What prompts this blog entry?
The Gazette's editorial about taxes. Editorial, "Failing on Perception and Reality," The Gazette, October 24, 2006.
[The thrust of it is that Iowa needs a "business friendly" environment to enjoy economic development, and that means a tax and administrative system that is competitive with other states. The Gazette finds Iowa's sales, unemployment and property taxes relatively acceptable -- ranking the state 19th, 27th and 33rd respectively. But it's concerned about the corporate and individual income tax rates that place us 46th and 45th -- even though that's misleading because it fails to take account of Iowa's somewhat unusual practice that permits taxpayers to deduct what they've paid in federal taxes from the income on which they pay state income tax.]
1. There's no such thing as "taxes." Each of us buys, and benefits from, an array of goods and services. Some come from the supermarket, department store, or drug store. Some come from our auto mechanic, insurance sales person, or hair stylist. And some come from government. We buy from government our roads and bridges, public schools, libraries and parks, fire and police protection, judicial system and jails, and the safety of our food and drugs. To speak of "cutting (or increasing) taxes" makes no more sense than cutting or increasing "cash," "checking accounts," or "credit cards." Taxes are just another form of currency we use to buy stuff.
2. "It's the programs, stupid!" Before one can rationally talk about "taxes" there needs to be a discussion of the programs we buy with that form of currency. Like the politician who wants to "cut taxes" but refuses to talk about defense spending and social security, and the other programs that make up the bulk of government expenditures, anyone who talks about "taxes" without talking programs is just blowing smoke -- and may be deliberately trying to impede your vision.
3. Program evaluation. All programs need evaluation, private as well as public. The pension program provided Enron's employees didn't work out so well. Ford just lost $5.8 billion dollars. Major airlines are in bankruptcy. There are "recalls" on everything from automobiles to laptop computer batteries. Our private pharmaeutical and health care delivery systems cost more, and produce lower nationwide statistical results, than those of almost any other major industrialized nation. Face it, the private sector could do with a little program evaluation as well.
Similarly, government programs need evaluation, too. How can that be done? There are many systems. Here's one.
"Zero-based budgeting" is a system of evaluating public programs individually as if they didn't already exist, rather than focusing on "taxes" and increasing, or decreasing, the expenditures across the board on all programs by a fixed percentage.
One way of approaching this process would be to imagine a triage based on payback.
(a) Assume the hypothetical example (I'll leave the actual numbers of this assumption for others to debate) that money spent on pre-natal care for pregnant women, plus health care and nutrition for their new-born children until, say, age 6 or 8, will pay back in future savings something like 10 times what we spend in those early years. Or perhaps there would be similar numbers on the benefits of preschool education programs. Or, say there's data to support the assertion that the failure to maintain buildings in state parks results in future replacement costs five times what the maintenance would have cost.
(b) Assume there are other public programs that pay back roughly what we put into them.
And (c) additional programs that cost more than they produce, or save.
Rationally, then, one might want to expand a program that pays back multiples of what's spent on it, and make the cuts in those that don't.
I'm not suggesting this is the best, let alone only, way to go about rational creation and management of a government's budget. What I am trying to merely illustrate is that rational, program-focused (rather than "taxes-focused") processes are available.
4. Negative taxes and corporate welfare. I have written at great length elsewhere about programs that give over tax money to (or reduce the tax obligations of) for-profit private businesses. This is not the place to continue that debate. For now, it's enough to make the point that honesty, not to mention basic mathematics, requires that an examination of the extent to which a state is "business friendly" involves a calculation not alone of the taxes that private businesses do and do not pay, it also requires a calculation of the amount of taxes that others pay that are then handed over to those businesses in one form or another of direct corporate welfare.
Also relevant is the tax money that supports public programs that provide a quality workforce, infrastructure, legal system, and so forth, that benefit business indirectly -- and which studies show is often more effective in attracting business to a state than one-time cash handouts.
5. Governments as profit-maximizing enterprises. Taxes can distort governmental decision-making. Would Iowa localities, and the state legislature, have approved gambling casinos and various lotteries (once a federal and state crime) if it were not for tax and other payments from the gambling industry to various units of government? I think not.
One of the many externalities of systems of taxation is their ability to alter the behavior of individuals, businesses -- and governments. To the extent a city's government is driven by policies that will maximize its property tax revenues, and those taxes are greater for commercial than residential property, the city will pursue policies that encourage manufacturing plants and discourage affordable housing. In short, governments will choose policies and actions that maximize their revenue -- no matter how it may distort what would have been best in "the public interest" -- in a manner similar to for-profit corporations.
6. Tax simplification. Taxation is not my area of expertise. But it does seem to me more complicated than it needs to be. And I don't just mean the complex ins and outs of the Internal Revenue Code. I mean the multiple systems of taxation: state and federal income tax, local property tax, sales tax, FICA (Social Security) tax, gasoline tax, and so forth that make it virtually impossible for citizens -- and their public officials -- to see the big picture.
There are valid reasons for some of these multiple systems beyond simply collecting more money and hiding the ball from the taxpayer. A legislature may raise its cigarette tax in an effort to discourage young people from taking up smoking. The gasoline tax may be a fair way of allocating the cost of road building and repair among those who drive in a rough proportion to their use of the roads.
And I can appreciate that there is a political advantage to hiding the ball. Many people would be appalled if they knew the total of all their taxes combined. But they might be equally appalled to know the total amount they spend on fancy coffees, cigarettes, beer and slot machines. The point is that "you get what you measure," that it's impossible to make intelligent decisions -- whether personal or public policy -- without accurate and adequate data.
However politically impossible it might be to do, wouldn't it be at least interesting to know what the consequences would be if the federal and state income taxes were the sole source of government revenue? No property or sales taxes. Fewer distorted, tax-driven, decisions by individuals, businesses and governments. A transparent, data-driven public discussion of public programs that could be easily grasped, and participated in, by all. (And, not incidentally, no more pennies on the counter for sales tax. No more driving the elderly out of their lifetime homes -- because the homes' value has increased 30 times what the house cost, and they can't afford to pay the property taxes.)
Meanwhile, think twice about ever voting for a politician who makes diversionary talk about "taxes" a centerpiece of his or her campaign.
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Technorati tags: TIF, TIFs, taxes, economic development, corporate welfare.
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