I was just going to write something else tonight when I come to find ShellGamer’s post on fair taxes. In Minnesota we have a biennial discussion of this with the release of the state’s Tax Incidence Study, which is routinely used by the state’s Democratic (or more precisely the Democratic-Farmer-Labor party, as it is called in MN) party as the rallying cry to take more taxes from “the rich”. It shows that our taxes in Minnesota, at the state and local level, are regressive. That is, those at the top of the income distribution pay a lower share of their income in taxes than those in the middle class.
There are several problems with such claims. Comparisons across years of these studies leads one to think the rich are getting a better deal than they did 10 years ago. But the rich 10 years ago are not the rich today. I have thought of introducing a bill that would call it the “Minnesota Tax Annual Incidence Study.” The annual incidence just says how much taxes you pay this year on the income you earn this year. What we really want to know is how fair taxes are over one’s lifetime, isn’t it? People do not stay in the same place in the income distribution from year to year; one study showed that only 6% of millionaires (earning $1 million or more) in 1999 stayed millionaires each year through 2007.
Federal taxes are progressive; these are ignored in our Tax Incidence Study, and ignoring them makes us look worse. On an annual basis income taxes are far more progressive than sales taxes, and both of those are more progressive than property taxes. Yet local governments rely mostly on the last, and states take a combination of all three. When viewed over a lifetime, the differences in progressivity between federal, state, and local disappear.
What we really want, in my view, is not necessarily a progressive tax system … unless redistribution is your explicit goal of government. (If it is, let the feds do it with an income tax. The reason will have to wait for comments or another post.) What we want is to start with an amount of government we want to pay for. I would like there to be money to pay the police and court officials and corrections officers, man the firehouse, pave the roads, and educate our kids (maybe privately, but again that’s besides the point.) We then figure out what’s the best way to collect that money. How can we get it without changing how people behave to avoid paying?
In all the discussion about fair taxes, what I don’t hear is what is an efficient tax. How do I keep people working, enjoying leisure, consuming what they want, while collecting enough to pay for the items we see as properly the function of government? Doing so keeps more wealth production and more leisure consumption, things that many of us find as important as fairness.