Making Poverty More Expensive

Regressive taxation. That’s when the taxes the government levies disproportionately hit those with less money than those with more money. They sound like something only an out-of-touch, snooty, oligarchical, oppressive, “let-them-eat-cake” sort of government would do, no?

Heh. If only.

Taxes on gasoline are a prime example: everyone who pulls up to the pump pays the same amount of tax on each gallon of gasoline. Assuming, for sake of argument, that all people purchase the same average amount of gasoline, the taxes the government levies on each gallon of gasoline draw a higher percentage of the income away from those who have less money to begin with than those with more.

Let’s break it down with some very simple arithmetic. (Don’t worry, I did the math already.) Think: if everyone pays $20 in taxes on gasoline per month, that $20 is 1% of the income for someone who takes home $2,000 per month and $24,000 per year, but $20 is only 0.3% of the income for someone who takes home $6,000 per month and a modest $72,000 per year, and a teeny-tiny 0.167% of the income for someone who takes home $12,000 per month, or $144,000 per year. So the same gasoline tax is 6-times more “costly” to a person making $24,000 as it is to a person making $144,000… You wanna know where the people whom our politicians, by their rhetoric, call “the rich”—i.e., those making $250,000 or more? That $20 per month is an easy-to-miss 0.096% of that guy’s income, or more than 10-times *less* costly as a percentage of income than they guy scraping by on $24,000 per year.

Now, mind you, the “taxes” that Joe or Jane consumer incurs at the pump are not just the straight-up taxes levied. They include other things government has done to make gasoline more expensive.

corn fieldThings like ethanol subsidies and requirements that gasoline have a certain amount of ethanol in it.

And you know what else the ethanol requirements have an impact upon? Food. So many foodstuffs are influenced by corn. Cows and pigs and chickens eat the stuff, making beef, pork (and sausage, and bacon, and ham, from the magical little animal), and chicken, as well as eggs, milk, cheese, butter, etc., more expensive.

Corn syrup is, oddly enough, made from corn, making anything with corn syrup more expensive. Here’s a challenge: go to the grocery store and try to satisfy your entire meal plan without putting anything in your cart that does not have corn syrup. If you manage to, good for you: it means you’re eating healthily. People ought not be eating much of the stuff anyhow, but it ought to be a choice rather than an economic necessity.

Then there is, of course, just straight-up corn itself: a staple of a healthy meal for families across the country.

But corn costs more now since 41% of the corn crop goes to ethanol and not to food or animal feed.

Then toss in the reduced gas mileage vehicles get from ethanol-infused gasoline, which means that businesses and consumers have to spend more on transportation for the same food…

Corn and gasoline are only two examples. Milk and wheat get pretty sweet deals as well.

So now look at both sides of that: the monetary burden from government involvement in gasoline is carried disproportionately by the poor, as is the monetary burden from government meddling in corn, ethanol, milk, and wheat for the same reasons.

Farm subsidies, over-bearing drilling and refining regulations, ethanol requirements, and the ever-increasing repression of industry by the EPA for ever diminishing returns, must end, or the poor will become wards of the state (moreso than they are now) and the middle class will cease to be the engine of ingenuity and advancement in this country, if it survives as a recognizable middle class at all.

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16 thoughts on “Making Poverty More Expensive

  1. DavidB says:

    You mention farm subsidies towards the end of your article, yet complain about so much of the (subsidized) corn crop going to ethanol – what do you think the price of corn products would be if the subsidies were removed?

    I’d wager the reason that so much corn product is going to alternative places, other than food, is that there’s an oversupply due to subsidies, not because it’s so highly profitable to turn corn into ethanol instead of food. (obviously it is better profit, once you have the oversupply, or they wouldn’t do it)

    So the idea that the price of corn-based foodstuffs should naturally be lower seems a bit flawed to me. Not to say it’s wrong, but it certainly doesn’t seem obviously true either.

    Your gasoline example suffers from a pretty large assumption that all people buy the same amount of gas. I’d say in many cases richer people would be more inclined to buy bigger, more powerful, less fuel efficient cars (sports cars, big SUVs for their 3 kids, etc) – where more fuel efficient alternatives exist. Or, indeed, drive a car instead of taking the bus, etc.

    So it’s not clearly true that fuel taxation is a fixed cost to all tax payers. They (income & fuel taxation) each serve different purposes – it’s not like we should switch all fuel taxation to income tax or the other way around (or remove them – looking at what is taxed & saying “we shouldn’t tax this” isn’t the right approach. You should be looking at what we as a society agree that the government should pay for – then find ways to fund that. If we have a problem with a certain taxation, we should look at where else we can get that same funding from – not remove it. If we’re reducing overall taxation we should be doing so by deciding which services not to provide at the governmental level). Fuel taxation is, among other things, a way to drive society in a more long-term sustainable approach (encouraging public transport usage/development, for example).

    1. John says:

      Although you are correct that rich people often buy larger, less fuel efficient cars, poor people scrape buy on older, even less efficient cars. Additionally, mass transit prices, even subsidized, go up when fuel prices rise. Since most food must be transported, higher fuel prices increase the cost of food again. Thus the fuel tax represents one of the most cruel and regressive taxes possible. This, coupled with the inefficiency of government, really hurts the poor.

      1. DavidB says:

        That gets into the “taxing the rich always hurts the poor” mentality which is flawed in some fairly clear ways.

        It presupposes that companies can sell just as many units even if they sell at a higher price. And that they do that whenever taxes increase.

        For basic food, that might be true – but lots of things aren’t that essential (indeed, the convenience of a car – yes, buses run on gasoline as well, but it’s about price/convenience tradeoff. If gas prices go up, people change their habits to reduce usage – the petroleum company doesn’t keep selling just as many gallons (or not for the same uses, anyway – some uses will be able to justify paying even higher prices, but lots of consumers won’t – and their change their habits to be less consuming because it’s tipped their cost/benefit tradeoff))

        So for anything other than the most basic survival needs, there is a tradeoff that both corporations and consumers are making – about how much they charge for a service & how much profit they make or convenience they gain. Increasing taxes doesn’t just flow down to the consumers of those services – it can actually flow up to corporate profits too.

        1. Joe says:

          DavidB. A) Your idea about subsidies not affecting the supply of corn for other uses is flawed because it is based on the notion that producing corn requires no further investment/effort than deciding whether or not to do so. Those farmers who have previously invested in this capability are motivated by the subsidy to make ethanol. If the subsidy were removed, there would remain a motivation (if not financial necessity) to sell corn via land, equipment and labor invested in for corn production. Not to mention the motivation the market provides via the expanse of uses for corn products. B) Your idea that wealthy people spend more on gas suffers from the assumption that more expensive vehicles consume more gas and that wealthy people drive more often. Fuel efficient versions of vehicles cost considerably more and there are many people that drive gas-guzzling F-150s to and from construction and other equipment-hauling jobs. Certainly, more people hold these types of jobs than the wealthy 5% supposedly all driving Suburbans. C) Your idea that we should worry about what we want to buy via taxes and not about how it is funded violates the goal of economics to study the long-term effects of financial systems and policies. Who specifically pays for government expenses can substantially affect our economy and/or the well being of people in different demographics. D) I would revise your statement about what a fuel tax is to read this way: “A fuel tax is a way to punish producers and consumers of oil products in the name of environmentalism (and political vengeance) that results in a burden that is more difficult for poorer people to bear than for wealthy people.” E) Your criticism of the observation that taxing the rich hurts the poor is flawed in a clear way: raising prices is not the only way that tax increases are addressed. If a company can’t raise the price of products and remain competitive, they can lower salaries, cut jobs and/or move their business to a state or country with a lower tax burden. Furthermore, there seems to be some confusion between corporations and “the rich”. Corporations represent shareholders of all income levels. Increasing taxes, for example, on oil companies, is a cut into grandpas 401k retirement investment. F) Perhaps a good measure of whether or not corporate taxes are at an effective level is to compare the rate to other industrialized nations and to look at what American companies are doing. Given that our rate is higher than almost every nation in the world, that corporations are leaving the country to set up business in other countries, laying people off, having to rely on bailouts, etc. I think that the answer is pretty clear.

          1. DavidB says:

            Hmm, this site seems to drop my formatting which makes reading my reply & others difficult… I wonder if I can do anything to improve that. It looks like the formatting is preserved in the output, but not actually tagged to produce breaks, etc. I wonder if inline HTML is usable

            a) That motivation would exist only temporarily until the market adjusted to the most economical/efficient use of resources, sans subsidies.

            b) if they’re driving F-150s for work, the gas is tax deductible as a business expense

            c) Who pays which taxes is important – but it should not be confused with which things are suitable for the government to pay for. We should decide if something is economical to pay for (eg: healthcare is cheaper when everyone has it, because you don’t have people forgoeing preventative care & then incurring a larger cost to fix what should’ve been avoided) – and then set about deciding how to fund it. I’m not saying “don’t worry about who pays for it”, I’m saying look at the two problems separately first. Then you can decide “we as a society can’t afford better roads – the cost/benefit isn’t there. It’s cheaper (overall, not just from a taxation/government expense, but in terms of vehicular/personal damage from road surface quality, etc) to have roads of quality than quality & that’s the right tradeoff.

            d/e/f) I’d be interested to see the actual numbers – my best guess is http://en.wikipedia.org/wiki/Corporate_tax#Taxation_of_corporations which doesn’t seem to support your claim. In any case whether you tax corporations or higher income earners with a more series of progressive taxation brackets… sure, I’m not too fussed.

            Ok, perhaps I should put things this way: Yes, even if I agree that fuel taxes aren’t a very ‘fair’ way to go about it – decrease fuel taxes & increase income tax with more progressive tax brackets. If you want to reduce the total government income, let’s talk about how the government is spending money.

            [though, come to think of it, encouraging people to ride the bus (via increased fuel prices) seems still potenitally within the government's domain. Roads cost money & they cost less money if people use mass transit. As to the environmental argument - I'm not convinced either way. I can at least see, in theory, that trying to encourage businesses to look at alternative sources a little ahead of the exhaustion of the relevant resources might be helpful, but equally if prices rise naturally as supply dwindles, market forces may react appropriately without any terribly problematic results]

          2. Tom Crowe says:

            The comments don’t preserve much in the way of formatting. I just type in-line, accept the formatting problems, and put six hyphens (which render as two em-dashes) between my major sections, like so: —— a) why are you concerned with the market at this late date? End the subsidies and exotic taxation designed to engineer societal behavior and truly let the market work. —— b) If they’re driving an F-150 *to* work, but not *for* work, it is not tax-deductible. —— c/d/e/f) Roads? yes. Healthcare? absolutely not. *More* progressive income tax? Not a chance (try a more fair across the board tax system and see how the economy soars, and, thereby, government revenue). Let’s talk about reducing ways the government is spending money and leaving more of it where it rightly belongs: in the hands of the economic actors who earn and spend it as they desire, driving true economic activity rather than the artificial economic activity of government pet programs. China keeps trying that, and their paper tiger is in a bad way.

          3. Joe says:

            Thank you DavidB. A) You’re underscoring the point of why ethanol subsidies are bad. The resources of land, labor and investment could be used for other purposes. If a corn field is turned into a Strawberry field, that makes the Strawberry market more competitive. The ethanol fields do not need to remain in corn in order to lower costs for people. B) Most people take the mileage deduction rather than calculating yearly vehicle expenses. Even going with the expense route, the deduction is only a percentage of costs. In other words, the gas tax is still an additional expense to that person in addition to the cost of driving the vehicle to and from work (which is not tax deductable). C) It sounds like what you’re saying is that even if the method of taxation is flawed, you still believe that ethanol is good and oil is bad. My point is that if some politician believes that to be true, instead of trying to force their will onto the market via legislation, they ought to simply buy an electric car and start a corn farm and allow others to decide for themselves how best to use their own resources. D) The wiki page on Corporate Taxes is a mess of wrong information. Here are the numbers: http://www.taxfoundation.org/research/show/23470.html

        2. Tom Crowe says:

          DavidB — And there is nothing wrong with corporate profits. Technological advancements and new developments leading to new hires are born of such as that. —— Taxing the rich *does* hurt the poor frequently enough, especially in reducing the rich person’s ability to invest in his or her own small business or in someone else’s business, reducing the ability to hire people and buy new equipment. (For clarification sake, don’t forget that $250,000 is considered “the rich,” but for the many, many, many small business owners who employ so many millions of people, that means the gross income of their company is $250,000, but their personal take-home pay is considerably less, but they are still considered “the rich.”) —— Why is it a good thing to use government to force people to take public transit or buy a smaller car if the market forces don’t dictate this is what is good or desired?

    2. Tom Crowe says:

      DavidB– I haven’t read through all the responses yet, this is the first time I’ve been able to look at any comments. But a few thoughts in response to your first post from 12:16 p.m. —— As far as farm subsidies and ethanol subsidies: do away with both/all. Let the market handle it. That way farmers grow that which makes sense for them to sell and people aren’t subsidizing gov’t engineering of the economy. A fair bit of the farm subsidies goes to paying farmers *not* to grow stuff on their land also, which doesn’t help anyone but farmers who now are not farming (aren’t hiring people to farm land laying fallow, either, so those subsidies are jobs killers to boot.) —— My assumption doesn’t make my gasoline example “suffer.” Making the quantity of gas purchased equal was simply to make the math easier, but the fact remains that each gallon of gasoline costs a poor person *more* than it does a rich person. Sheer volume doesn’t actually matter for the truth of the situation. Also, the higher burden on poor people means it is that much more difficult to get a job that is a good driving distance away since more of the meager take-home pay they muster will be consumed simply driving to and from work. Rich people are more able to either move or to rent an apartment nearer to work so they don’t have to commute every day. So it hurts the poor more in that regard also. Third, if part of the point is societal engineering by the eggheads in government then that’s another problem because it means we are raising gas prices to force people to buy smaller more fuel-efficient (i.e., less massive and therefore less survivable in a crash) cars. Whom, do you think, will be more susceptible to the pressure? The poor, or the rich? So then you’re also consigning the poor people to less-safe cars than the rich people can buy just because you want to increase fuel efficiency for a negligible-at-best environmental benefit. Seems like an unfit tradeoff. Not to mention you also help my point by mentioning the poor will be more likely to have gas guzzlers, which mean larger, more survivable cars, and more fun to drive. Not very nice to price people out of the market just because they can’t afford the gasoline. —— I agree that we need to cut spending massively in all sorts of ways and places. I am not advocating that all “sales” taxes be eliminated. I am advocating that people consider what they are doing to the least wealthy among us when they have pet projects (ethanol lobbies, milk lobbies, environmental lobbies, etc.) that they want the government to smile and lavish monetary benefits upon.

      1. Everett says:

        Regarding formatting, one of the other posters here told me that the HTML for line breaks works here, so that’s what I was doing when I was posting more often.
        For those that don’t know, its (br) with the brackets being the carrot brackets rather than the parentheses ones.

        1. DavidB says:

          @Everett – doesn’t seem to work, sadly. That’s what I tried in my previous post. (also the tab order from the “name” to the “email” field in the reply box is a bit broken – you tab from name to email in the ‘new thread’ box way down the bottom). Oh well.

          1. Everett says:

            You’re right, it doesn’t seem to be working anymore. It was working a couple months ago. Might’ve been Josh Mercer who I spoke to?

          2. Joshua Mercer says:

            Wow. You are right. The line spacing and HTML formatting isn’t working anymore. I will crack the whip.

        2. Joe says:

          Testing line spacing. Carriage returns please appear here: Two lines down is my destiny!

  2. Davide says:

    Wow this post made me sit up and think. It is very informative. Thank you

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