much too large, but, it seems to me Schiller’s number is too small.  Based on an earlier Policy Matters article (p. 6 chart), it still seems to me that the accurate amount should be much greater than $375 million. I’m wondering if I’m making some other dumb mistake.  Here is the e-mail that explains my reasoning:

Zach, thanks for the reply.  You point out that in my thinking I made a fundamental error. According to Honeck’s chart, the top 1% of incomes received 26% of  the total tax reduction of $2.2 billion or $572 million.   My error was that I didn’t account for the fact that if the top rate of 7.5% for incomes in excess of $200,000 would be reinstated, then, of course this top 1% of incomes — incomes in excess of $339,000 — according to the 2005 Tax Reduction Act, would still have taxes on the first $200,000 reduced by 21%.

But, it seems to me that Honeck’s chart indicates that if the 7.5% top rate would be reinstated on incomes in excess of $200,000, then a lot more than $375 million would be recouped.

Look at only that top 1% of incomes.  According to Honeck, this group starts at incomes of $339,000 and the average income for this group is $890,000.  If the top rate of 7.5% were reinstated only for this group, then, on average, the new tax would be .075 x (890,000 – 339,000) = $41,325.  The 2005 Tax Reduction Act reduced this by 21% or $8678.   So reinstating the 7.5% top rate would mean that, on average, $8678 of the  $10,273 current average tax savings for these top incomes (Honeck’s chart) — 84.5% —  would be recouped.

If 84.5% of the tax reduction for incomes in excess of $339,000 is recouped, then, according to the above, this would amount to 84.5% of $572 million or $483 million.

I think a good recommendation to the State Assembly would be that a new tax bracket be made that would reinstate the 7.5% tax rate for only this top 1% group.  The public would be much more willing to reinstate the 7.5% top rate on incomes in excess of $340,000, rather than reinstating it on all incomes in excess of $200,000.

If the 7.5% top rate would be reinstated on taxable incomes in excess of $200,000, rather than $339,000, according to Honeck’s chart, according to the reasoning above, the amount recouped would be much more than the $375 million that you cite.    (I don’t have the data to calculate how much would be recouped on incomes from $200,000 to $339,000.)

Any enlightenment you can give to all of this will be appreciated.  Thanks.

I sent the e-mail below this morning to Zach Schiller of Policy Matters Ohio.

Zach Schiller:  I am glad to see that the Dayton Daily News published your article “Ohio Needs Revenue It’s Lost Since Tax Cuts 4 Years Ago,” this past Saturday.

I am trying to understand the discrepancy between your data published in the DDN article and the data published in a Policy Matters article last April, “A Step Toward Fiscal Balance: Options for Ohio’s Income Tax,” written by Jon Honeck.

In your DDN article, you wrote, “Restore the previous 7.5 percent top rate of the state income tax on income over $200,000 a year. This would affect fewer than 2 percent of Ohio taxpayers and generate around $375 million a year.”

In a Policy Matters article published last April, Jon Honeck showed a chart (on page 6) that showed that the top 1% of Ohio’s incomes (Starting at $340,000) received 26% of the total income tax reduction. Given that the total income tax reduction per year, when the 2005 Tax Reduction Act is fully implemented, is estimated to be $2.2 billion, it stands that this top 1%, alone, received over $570 million of the tax reduction.

The Honeck article does not show what percentage of the total tax reduction was received by those incomes in excess of $200,000, but by analyzing Honeck’s chart, it seems a conservative estimate would be that incomes in excess of $200,000 received about 34% of the total tax reduction, and 34% of $2.2 billion is about $750 million. Using Honeck’s figures, it appears that the amount of tax reduction received by incomes in excess of $200,000 is twice what you reported in your DDN article.

The fact that the top 1% of incomes (those in excess of $340,000) received 26% of the income tax reduction has been a very unreported fact, and I’m surprised this fact was not included in you DDN article.  Focusing on this top 1%  of income, I feel, gives a more compelling argument for tax revision than looking at those incomes in excess of $200,000.  I’ve been using this 26% figure in a lot of articles, so I hope I’ve not been given wrong information.

These are some of the articles where I refer to the fact that 26% of the total income tax reductions from the 2005 Tax Reduction Act go to incomes in excess of $340,000:

• The Quinnipiac Poll Failed To Ask: “Shouldn’t Ohio’s Most Wealthy Be Taxed More?” March 18, 2009
• Governor Strickland Fails To Explain Impact Of 2005 Tax Reduction Act On Ohio’s 2009 Budget Shortfall January 28, 2009
• Gov. Strickland Should Seek Revision In Ohio’s 2005 Tax Reduction Law — Before He Asks The Feds For Cash Handout December 9, 2008
• Democrat Candidates For Ohio State Assembly Fail To Challenge Republicans On Crucial Budget / Tax Issues November 3, 2008
• Chris Widener, Republican Senate Candidate, Boasts About Tax Cuts, But How Will He Solve Ohio’s Budget Crisis? October 8, 2008
• Ohio’s 2005 Tax Reduction Law Diminished, By 21%, The Progressivity of Ohio’s Tax Code August 6, 2008

I noticed in the NYT this morning this interesting headline: “Illustrator Maira Kalman observes, as Tocqueville did, the essence of democracy.” Wow. What a treat. Kalman evidently has recently visited a New England town hall meeting and the visit inspired this work. It is sort of a long poem — illustrated them with great drawings. I think she has some good insight into the essence of democracy.

I found a TED video of a Kalman presentation. She seems an endearing person. In the presentation she discusses a lot of her illustrations and explains some of her inspiration. (I embedded the video below.)

I checked the NYT for previous Kalman presentations, and found one that she completed in honor of Barack Obama’s inauguration. It is called, “Hallelujah” And in its first frame is a wonderfully drawn angel. I think Kalman is quite a poet. Her narration goes:
The angels are singing on this glorious day. And we mortals driving down to Washington, passing white mountains and black mountains of unidentified industrial stuff, listen to Lorraine Hunt Lieberson sing words from a Bach cantata, “Now is the time of grace.” The heart is racing and all I can say is Hallelujah