Which State Pays the Highest Taxes

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```					Assignment 2 - Suggested Answers
Public Budgeting 834
Seligman & Russell
Spring 2010

Now with memo tab!
CHAPTER 7 #1A (various acceptable answers, including…)

In a descriptive format :
For 2008, Ohio's per capita state-local tax burden was \$4,049, which represents 10.4% of income per capita. T
of 9.7%. Ohio's burden per capita is higher than all of it's neighboring states with the exception of Pennsylvan
in terms of state-local tax burden.

In tabular format:
State Taxes (2006)               Local Taxes (2005)
Area              \$ (mill)                   Per Cap.     \$ (mill)     Per Cap.

National                            650,612      2,199      1,308,507         4,422
Midwest                             164,703      2,501        273,136         4,148
Ohio                                 24,011      2,095         47,141         4,114
Illinois                             26,412      2,076         55,667         4,376
Indiana                              12,854      2,054         25,034         4,001
(etc.)

CHAPTER 7 #2
The Joint Committee on Taxation of the United States Congress estimates that the highest 1 percent of the inc
federal individual income tax collected in calendar year 2000. What does this information tell about progressi
income tax? Explain.

The information given does not provide enough evidence to make a statement about the progressivity or regr
wealth distribution (the makeup of the tax base) would be necessary in order to comment on the progressivity
tax paid a certain group. Examples of regressive and progressive taxes with the same proportion of total taxe

counter example:
Tax Payer(s)                   Income      Tax Rate      Taxes Paid    % Taxes

Regressive        NBA Benchwarmer             1,265,060         10.0%       126,506      33.6%
99 PhD Students             1,000,000         25.0%       250,000      66.4%

Progressive       Successful Attorney           316,265         40.0%       126,506      33.6%
99 PhD Students             1,000,000         25.0%       250,000      66.4%
0.4% of income per capita. This is higher than the national average
the exception of Pennsylvania (\$4,463). Ohio ranks 18th nationally

e highest 1 percent of the income earners paid 33.6% of the total
ormation tell about progressivity or regressivity of the the federal

bout the progressivity or regressivity of the tax. Information about
omment on the progressivity of a tax based on the proportion of the
ame proportion of total taxes paid by 1% of the population follows:
CHAPTER 8 #2

50% of gift up to 50\$ (benefit of gift stops out at \$100 donation.                              (basis for e.)
Schema I                                 Tax          State                Fed                    Cost of
Contrib.       Rates       Benefit (a.)        Benefit(b.)               Gift (c.)

Jones                     \$100        35.0%         \$50.0                 \$17.5                   \$32.50
Blue                      \$100        15.0%         \$50.0                  \$7.5                   \$42.50
sum                       \$200                      \$100                   \$25                     \$75

.d Changr in state tax policy such that donation is deductable and state rate is a flat 3%.
(basis for e.)
Schema II                              Tax          State                 Fed                     Cost of
Contrib.     Rates    Benefit (a. of d.)    Benefit(b. of d.)          Gift (c. of e.)

Jones                     \$100        35.0%          \$3.0                 \$34.0                   \$63.05
Blue                      \$100        15.0%          \$3.0                 \$14.6                   \$82.45
sum                       \$200                        \$6                   \$49                     \$146

e. Seems likely that the Universities might prefer the previous scheme but really this depends on the composition of the don
See below, big doners do better under the deduction Schema (II)
Schema I'                              Tax           State               Fed                 Cost of
Contrib.     Rates Benefit (a. of d.)      Benefit(b. of d.)      Gift (c. of e.)

Moneybags               \$10,000       35.0%         \$50.0                \$3,482.5                \$6,467.50
RichieRich               \$1,668       15.0%         \$50.0                 \$242.6                 \$1,374.88
sum                     \$11,668                     \$100                  \$3,725                  \$7,842

Schema II'                             Tax          State                 Fed                     Cost of
Contrib.     Rates    Benefit (a. of d.)    Benefit(b. of d.)          Gift (c. of e.)

Moneybags               \$10,000       35.0%         \$300.0               \$3,395.0                \$6,305.00
RichieRich               \$1,668       15.0%         \$50.0                 \$242.6                 \$1,374.85
sum                     \$11,668                      \$350                 \$3,638                  \$7,680

CHAPTER 8, #3
Tax        Investment                       AFTER TAX                       Per
Type                                  Rates        Return (i)         Rate of return        Net Return            Dollar

low income                muni        0.0%           5.0%                 5.000%                    \$400
corp        10.0%          6.5%                 5.850%                    \$468
high income               muni        0.0%           5.0%                 5.000%                    \$750
corp        35.0%          6.5%                 4.225%                    \$634

CHAPTER 8, #6
Taxable       Net                           Average Tax Rate         Marginal Tax Rate
Income                   Income      Income           TAX             (tax : income)           (tax : income)
\$10,000       \$0    \$10,000       \$0     0.000%   0%
\$20,000     \$5,000  \$19,500      \$500    2.500%   10%
\$40,000    \$25,000 \$37,500      \$2,500   6.250%   10%
\$150,000   \$135,000 \$136,500   \$13,500   9.000%   10%
the composition of the doner base.

Investment
Amount

8,000
8,000
15,000
15,000
Elements of a good answer to the essay question below:

Some state & local governments opt to keep workers out of Social Security—Ohio among them.
Imagine that next week, the federal government passes a law that prohibits this.
Specifically, beginning January 1, 2010 all State Employees will begin to contribute to, and be covered by Social Security.
Write a one page memo to the head of Ohio’s Office of Budget and Management, J. Pari Sabety, highlighting the impact of
the policy change for Ohio’s experienced tax wedge (the difference between what employers pay in salary and taxes, and
what employees receive in salary net of taxes) and budget. Suggest areas to be investigated for compensating savings.

In crafting your memo you may wish to reference:
-1-            obm.ohio.gov,
-2-            the census data sources listed in the lecture of 5/6/2009
-3-            Previous assignments and review problem sets on this topic
-4-            other sources at your discretion.
Be sure to cite all data sources you use as you would any other reference materials.

Points:
From the listed references you should find:
-1- OASI contribution rates of 12.4 percent split between employee (EE) and employer (ER)
-2- OPERS contribution rates of 21 percent split to be 11 percent ER and 10 percent EE.(*)
There are two essentially misguided policy options:
One is to add the OASI program to the existing one - yielding 12.4 + 21, or mandated contributions of 3
The excess burden of this policy is the additional 6.2 percent of pay that the State of Ohio as ER faces

The second is to replace the OPERS program wholesale with the OASI program, reducing contributions
This policy yields are reduction in expenses for the State-as-ER of 4.8 percent of payroll after Jan 1, 20
The first policy is misguided inasmuch as employers and employees alike would be unlikely to appreciate an inc
6.2 percent of pay each period. That said, EEs could accommodate this policy by reducing their own retirement sa
6.2 percent or more independently. In fact they could essentially cut savings by a bit more because the SSA bene
for whether they could cut by the whole 12.4 percent, it really depends on what they expect in terms of returns fr
salary, dependents and health all play into the experienced yields. And of course SSA essentially offers a lower ris
Wall Street, so all of that factors in. As for the State-as-ER, there is no obvious opportunity for compensating savi
The second policy is misguided inasmuch it fails to recognize that OPERS is essentially fulfilling two roles, that o
system (it is currently a substitute for OASI) and that of an employer provided pension or savings system. You can
of the contribution down into the public component (12.4 percent) and the employer component (8.6 percent (=
Net of the EE portion, policy option 2 essentially cuts pay & benefits by 4.8 percent--more on an after tax compen
there are differences in the returns from either program which get to adequacy of savings and retiree benefits, ve
Let's acknowledge too that the State must compete for labor in the labor market, a policy like this might reduc
in attracting a sufficent quantity of employees with the prefered skills and capacity.
The breakdown just above suggests a better policy response, one in which OPERS is reduced to an employer ty
We might start with the 8.6 percent difference and note the ER and EE increments of 4.8, and 3.8 percent. Starti
will explicitly point out OPERS administration--it's expense burden may not decline in line with scale. Now here is
First, the State might eat the difference -- this would increase expenses, and thus one might fish for "compensa
Let's consider for example, the difference between a 4.8 percent grant and a 2:1 match up to 3 percent. If not all
the 6 percent exposure might yield a burden of less than 4.8 percent. Or not. Alternatively the State might offer
match up to 5 percent, this would require EEs to increase Their contribution by 1.2 percent in order to gain an ad
The yield of burden from the 1:1 match might more reasonably be expected to be lower than the realized 4.8 per
If the administrative costs of OPERS persist in being very high relative to subcontracting administration for new
assuming OPERS is well funded (it is), then one might replace OPERS with an investment firm or insurance compan
to the Employer program at Jan 1, 2010, or at some future time as yet to be determined.
Finally, while there is a taxmax under SSA of \$106,000/yr or so, there is none with OPERS so that leave more th
whenever the state pays some employees salaries above the SSA Taxmax (it does).
The basic ideas for the a good memo all fall out of a well crafted table, the table may not have to cover every case
Program:                   ER         EE         Total
Previous OPERS (*)         11         10           21                 (*) seen here are rates for Public University t
SSA                        6.2        6.2         12.4                a variation of the ER:EE split. Of course it is t
difference                 4.8        3.8         8.6                 consideration for the budget.
and so it would be good to include such a table in your memo.
offering consideration of the tax max is a nice touch in a one pager.
offering consideration of the administrative costs of OPERS after Jan 1, 2010 is the bigger part of getting this mem
Whether or not you do someone is sure to, and in fact, that is likely to be the next exercise--
Estimate the administrative costs for OPERS over time if it winds down previous public pension commitments
and continues to administer a smaller ER program.
vered by Social Security.
highlighting the impact of
y in salary and taxes, and
compensating savings.

EE) and employer (ER)
and 10 percent EE.(*)

21, or mandated contributions of 32.4 percent of pay.
that the State of Ohio as ER faces after Jan 1, 2010.

I program, reducing contributions to 12.4 percent of pay.
8 percent of payroll after Jan 1, 2010, EEs save 3.8 percent.
ld be unlikely to appreciate an incease in expenses of
y reducing their own retirement savings, whenever they save
a bit more because the SSA benefit is financed by ERs as well. As
they expect in terms of returns from social security, marriage
e SSA essentially offers a lower risk lower yield product than
pportunity for compensating savings except through salaries.
sentially fulfilling two roles, that of the public
ension or savings system. You can do a rough break out
ployer component (8.6 percent (=21-21.4)).
ent--more on an after tax compensation basis. Additionally
of savings and retiree benefits, versus what was expected.
rket, a policy like this might reduce the State's competitiveness

PERS is reduced to an employer type program.
nts of 4.8, and 3.8 percent. Starting here, a good memo
ne in line with scale. Now here is where one can get creative.
thus one might fish for "compensating savings."
1 match up to 3 percent. If not all employees take the match
lternatively the State might offer a 1:1
1.2 percent in order to gain an additional 0.2 percent from the State.
be lower than the realized 4.8 percent current.
ontracting administration for new contributions, and
estment firm or insurance company to administer contributions

with OPERS so that leave more than the 8.6 percent on the table for OPERS

may not have to cover every case to be useful:

re are rates for Public University types, other employee groups experience
of the ER:EE split. Of course it is the ER contribution that is of first order
on for the budget.

he bigger part of getting this memo noticed in a crowd.
xt exercise--
ious public pension commitments,

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