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The bulk of the discussion at the legislative town hall meeting last week was focused on fiscal issues of one kind or another. One thing that was briefly touched on was the potential return of sales tax on unprepared food. I have always been a fan of not having that tax, because of its supposedly regressive nature and because unprepared food is generally what I spend my money on, and I see no reason to volunteer for higher taxes on it. A couple of statements in that brief discussion got my brain thinking about some different aspects of tax policy.
One statement that someone made was that when the tax on unprepared food was eliminated the stores simply raised their prices accordingly so that the savings went into their pockets rather than taxpayers. That didn’t strike me as accurate, but even if it was accurate it is no excuse to reinstate the tax – the stores would let consumers absorb the taxes on the now higher prices rather than lower the price to accommodate the tax.
Sen. Liljenquist mentioned that people don’t tend to buy luxury items in down economies. When combined with the fact that our expectations fo government tend to increase in down economies I saw why governments tend to grow endlessly – there is generally an inverse relationship between our demand for government services and our ability to pay for them. When times are tough we demand more and politicians do their best to oblige us. When times are good we tend to expand government in areas that were not previously considered crucial by eating into any taxes that exceed our recession-limited budgets. When times become lean again the once-discretionary programs are viewed as essential and demand greater sacrifice from citizens to maintain the programs that would have been considered outrageous in the previous downturn.
From this perspective it makes more sense to favor regressive or at least “fair” tax schemes where those with the least ability to pay also have a vested interest in the tax rates so that they are less likely to get extravagant when times are generally better and so that the tax revenue is generally more stable. It is simply foolish to base our most essential services on revenue sources that are unavailable when the services are crucial.
I’m not trying to argue that luxury goods should be tax-exempt, but if they form the basis of our tax revenue for essential services we will always be in for gut-wrenching decisions whenever their is a dip in our economic outlook.
6 replies on “Taxes: Supply vs Demand”
So we should tax poor people in a recession so they will be less likely to get extravagant when times are better. But we should not tax wealthy people in a recession so they will be more likely to continue their extravagant ways, I assume. Sounds suspicious to me. It’s based on a couple of fallacies: 1) that poor people can “get extravagant” without additional income; and 2) that the extravagance of the wealthy will redound to the good of all.
In the first instance, there are only 2 ways a poor person can spend extravagantly: either they stop being poor, in which case they can supposedly pay for their extravagances, or they are given credit by a financial institution that is operating in an irresponsible manner. We have certainly had a lot of the latter, but that problem should be corrected by shutting down the irresponsible banks and possibly arresting the officers who engaged in this behavior not by raising taxes on the poor.
In the second instance, the benefit of spending by the well-to-do is limited these days. They will certainly create or maintain a few low-paid service jobs, but any larger purchases are more likely to be imports. They might speculate in the stock market, but it’s hard to see how that helps most people.
Perhaps a value-added tax or VAT would be better. While I oppose taxing food, if we must do so a value-added tax would insure that the more processed the food, the higher the rate of tax.
You’re putting words into my mouth. I specifically said that I was not advocating that we abolish taxes on luxury items, nor did I suggest that we should stop taxing wealthy people in a recession. On top of that I have never suggested that we should raise taxes on the poor during a recession – I simply noted that taxing luxury items produces higher revenues precisely when they are least useful and inadequate revenue precisely when we can least afford it.
You also misread what I meant to say about poor people becoming extravagant when times are better. What I meant to say there was not about the poor being extravagant personally but about them being engaged in the tax structure so that even when times were better they would be clamoring for keeping government programs appropriately limited rather than shouting that all surpluses should be put toward expanded programs. If they feel that all the excess is money from other taxpayers they are less likely to oppose using that money to fund programs that they would rather not pay for themselves.
A value-added tax makes sense on the surface, but again, when times are tough people stop eating out and buying more processed food so there still remains an unsustainable inverse relationship between supply and demand in tax revenues.
Noone likes taxes but if there needs to be a tax, I’d prefer one with a broad application across society. That is why I’m OK with increasing the tax on food. Those who say they are against the tax on unprepared foods should identify an alternative. Either suggest another tax to raise, or identify those government services you would rather do without.
The only tax increase I have heard suggested this year is to raise the cigarette tax which I am confident will not have the adverse effect on smoking that they claim it will have.
David, I’m sorry if I misconstrued your argument. I will say that if you are contemplating running for political office, you will need to be very careful about statements so that your opponent won’t twist them around the way I apparently did.
Taxing luxury items in today’s US economy is a pretty good bet. The people who can afford luxury items in good times are usually the ones least affected by economic downturns. While they may cut back, at least there will still be some revenue and we need not worry that we are denying anything of value to them by imposing the tax. As for poor people advocating cutbacks or freezes in government programs, I don’t think there’s anything you can do to achieve that goal other than fail to educate them and feed them nonstop disinformation. The trickle-down theory and the rising tide lifts all boats theory have been proven false so there’s not going to be a lot of faith left in them especially by those whose boats sank while the tide rose. In fact, there’s generally more clamor for government programs to create jobs and provide a social safety net when times are bad. When things improve, the forces of reaction are generally able to roll back those programs until their policies cause the next recession.
I accept your inverse relationship between supply and demand in tax revenue argument. Unfortunately when tax revenues are sinking due to economic malaise, the government is the only entity with the capability and power to restart the economic engine and protect the powerless from the worst effects of the downturn. It is during such times as these that governments must spend and increase their deficits. When times are better, responsible governments should cut back on unnecessary programs (about 50% of the military budget for starters) and bring the budget back into balance. For all his faults, that’s what Clinton was able to do during the tech bubble of the ’90s. Unfortunately during the housing bubble, the government vastly expanded the deficit mainly by cutting taxes, engaging in military adventures, and giveaways to big business like the Medicare drug program. Had they continued to balance the budget and pay down the deficit, the government would be in a much better position to act today to address the economic problems.
It would not matter how carefully a candidate states their position they must always accept that their opponent will misrepresent what they say if it could possibly be advantageous to do so. I accept that your misinterpretation was not malicious.
Once upon a time I would have believed that those buying luxury items are often above being seriously affected by economic downturns, and certainly some of them are, but the fact is that today most of the luxury purchases are being made by people who can only afford them on easy credit – which is hopefully a thing of the past (easy credit that is). I believe that the tricky down effect works pretty well in an economy that is based on sound production rather than being heavily subsidized by credit. Credit has the effect of forcing things to trickle up because those receiving the credit spend all their time paying those who already have the capital rather than those who have the capital paying those who produce the goods.
I recognize that the inverse relationship is never going to go away but we can do some things to minimize it by lowering our expenditures to only the most essential services so that we don’t have to be dependent on the most volatile tax revenue streams. I also accept that there are benefits to deficit spending – the problem is that, like morphine, too much is worse than none at all in virtually all cases. Too much deficit spending is exactly what we have had for most of my lifetime. I’ve never been one to heavily promote the idea of a balanced budget amendment, but I am supportive of the idea partly because I have never seen a proposal for such an amendment that did not include some reasonable exceptions. Responsible governments, which would cut back on unnecessary programs and pay down debt when the economy was prosperous, would not be nearly as big a problem with deficit spending power as irresponsible governments. Unfortunately responsible governments are very hard to come by.
Liberals like to credit Clinton for balancing the budget. Republicans like to credit Congress for doing so during his term. I think that it was the combination of a Democratic president and a Republican Congress who were so busy sniping at each other that they brought the government to a standstill multiple times that made for a couple of fiscally responsible years. That is why I have argued for a split government – and I am specific about the split. Congress should be in the hands of Republicans and the president should be a Democrat. Bush 43 proved how terrible Republicans controlling both branches could be, Obama’s first year alone is ample evidence of how ludicrous Democrats controlling both could be, and both Bush’s demonstrated that a Republican president with a Democratic Congress was only a slight improvement over single party control.
You are absolutely right that Bush and his Republican Congress of 2001-2002 squandered a fantastic opportunity to keep the budget balanced, pay down the debt, and show what limited government could do – and those inside the beltway wonder why so many grassroots Republicans want to toss out their compromised incumbents despite all the “seniority” arguments.