In the fall of 2008, I outlined on Blue Mass Group a revenue neutral proposal to provide low and middle-income income tax relief.
I benefited from the comments offered on BMG and from consultation a number of colleagues and others.
Here is the summary of my conclusions about the proposal as of the end of January 2009.
- While the proposal could benefit from further study and tuning, it is basically sound domestic policy — it provides relief to people who need relief and does not burden others unreasonably.
- One concern is that it might have an anti-business effect. One cannot fully discount that concern.
- The public perception of it is likely to be unfavorable: It will be boiled down to a rate increase, even though it actually provides relief to most of the population.
- Additionally, among those who fully understood the changes, there would be skepticism as to whether the exemption increase would remain coupled wilth the rate increase. People would be afraid that the rates would stay high while the exemptions went away at a future date.
- Concerns 3 and 4 might be overcome, but only through a major public campaign and that the usual advocates would be unlikely to mount that campaign in the absence of a revenue benefit.
- The appropriate way for me to handle the proposal is as a concept to be considered if and when people are considering revenue measures — it is per se revenue neutral but could be combined with revenue measures.
We need individual income tax raised and some corporate loopholes closed and tax giveaways renegotiated to be more reasonable. Progressive income tax rates is the solution. We need to LOWER the sales tax as soon as we can better tax income and the wealth, instead of punishing the poor and middle class.
I agree that we need to increase the income tax, and use the additional revenues to offset regressive taxes; sales, property, or both. (Sales is a little less regressive than it could be because many forms of food and clothing are tax-exempt.)
Property taxes are a particular problem, because we use a good chunk of those to pay teachers, firefighters, and police. These jobs (especially teaching) are resistant to “increased productivity” because of their nature, and because we want them done by skilled people. Long-term, wages grow faster than inflation, and inflation grows faster than 2.5% per year. The exponential function with the biggest base always wins, which means that over time, town income must grow faster than inflation.
This is ok, because our own incomes (what we use to pay taxes) also grow faster than inflation, but it also means that — if we fund towns primarily with property taxes — property tax revenues must grow faster than inflation, which is certainly faster than the prop 2.5 limits. If this is to be avoided, a continuously increasing (increasing a little bit faster than wage growth) stream of additional revenue must be provided. Either local aid increases every year as a fraction of town revenues, or else new development occurs not once, but every year.
By-the-way, when I hear the phrase “the property tax is a stable source of income”, I wish I had a dunce cap to hand out. Prop 2.5 mathematically guarantees that property tax revenues are stable, and we could do this with any other tax (sales, gasoline, income) in the very same way, but we would never put up with it. Property tax revenues are “stable” because when values go up, the rate goes down (except for the 2.5% annual increase) and when values go down, rates go up (in addition to the 2.5% annual increase). We could make the income tax “stable” simply by automatically increasing the rate when incomes fell, and decreasing it when incomes rose. So far, we’ve only managed to decrease the rate during boom times, and thus are “surprised” when we fall short during a bust.
It would be better if we kept the rate steady and instead got serious about a monsoon-quality rainy day fund — that would temper the booms and cushion the busts, instead of vice-versa.
You all need to read Steve Forbes book “Flat tax revolution” The guy is a genious!
All higher taxes do is give the politicians more money to waste. I would rather see a complete audit revealing the waste, redundancy, and corruption so that the system could be run more efficiently.
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