A new report out claiming that various Republican Governors and State politicians are suggesting that the tax system be made more regressive. That is, we shift more of the burden of paying for State level government off the rich and onto the shoulders of the poor. This may or may not be a good idea for political reasons but they’ve most certainly got the macroeconomics of this right. It really is true that consumption taxes cause less loss of economic activity per amount of revenue raised than do income taxes. Thus, assuming that you do in fact want the society to be as rich as possible in general, you should indeed be cutting income taxes and replacing them with consumption taxes. That’s on efficiency grounds as the jargon puts it. But tax policy doesn’t only work on such grounds: there’s also equity to consider. And there it is, to put it mildly, much less certain that this is indeed a good idea.
Here’s the complaint itself:
A number of Republican-led states are considering tax changes that in many cases would have the effect of cutting taxes on the rich and raising them on the poor.
Conservatives are known for hating taxes but particularly hate income taxes, which they say have a greater dampening effect on growth. Of the 10 or so Republican governors who have proposed tax increases, nearly all have called for increases in consumption taxes, which hit the poor and middle class harder than the rich.
Favorite targets for the new taxes include gas, e-cigarettes, and goods and services in general. Gov. Paul R. LePage of Maine, who wants to start taxing movie tickets and haircuts, is also proposing a tax break for the lowest-income families to relieve some of the pressure.
At the same time, some of those governors — most notably Mr. LePage, Nikki R. Haley of South Carolina and John R. Kasich of Ohio — have proposed significant cuts to their state income tax. They say that tax policies that encourage business growth provide more jobs and economic benefits for everyone.
The macroeconomics of that claim is entirely true. All taxes have something called a “deadweight cost”. This is simply economic activity that doesn’t happen because of the simple fact that we’re levying a tax. If we tax the purchase of apples then fewer apples will be purchased. This is entirely divorced, by the way, from any good that might be achieved by how we spend that revenue collected. We also know that different taxes have different deadweight costs. We even have a ranking of them. At the top, with the highest costs for the revenue collected, we’ve transactions taxes like the financial transactions tax under consideration. This is so expensive that it’s a really, really, bad idea to tax in this manner. Then come capital and corporate taxes, then with lower again deadweights incomes taxes, then consumption and then finally repeated taxes on real property, or land value taxation. If we were interested only in efficiency (we’re not, equity is important too) then we would collect as much as we could from a land value tax, then from Pigou and sin taxes (carbon emissions, cigarettes, booze) then general consumption taxes and so on. Perhaps leaving corporates and capital entirely untaxed. And there’s a whole field of study, optimal taxation theory, that suggests that we really should do that and the general prescription is the progressive consumption tax. There’s general agreement that on purely those efficiency grounds this is about the best we can do with a tax system.
However, that’s not actually enough. For equity is important: and lots of people don’t think it is fair that the government should be paid for on the backs of the poor. And they might well be right about that too. However, the point that’s being made here is alittle different:
A new report from Keystone Research Center and Good Jobs First shows that states could generate up to $200 billion in revenue to meet state needs by fixing inequities in state tax codes. The study shows that surging inequality has skewed huge amounts of income to the one percent, who pay far lower tax rates than the middle class, squeezing state budgets unnecessarily.
If inequality of income is increasing then moving that tax burden away from the rich to the poorer might well leave a gap in the amount of tax raised. It just doesn’t counter the argument that the shift is increasing efficiency though, it just means that one needs to be more careful about the estimates of the tax that will be raised.
As to whether the US tax system should be more progressive or not, more regressive or not, my own opinion is that it needs to become more regressive. Because it’s already the most progressive taxation system in the OECD countries. No, I know, this isn’t something that most people know but how progressive a system is is not based upon the rates that the rich pay. There’s plenty of countries with higher rates than the US. Rather, it’s defined by how much of the tax burden is paid by the rich and how much by the poor. Precisely because the US does not have a VAT (and while there are sales taxes in some places they’re not everywhere and they’re at much lower rates than a VAT usually is) that tax system in general is more progressive than all of the others which do have a VAT. Thus it might actually be worth making the system a little more regressive in order to increase efficiency.
My latest book is “23 Things We Are Telling You About Capitalism” AtAmazon or Amazon UK. A critical (highly critical) re-appraisal of Ha Joon Chang’s “23 Things They Don’t Tell You About Capitalism”.
