Pur Autre Vie

I'm not wrong, I'm just an asshole

Wednesday, January 14, 2015

Taxes and Federalism

I'm not going to write a long post right now, but I just want to put down a marker that this article in the New York Times is exactly what you would expect:

States and localities have regressive systems because they tend to rely more on sales and excise taxes (fees tacked onto items like gas, liquor and cigarettes), which are the same rate for rich and poor alike. Even property taxes, which account for much of local tax revenue, hit working- and middle-class families harder than the wealthy because their homes often represent their largest asset.
The federal income tax system, by contrast, primarily taxes individuals at a graduated rate, and those who earn more pay a larger share. (The federal system also uses payroll taxes to raise large sums for Social Security and Medicare, dipping into the pockets of many low- and moderate-income Americans who pay little, if any, income tax.)
At the local level, if you tax rich people, you will drive them away, because you are in vicious competition with nearby (and not-so-nearby) jurisdictions.   The federal government, on the other hand, has much more leeway to impose progressive taxation.

One potential solution is to impose higher taxes at the federal level and then distribute them to local governments on a per capita basis.  This has the potential to counteract the race-to-the-bottom dynamic and allow local governments to do their job without imposing high taxes on the poor.

Interestingly, there is a good argument that it's important to lower marginal taxes at the low end of the income distribution, a result that conservatives in theory could get behind.  (In other words, in terms of incentive effects, taxes are more distortionary at the low end of the income spectrum, and so it is beneficial to trade away lower marginal tax rates at the low end for higher marginal tax rates at the high end.)  But because the conservative movement is so bound up with its rich constituency, I don't think you'll hear a lot of conservatives arguing for a systematically more progressive tax code.


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