Thursday, February 01, 2007

All Tax Cuts are Not Created Equal

The current stir in the state ledge is about what kind of tax cut to pass- if any is to be passed at all. Some argue that the sales tax on groceries should go, others take the view that even millionaires buy groceries, so a "targeted tax credit" to the poorest taxpayers is the way to go. There are even some voices calling for the tax cuts to go to business, in the belief that they will efficiently take advantage of such opportunities, and hire new people at good wages to do so. That last is sometimes perjoratively referred to as "trickle-down economicis".

All tax cuts are not created equal. Some are better than others, some worse.

(continued, click THURSDAY below and scroll down for rest of article, or if sent straight here just scroll down)


Anonymous Mark Moore said...

Some want tax cuts targeted for the richest taxpayers, some want tax cuts that are broad based, and others want tax credits for the poorest taxpayers.

On that last category, honesty in advertising compels me to remark that "tax credits" that are in excess of the taxes that one pays in are not "tax credits" at all, but "welfare payments" re-named to make a wider swath of Americans more comfortable with taking the bribe. Would I vote to eliminate them? No. But I'd call the program what it is. Doing otherwise leads to further error.

That leads quite naturally to the idea that the wealthy ought to recieve most of the tax cuts, because they pay most of the taxes. Statists who think that the main point of the tax code is to re-distrubute income don't get that point at all. They stare at it with blank incomprehension like a pig staring at a wrist watch.

Of course, how much of a tax is paid by the wealthy depends on what kind of tax you are talking about. It is certainly true in the case of federal income taxes- the top half of earners pays 96% of the income taxes. The bottom half of the population pays only 4%, and are thus glad to vote themselves additional benefits from the pockets of the other half of their neighbors. On the other hand, my guess is that a sales tax on groceries would be much more evenly distributed.

As a proportion of income, the rich would tend to pay less than the poor on grocery taxes- which is why it is considered a "regressive" tax. Liberals like "progressive" taxes, which is to say taxes where the amount you pay goes up exponentially as your income increases.

The "targeted" income tax credits might miss some of their intended targets- like elderly people who don't file income tax returns. But that is not the only reason they are not the best choice, or the most moral choice.

A broad-based tax cut, like a cut in the grocery tax, is more moral than a targeted tax cut, whether the target be the rich or the poor. Targeted tax cuts pit one group of citizens against another, with the government playing the role of the benevolent "decider" of which group of citizens is most "deserving". Broad tax cuts address the truly critical distinction- WHO KEEPS THE MONEY, THE CITIZENS OR THE GOVERNMENT


7:54 AM, February 01, 2007  
Anonymous Mark Moore said...

"Trickle down" tax cuts say that if you give the tax cuts to business, they will use the opportunities to expand and that will lead them to hire more people, spend their higher profits, etc.... The benefits will "trickle down".

OK, but if you gave tax cuts to the working class, they would have more money to spend, and that itself would be an opportunity for business. When they use those opportunities they will expand, and hire more people, etc.

My point is that it does not matter whether the tax cuts trickle up or down, what matters is that private citizens keep more of their own earnings, and either way that benefits everyone.

The grocery tax is an excellent tax to cut because it is broad based and non-discriminatory. It does not divide us into groups pitted against each other grabbing for a "targetted" cut for them to the exclusion of our neighbors. It is also a tax where you decide how much you want to pay to some extent.

The real battle is citizens vs. government, and we need to stick together. Their job is to divide-and-conquer us. The politicians are doing a good job keeping us distracted with side-shows on "this cut or that one". The real issue is the pitiful size of what they are talking about giving us back compared to the massive amount of overage that they are keeping in order to grow government.

8:08 AM, February 01, 2007  
Anonymous Anonymous said...

By this logic, it sounds like you'd be in favor of a national retail sales tax.

1:51 PM, February 01, 2007  
Anonymous Mark Moore said...

I'd favor a flat tax. The national retail sales tax has a number of other serious problems. I'd actually like 50 flat rate income taxes. That is, the feds send a bill to each state based on their projected share of national income, the total of the bills to equal the amount required to run the federal government. Then each state is free to decide how to collect the money for their share of the federal tab.

3:45 PM, February 01, 2007  
Blogger Matt G said...

Thanks for discussing this topic. A quick comment: an earlier comment says that "honesty in advertising compels me to remark that "tax credits" that are in excess of the taxes that one pays in are not "tax credits" at all, but "welfare payments" re-named to make a wider swath of Americans more comfortable with taking the bribe."

In the context of the Arkansas proposals being discussed here, this simply isn't true. The folks arguing for a targeted tax credit were advocating an Earned Income Tax Credit. This is an income tax-based credit that doesn't depend on how much income tax you pay. This might sound crazy at first, but it's not.

Think about it this way: Beebe wants to cut the sales tax on groceries because it hits low-income families hardest. But groceries are at least 10% of the state sales tax base, and simply dropping the rate on everyone would cost a lot of money and wouldn't be designed to achieve the goal Beebe says he wants to achieve.

An alternative approach that some states have tried basically defines what's meant by "low income" and allows these folks to apply for a tax credit designed to offset their sales tax on groceries. It's a sensible approach that costs a lot less than a general exemption and ensures that the tax cut goes exactly to the folks Beebe says he's concerned about.

These credits typically appear on state income tax forms, for purposes of administrative ease. But that doesn't mean you should think of it as an income tax credit. It's an income-tax based credit that is designed to offset sales tax liability.

Put another way, the EITC proposal that was offered as a counter to the food tax cut was designed to offer low-income families roughly the same tax cut they would have gotten under Beebe's plan. So how can this tax cut be a well-deserved tax cut under Beebe's plan and "welfare" under the EITC alternative?

Thanks for this discussion!

5:06 AM, February 10, 2007  

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