Category Archives: taxes

taxes

On Taxes, Part I

The first in a short series on tax policy.

Progressive Taxation Overall
Some progressives believe that every single tax must be progressive. Instead, progressivity is more properly measured by an examination of overall taxes rather than each tax separately. In other words, regressive taxes—such as the gas tax or car registration tax—are fine as long as the overall system remains progressive.

Federal Taxes Should be the Most Progressive
The ability of many businesses and individuals to move pits states and localities against one another in terms of the tax burden. While not all businesses can easily change locale, others may choose where to locate based at least partly on state and local taxes. In contrast, it’s harder for many businesses to escape the United States even in our increasingly globalized economy.

Even Flat Taxes Can be Progressive
If you have a flat tax rate of 5% that only kicks in after the first $50,000 in income, the percentage of total income paid will vary dramatically based on income. People who earn less than $50,000 will pay nothing, while people who earn $70,000 will pay $1000 (5% of the $20,000 above $50,000) or 1.4% of total income. In contrast, people with incomes of $120,000 will pay $3500, or 2.9% of income. Someone with an enviable income of $1,000,000 per year would pay $47,500, or 4.75%.

In the years when Maryland became the wealthiest state in the country, we had a very flat tax that was not at all progressive because the top marginal rate kicked in with only a few thousand dollars of income. Today, we have gone in the opposite direction with progressive taxation with a variety of marginal rates.

Broad Based is Best
The temptation to encourage or to discourage different activities through the tax code is great. But loopholes or variation in tax rates are economically distortive and make the code more complex. Broad based taxes also spread the pain of taxation across different businesses and fields of economic activities.

Externalities are the Exception
The key exception to broad based taxes should be when economic activity dumps costs unfairly on the public sphere. Pollution is the key example as polluters dump the cost of cleaning up their mess on everyone else. As a result, levies on these sorts of activities can help discourage them or pay for cleaning up the mess at time even if broad-based taxation should remain fundamental.

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Estate Tax Cut Passes

The change in the amount of an estate exempt from state tax has passed the Maryland Senate today. As it already passed the House, it will become law with Gov. O’Malley’s signature. The law will increase the estate tax exemption to $4 million by 2018 and equal to the federal exemption in 2019. I wrote a post arguing for a more working and middle-class oriented tax cut a week ago.

All who voted no are Democrats. The vote in the Senate was 36-10. The following senators voted NAY:

Frosh, Jones-Rodwell, Kelley, Madaleno, Manno, Montgomery, Pinsky, Ramirez, Raskin, Rosapepe.

Sen. Nancy King did not vote.

The vote in the House was 119-14. The following delegates voted NAY:

Barkley, Bobo, Carr, Carter, Fraser-Hidalgo, Gutierrez, Howard, Hucker, Luedtke, Mizeur, S. Robinson, Waldstreicher, A. Washington, M. Washington.

The following eight delegates did not vote:

Barnes, Frank, Healey, Hixson, McDonough, Myers, Simmons, Sophocleus

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taxes

Alternative to Inheritance Tax Cuts

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Much ado has been made of the necessity of cutting inheritance taxes in Maryland in order to avoid driving away wealthy people from Maryland looking to leave their assets unencumbered by state taxes. Sounds like a reasonable theory. And it’s a priority of Senate President Mike Miller and House Speaker Mike Busch.

Except that there is only anecdotal rather than systematic evidence that these specific taxes actually drive people away. The more thorough analyses indicate little impact. In any case, it’s not clear that even if it were so, that the changes will accomplish the goal, as other states have no inheritance taxes at all.

Since revenue estimates keep declining, it’s not at all clear that tax cuts are advisable at all at this time. If we’re not careful, the State may end up having difficulty paying its bills. Alternatively, the General Assembly would need to identify spending cuts to match the tax cuts. After all, tax cuts are another form of expenditure.

If the State desires to cut taxes, there is a better way. Instead of cutting a tax that does designed to accomplish the illusory problem of preventing wealthy taxpayers from fleeing the State, let’s simply raise the minimum amount on which state income taxes are paid.

This alternative has many virtues. First, it puts more money directly in the pocket of ordinary people who need the money and whose incomes have stagnated for some years. Second, people with less money are more likely to spend it and stimulate the economy.

As it turns out, lots of poor, working, and middle-class people can generate jobs just fine with their spending power. Contrary to propaganda that only the rich are job creators, basic economic theory says that everyone generates jobs through their consumption and savings (i.e. investment).

Finally, this sort of tax cut benefits everyone who pays taxes. The wealthy get a sum too–the same amount as most who pay taxes. It nonetheless remains a smaller amount of their income. A fairer way to reduce the burden on all of the people who are bear it rather than a select few who don’t need a break. More crucially, there is no solid evidence that doing so will aid our State’s economy.

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