Banish The "No Tax" Movement to the Depths of Hell
What are we doing here?
Policy Gripes is a series of posts where we combine our two highest forms of expertise: economic policy and complaining.
I say this as a proponent of low taxes and limited government: the “no tax on ____” movements need to end.
Over the past few years, we’ve seen least semi-serious efforts to end taxes on:
Tips
Overtime
Social security income
Bonuses
Property
Property, but just for seniors
Property, but just for anyone with a paid off mortgage (wtf?)
Sales tax, but only for diners in New Jersey that have been open for at least 25 years
Pet food
Car loan interest
Boat loan interest
Federal income tax for the entire middle class
Federal law enforcement income
Guns and ammo
I’m one “no tax on ____” proposal away from an aneurysm.1
It’s like the world’s worst game of Musical Chairs. When the music stops, the one W-2 worker who hasn’t gotten an exception will be funding the entire government.
The best taxes have low rates and broad bases, a design that leads to fewer behavioral distortions and steadier revenues. Granting exceptions to favored voters or industries necessitates higher rates on a narrower base. That leads to less predictable revenues.
At a political-level, I get it. This stuff resonates with voters. Take this quote from a New York Times’ focus group:
Except no, Governor DeSantis doesn’t have a very good point . What does a mortgage have to do with property taxes? Should sales taxes only apply to people paying with credit?
[You can read the Tax Foundation’s detailed analysis on Florida’s property tax proposal here.]
Yes, voters eat this stuff up, but we Americans notoriously eat all kinds of stuff that we really shouldn’t.
Briefly, here are a few reasons to oppose these efforts.
Thinking Through Incentives
High tax rates can reduce an unwanted behaviors like smoking cigarettes, drinking, gambling, etc.
Tax deductions, credits, and exceptions can encourage desirable behaviors like charitable giving, having children, etc.
Look at the list up above. Do we really want to incentivize tips and bonuses while disincentivizing salaries? Is stimulating boat buying a worthwhile policy goal? Even pets, much as I love them, do not need tax incentives.
Fairness
I don’t like fairness as a policy consideration, but come on. This is bad.
Take a teacher who makes $50,000/year (all salary) and a bartender who makes $50,000 (half tips). Under the OBBBA’s new “no tax on tips” provision, the teacher would owe about $4,000 in federal income tax, while the bartender would owe about $500.
Property Taxes Are the Worst Taxes (Besides All the Others)
Property taxes should be kept low. Property taxes are also critically important because they encourage the transfer of land to higher efficiency uses and produce revenues that are exceptionally stable over time.
Without carrying costs on real estate, you’d get major land hoarding, which would make housing less affordable in the long run and, quite possibly, in the short run too.
There’s also this notion that seniors shouldn’t have to pay property taxes (many states currently limit property taxes for seniors). I sympathize with anyone forced out of their home because of rising property taxes, but “the asset I own appreciated too quickly” isn’t the worst kind of problem.
These exemptions are hard on younger households, especially families (or would-be families) looking to become homeowners. Municipalities are forced to raise other tax rates to compensate for the lower revenues, shifting an even larger portion of the tax burden onto everyone else. This also reduces school funding while making it harder for those young families to afford a home.
California, which limits the annual increase in assessed value to 2% per year, is the poster child for how these policies can distort the real estate market.
The Government Needs to Be Funded
The federal deficit is $39 trillion. Will getting rid of these bad tax exemptions fix it? Not even a little bit, but given that neither party has the political appetite to cut spending, avoiding needless tax carve outs is a small and easy step in the right direction.
What’s Next?
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Don’t misunderstand me, there are good tax exemptions out there. Take, for instance, the fact that virtually every state exempts manufacturing equipment from sales tax. That’s a well designed policy that incentives a desired form of investment.