Down the Up Staircase

May 7th, 2013 at 3:50 pm

Spent the day in lovely North Carolina where the legislature is contemplating some very bad tax policy.  There’s this scourge across the land where a number of states are cutting their income taxes and raising their sales taxes.  Bad idea.

[Here’s my slides and talk from today: Slides & Talk]

First off, you’re shifting your revenue collection from a progressive to a highly regressive source of taxation.  Such a shift is unmistakable in the figures below, showing effective tax rates—taxes/income—by income level for North Carolina sales and income taxes.  Since low-income households consume much more of their income than high-income families (and since sales taxes are rarely graduated) that graph is a downward staircase, with the liability concentrated at the low end.

Income taxes in NC, on the other hand, are relatively progressive.  In fact, that upward staircase is pretty much a mirror image of the sales tax graph.

So what’s the rationale for the shift?  It’s the same old trickle-down nonsense that you might be thinking should have left the national stage with Mitt Romney.  The consultants who flit about the land trying to get states to swallow this stuff argue that it will unleash entrepreneurs and job creation.  Not surprisingly, they remain impervious to evidence, including analysis like this or this (the first link contains the citations I mentioned in my talk).  Or the Bush years…whatever.

It’s also difficult to maintain revenue neutrality under the weight of this shift—income grows faster than sales over the longer run—and, in fact, here in NC a Republican state senator proposed such a plan this very day that immediately starts losing revenue.

The thing I tried to explain to my audience down here thus went like this:

…it is far too easy for these debates to be cast wholly in terms of “taxes bad…therefore, tax cuts good.”  I’d say those few words pretty much sum up the substance of this debate for the last few decades, not to mention a lucrative career for the lobbyist Grover Norquist.

But unless you believe schools and universities are bad, and police and firefighters are bad, and libraries and roads and bridges and water systems and early childhood learning and hiking the trails over at Eno River or the beaches of the Outer Banks…unless you think they’re bad too, then I strongly suggest that the first question—the very first thought—you have when someone comes to you with their great big tax cut idea, is: how are we going to make up the lost revenue and which groups are going to be hit by the shift in tax burden?

NC has long been committed to solid education from early childhood interventions through their jewel-in-the-crown system of higher ed, along with maintaining some beautiful natural resources.  The idea that they’ll seduce businesses to come to the state by shifting taxes from income to sales, while continuing a trend toward disinvestment in public goods like higher ed, natural resources, and infrastructure is exactly backwards.

Again, facts don’t drive these debates but given the potential tradeoff here—supporting vital public goods versus tax cuts for the wealthy paid for by tax increases on the poor—my colleagues and I will continue to put them in front of anyone who asks.



Source: ITEP, Who Pays? 4th Edition


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9 comments in reply to "Down the Up Staircase"

  1. Jane Peters says:

    Of course they’re a bad idea. That’s why they’re in favor of it. They’re just trying to shift the burden from the people who can most afford it to the people who can least afford it.

  2. Nick Batzdorf says:

    I’d be interested in your opinion of the internet sales tax.

    My first reaction was that it’s regressive and therefore bad, but Dean Baker argues that while he’d love to see it replaced with income taxes, that’s simply not going to happen. And since poor people don’t buy as much stuff online, it’s not as regressive as one might think; and anyway, why would one want to subsidize internet sales at the expense of brick and mortar shops.

    I’m somewhat undecided – and I admit that part of that somewhat indecision is because I like not paying sales tax when I order stuff online. 🙂

  3. Joel Johnson says:

    Jared- In your remarks you said you would link on your blog to eight studies that control for other factors when looking at the impact of state income taxes on economic performance. Will you do that? Thanks.

  4. Ted Boettner says:

    Nice job in the debate. I think you could be even stronger when defending taxes and business location decisions. Its really simple arithmetic. State and local taxes make up a very small part of the cost of doing business (1-2% max after federal deduction) and are easily inconsequential when considering other larger costs like labor, utilities, and occupancy or raw materials. Businesses fighting for tax subsidies are nothing but rent seekers. The same rent seeking that AARP does for seniors (although there rent seeking tends to bend toward equity). One good frame that we’ve been using is that we need to make our state a good place to do business instead of a cheap place to do business. A good place has enough demand to attract quality retail (trader joes vs family dollar) that takes care of their primary needs (good markets, quality labor, ect) instead of secondary considerations like taxes.

  5. Katie says:

    Thanks for going to bat for libraries. Most people don’t realize their importance, especially in recessions and when there is still such an obvious digital divide (prohibitive to the poor to find a job/better job, kids to do homework/research, etc). The title of this blog also reminded me of a book that is sitting on my nightstand! “Down the Up Escalator: How the 99% Live in the Great Recession” by Barbara Garson.

  6. John says:

    I’d like to hear your views regarding incentivizing people to save more through sales taxes. Wouldn’t another product of the proposed policy lead to North Carolinians saving more vs consuming more? My understanding is that there’s a real savings vs consumption problem in the United States in general and couldn’t this be corrected by this and similar measures, leading to more stable (though possibly less dynamic) economic growth? Again, I’m not saying that it’s necessarily correct to try to replace the income tax with a sales tax, but I’d be interested on whether you think this could be a possible positive outcome of the policy. It may very well be that it’s just not worth the cost.

    • Jared Bernstein says:

      Good question. It’s true that many economists like sales taxes because they discourage consumption and encourage savings but as usual, there’s more to think about here. First, as the figure on the left shows, they’re regressive and since low-income people consume most of their income, they can’t avoid them. So these schemes that shift states’ revenue collection needs onto sales taxes are just too regressive.

      Second, given the increased stocks and flows of global capital, investment in any country is less dependent on that country’s savings rates.

      But you’ve still got a point–there’s a role for taxing sales and it probably would help to lower excessive consumption.

      • John says:

        Thanks very much for your answer! I guess my only follow up would be (and I apologize for not being smart enough to figure this out for myself) whether there could be ways to tweak the tax that would make it fall less on the poorest groups. As I understand, non-prepared foods are currently taxed at a reduced rate, what if this and other staple purchases could be exempt from a newly proposed sales tax (would potentially have the externality of encouraging better eating habits as well)? Anyway, apologies for the hypothetical, completely understand if you don’t have the opportunity to respond as this has somewhat deviated from the original topic of this specific proposed legislation.