OK

You have to hand it to Republicans. There is no disaster so awful that they're not willing to give those who caused it a pass and point toward some long treasured goal of the right as the solution. How nice it must be to be both the instigators and the benefactors of a crisis.

Despite the calls for radical change that run from the Ryan plan to the more-crazy-than-thou efforts of the growing field of Republican presidential contenders, the truth is that the current deficit crisis is of their own making. The biggest factor by far is simply the Bush tax cuts. The second biggest factor is the decline in revenues brought on by the economic downturn. After that comes the expenses of the wars in Iraq and Afghanistan.  If you allow the tax cuts to expire (which they will), allow the economy time to recover (which it will), and bring the troops home (which we will) the deficit problem will go from mountain to... well, if not molehill, certainly not much more than a middling incline. If Republicans really would just leave things alone, things would get better.

Of course, the last thing Republicans want is for recovery to set in and the deficit to decline. That would rob them of their crisis-generated opportunity to go Galt on America. Instead they want to use this moment to see just how far they can push. Forget Overton windows, they've opened up the Overton skylights and knocked down whole Overton walls in an effort to drive the national conversation into realms of rightness previously unknown.

Naturally, the first step in any Republican fiscal plan is reward those least in need of assistance by cutting income taxes, estate taxes, and capital gains tax. All of these get shoved down in the latest Republican budget, and now that Ron Paul has ramped up the 2012 edition of his traveling medicine show, expect the idea of eliminating the IRS and instituting some fair tax / flat tax / national sales tax to become the center of the fight to claim the right.

But before we start compromising toward whatever madness wins the day (I'm guessing no capital gains, no estate tax, and everyone with a net worth greater than $1b gets a free polo pony), why not strike back with a tax proposal of our own? And it even cuts taxes... just not the taxes that interest the GOP.

The thing is, those taxes the Republicans want to cut won't do diddly to pick up the economy. Cutting taxes on capital gains only generates more concentration of wealth, which is the opposite of economic health. It doesn't create jobs. It doesn't stimulate growth. It just encourages those who want to treat our economy like a game of high stakes poker. The same goes for the potential stimulative effect of chopping estate taxes or lowering the top income tax rate. The people at the top of the charts are already sitting on the biggest piles of cash in human history. The reason they're not creating jobs has nothing to do with their tax rates being one, or two, or ten percent too high. The reason they're not creating jobs is that making rich people richer doesn't create jobs. Not now, not ever -- and we have the numbers to prove it.

Both jobs and economic health are generated through one thing: demand. Demand comes when the majority of people at all levels of society have the cash available to spend on the things they need. And for the vast majority of people, income taxes are not the biggest burden placed on them by government.

Take a look at this chart.

More than 80% of Americans are burdened more by state and local sales taxes alone than they are by income taxes. Only for the top 1% of earners do income taxes take a greater percent of their income than sales and property taxes.

Why is this? Because most Americans do something really interesting with the money that comes their way: they spend it. They buy food. They buy clothes. They buy toothpaste, toys, tool chests and toilet paper. Through that spending, they create demand. What doesn't get spent on consumables gets turned into the kind of long term assets that most people need to get by in the world. It turns into a roof over their heads and transportation to get to work. Which creates more demand. More jobs.

By spending their money, the majority of Americans fuel the health of the economy. They're the juice in the system. The churn. The fire in the boilers.

Meanwhile, up at the top end of the scale, those top 1% of earners don't neither spend their income or turn it into property. They don't consume it. They don't convert it. They just sit on it. This chart alone is enough to demonstrate that cutting the tax for those at the top is worse than pointless. The very rich are not turning their money into things / demand / jobs. They have so much more than they need that their money is simply stagnant. Sending them more cash would be no more effective than throwing it into a volcano.

Unfortunately, those spending and converting actions that most Americans engage in are attacked by regressive systems that hit from dollar one. These are not invisible taxes. They're all too visible. They're part of every transaction, large or small. They're the reason your dollar bag of pretzels can't be purchased with a dollar. They're the reason that new Chevy or Ford costs you extra both when you buy it and every year you own it.

The real tax burden on Americans, the tax that actually contributes most to gumming up our economy and slowing the creation of demand, is not income tax at all. It's sales tax. The result of sales tax is that not only do the great majority of Americans pay a larger percent of their income in taxes than the wealthy, but the stimulative effect of their spending is reduced.

Suppose that instead of the chart above, we had one that looked like this:

The first thing you might notice about the distribution of the three types of taxes on this chart is... there are only two types of taxes. Sales tax is gone. Replacing sales tax is an increase in income taxes. However, this increase is not created by directly raising rates. It's from first allowing the income disparity generating Bush tax cuts to expire and secondly addressing some of the items that make the huge bar on the left of this graph.

If you look at all those itemized deductions on your tax form as government expenditures, they're the largest "government program" going. Yes, they do reward specific activities that we generally consider both desirable and stimulative, but they do it in a way that's a lot less direct and immediate than eliminating the negative impact of sales taxes. By dropping most deductions, everyone -- including those in the lowest income bracket -- would pay more income tax, but the impact would be most felt by those whose income is currently most sheltered by deductions and not being converted into goods and jobs. The overall impact of eliminating sales tax and most income tax deductions is that over 80% of Americans would pay less tax and the tax directly eliminated would be the one they face every day in their transactions. It would be possible to shift the numbers around and protect the poor from the increased impact of income taxes, but I'd just as soon not arm the GOP with ammunition for the "poor people don't pull their own weight" arguments. Seeing most of the regressive burden that the majority of Americans currently shoulder turned into progressive taxes that are shifted to those most able to afford them is good enough for me.

Of course, there's one big sticking point in this plan. There is no federal sales tax in the United States. Sales taxes are their business of states and localities. If the federal government was to crush all sales taxes by fiat (assuming that it could), it would leave a monster gap in the budget of already smarting state and local governments. To get around that issue, the program would need to be phased in, with more dollars from income tax distributed to the states to compensate for reductions in their regressive sales taxes. Hey, we could even make it in the form of block grants that the states could use as they please. In fact, we should.

Of course, some states might not want to go along. They might keep their sales taxes high, refusing to give up on a funding mechanism that punishes the majority of Americans while giving those at the top a free ride. So let them. When "high tax state" really means "high sales tax state," we'll know which state legislators care more about their constituents than their wealthy donors.

Now, about those property taxes...

Notes

Most of the graphs and numbers for this morning came from the Center for Budget and Policy Priorities. That second graph, the one that shows "no sales tax world"? That one's straight from my imagination bolstered by CBPP data and a lot of massaging in Excel. If you're interested in the details, by going through state budgets one by one, I came up with a total estimate for annual sales tax revenues somewhere around $400B. This does not include local taxes (though it does include some extremely optimistic ideas about revenues) so I bumped it to $500B. I'm willing to believe I'm off by 50% in either direction. With that number in hand, I went looking for income tax deductions and found some of the cuts here, here, and in a lot of programs that many people (myself included) like. Rather keep the alternative energy credit and just boost the top rate? I'm right there with you.

If you're interested in how sales taxes are distributed across the country, here's a peek.



Yes, it's too small. Click for a larger view.

Some states clearly get it. Delaware, Oregon, and New Hampshire have no sales tax. Some other states that look low on that chart are not quite as tax-free as they seem. Both Montana and Alaska allow local sales tax, so the rates there are not actually zero. Other states also allow local taxes on top of the state tax, so don't let that chart fool you.

Wikipedia has a nice run down of all the states.

 

Tags

EMAIL TO A FRIEND X
Your Email has been sent.