Start at the starting line | Eastern North Carolina Now

    Publisher's note: The author of this post is Mitch Kokai, who is senior political analyst for the Carolina Journal, John Hood Publisher.

    A runner could make major improvements in his 5K time by starting his race at the 1,000-meter mark.

    But no one would accept his race results as valid, and he would offer no evidence of an actual improvement in speed.

    Much like the cheating runner, political observers hurt their arguments when they fail to start at the proper starting line. They present insufficient evidence to make their case. There's no good reason to accept their arguments as valid.

    A couple recent examples come to mind.

    First, there's the case of competing personal income tax breaks for high- and low-income earners tied to North Carolina's new state budget.

    Previous Daily Journals have examined Gov. Roy Cooper's claim that a taxpayer earning $1 million would see a tax break 85 times as large as that enjoyed by a "working family" of undefined income. Fellow Democrat Darren Jackson, the N.C. House minority leader, doubled down on that claim by suggesting that the $1 million earner would reap a break of $8,226 while a married couple earning $25,000 would see savings of just $39.

    The real numbers for tax breaks at those income levels - $2,533 versus $150 - show an actual margin of 17-1.

    But that's not the proper starting line for the discussion.

    State government isn't dipping into a huge bank account to write $2,533 checks to millionaires and $150 checks for couples with $25,000 incomes. Instead these breaks reduce the amount of money taxpayers will have to pay to the government in the future.

    To determine whether the disparity between $2,533 and $150 represents more than just a case of Republican lawmakers playing favorites, it helps to know how much the competing households pay in income tax before and after the tax changes.

    Factor that essential information into the discussion, and you learn that the gap between the amount of taxes paid grows under the new tax plan. That growth favors the married couple earning the lower income.

    Under current law, the $1 million single filer pays 132 times as much income tax as the $25,000 couple. Under changes tied to the new state budget, the single filer will pay 198 times as much.

    One more example should help make the point. Another recent Daily Journal focused on the different tax burdens of a bank president earning $120,000 and a bank teller earning $25,000. The president earns 4.8 times as much income. (For consistency's sake, we'll assume here that the bank president is single while the teller is the sole earner in a married household.)

    Under current state law, applying a flat tax rate of 5.499 percent and a standard deduction of $8,750 for the single filer and $17,500 for the married couple (and no other credits, exemptions, or deductions), the bank president owes $6,117 in state income taxes. The teller owes $412. The president's bill is nearly 15 times as large as the teller's.

    Because of the new state budget, the flat tax rate will drop to 5.25 percent in 2019. The standard deduction jumps to $10,000 for the single filer and $20,000 for the married couple. Now the president owes $5,775 in state income taxes. That's a $342 tax break. Meanwhile, the teller owes $262. That's a $150 tax break.

    Pick the wrong starting line for your consideration of those tax effects, like Gov. Cooper and Rep. Jackson, and you might complain about the bank president getting a tax break ($342) more than twice as large as the bank teller's ($150) tax break. But you would miss important information about the tax burden each household faces before and after the tax change.

    That means you would not see that the gap between the two households' income tax burden grows ... to the lower-income married couple's benefit. Under current law, the bank president pays 15 times as much as the teller. With the changes, he will pay 22 times as much personal income tax.

    We also see evidence of political observers choosing the wrong starting line when they tout economic impact studies. Governments tend to rely on these studies to promote new taxpayer spending on sports stadiums, convention centers, and other high-dollar projects.

    As John Locke Foundation senior economist Roy Cordato warns, these studies "ignore basic principles of economics and do not meaningfully measure what they claim to measure." One could say that the people who compile these studies choose the wrong starting line.

    The typical impact study suggests that taxpayer spending on a government-endorsed project will generate a significant positive return on investment. The claim often employs a "multiplier effect." It purports to show more positive impact as an initial dollar of spending winds its way through various sectors of the local economy.

    But it's wrong to start the discussion with government spending. Choosing that starting line assumes the government has a big stash of money that appeared from nowhere.

    In the real world, government gets money to pay for the high-dollar project by taking it out of the private sector. Whether acquired through taxation or borrowing (in the case of a bond), any dollar government spends on its chosen project is a dollar unavailable for use elsewhere within the economy.

    Economic analysis should account for the losses, or "opportunity costs," associated with the government's removal of resources from the private sector. Most economic impact studies fail even to attempt to make that calculation. The studies suggest instead that government spending generates huge benefits and almost no costs. That incomplete analysis leads to "absurd claims," in Cordato's words.

    About as absurd as expecting to win a medal for running just the last 4K of a 5K race.