Another Flawed Tax Inequality Study

the state’s bottom 20 percent of earners – those making less than $26,100 a year – pay approximately 9.6 percent of their income in taxes every year, compared to just 2.6 percent for those making $580,000 or more each year. 
Sounds pretty bad, does it not? There is a number of flaws with these numbers. We will get to them in a moment. First, let us hear what the Tribune suggests is the reason behind these numbers:
Wyoming’s reliance on a number of “regressive” taxes – or taxes that disproportionately impact poorer taxpayers compared to wealthier taxpayers. According to the report, just under 7 percent of Wyoming’s poorest residents’ annual income goes toward paying sales taxes – compared to just over a half percent share for the state’s richest.
These numbers originate with an outfit called Institute of Taxation and Economic Policy. If we follow the link back to them, we find a series of casually assembled tables and charts that are supposed to "prove" that Wyoming has a regressive tax system. Sadly, the numbers do none of that, burdened as they are with a list of rather embarrassing flaws.

The first flaw is that there is no methodological account of how they arrived at their numbers. All we know is that the tax numbers represent state and local taxes from 2015 through 2017, but we have no way of finding out where ITEP got their numbers from. Or did they collect raw tax data straight from retailers collecting sales taxes, counties collecting property taxes...?

The second flaw with the report is that it does not explain how it divided taxes up by income group. How do the report authors isolate the property tax paid by high-income earners? Do they have data that split up property ownership by income group? If so, what is their source? 

The same problem applies to their sales-tax data. In order to know how large a share of his income a person pays in sales and excise taxes, you need to have a good idea of how large a share of his income that person spends on items subject to the sales tax. A necessary condition for this type of data is that we can estimate the propensity to consume for each income group. What raw data did the ITEP use as their base for these estimates? 

Knowing the multiplier by income group is, again, a necessary condition, but it is not sufficient. In addition to knowing what share of his disposable income a person spends each year, we also have to have a good idea of the composition of that spending. That includes knowing what part of his consumption is spent in Wyoming, not outside the state. For example, do wealthy people who tend to buy expensive cars, buy them in a state with lower sales taxes? Do they spend part of their year in a sunbelt state, thus benefiting that state with some of their regular, sales-tax burdened expenditures?

These are important methodological questions that you have to be able to answer, if you are going to individualize tax payments the way the ITEP study does. Yet there is not a shred of attempt from ITEP to address them.

The third flaw with their study relates to income. They have not reported where they got the income data from, nor do they explain whether the numbers represent income before or after federal income taxes. They also do not specify what type of income they use: is it just salaries and wages? Dividends and interest? What about tax-paid benefits? This particular point makes a major difference for the actual tax burden of low-income families (given, again, that the ITEP actually could isolate their tax burden).

The last, and perhaps most amusing flaw is that the study strictly defines Wyoming as a zero-corporate income tax state. They can get away with this from a narrowly legal viewpoint, but then they have to explain how they treat that tax elsewhere. After all, any tax on corporations is a tax on the individuals who work there.

I am actually surprised that people on the left do not get this. According to Marxist economic theory, the entire production value that comes out of a worker's day of labor belongs to him - defined as such under the classical labor theory of value. Therefore, a tax on corporate revenue, even when that revenue is defined as profits, is by definition a tax on the worker's earnings. But, as always, the left changes theory and methodology depending on what serves their political goals at any given point in time. 

The ITEP report is widely praised by Better Wyoming, who, just like the Tribune, failed to ask for any kind of methodology. That is fine; Better Wyoming is not exactly known for their analytical stringency. Perhaps we should not expect too much from today's journalists either, but anyone else who reads this report should keep in mind how inherently questionable its methodology actually is. 

ITEP itself does not make things easier. In their full-length report they have a "methodology" section that essentially accounts for some technical matters in the calculation of tax distribution across income groups. There is no specification of what assumptions go into the model through which they claim to reach their results. As for data sources, they bundle together a number of them:
Miscellaneous IRS data; Congressional Budget Office and Joint Committee on Taxation forecasts; other economic data (Commerce Department, WEFA, etc.); state tax department data; data on overall levels of consumption for specific goods (Commerce Department, Census of Services, etc.); state specific consumption and consumption tax data (Census data, Government Finances, etc.); state-specific property tax data (Govt. Finances, etc.); American Housing Survey; Census of Population Housing; Energy Information Administration; Federal Highway Administration; BDS Analytics; Centers for Disease Control and Prevention.
I am sorry, but this is not a reference list. This is a sorry excuse of an attempt to look scholarly. What data did they get from where? What time series? How do they account for different methodologies used by the different sources? What exactly are are "etc" data sources?

Back when I was a college professor, I would not have allowed a freshman student to get away with this sloppiness. Embarrassing, plain and simple. 

All in all, the ITEP study could have been worth taking seriously if it had been done properly. Then again, a proper piece of work would very likely have yielded entirely different results - you know, the kind that a leftist outfit like Better Wyoming or Mary Throne would not have appreciated. 

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