Chris Pullman and Richard Reeves at Brookings write opposing a reinstatement of the deduction for state and local taxes on the federal income tax. Jonathan Parker, a great economics tweeter, tweets approvingly,
But though they are right, but they are not right for the central reasons. And the reasons they give are a lot less non-partisan than Jonathan makes it sound.
Their arguments against SALT are entirely based on redistribution -- tax the rich more.
1. Lifting the SALT cap would be massive tax cut for rich
2. Lifting the SALT cap much more pro-rich than Trump’s tax bill
3. Even with the cap, the SALT deduction is most valuable to affluent
OK, it's fun to point out the hypocrisy of Nancy Pelosi, Chuck Schumer, and Joe Biden savaging the Trump "tax cuts for the rich" and promising more such, yet so heartily backing a proposal that is very narrowly targeted at lowering taxes for their (largely Democratic, Blue-state) wealthy supporters.
But this argument is Democrat v Democrat. By this analysis, the tax system should always be more progressive. The only answer to "how much should we tax the rich?" is always "more." That's not really "non-partisan!"
When is enough enough? What is the right overall (federal, state, local, payroll, sales taxes, property taxes, estate taxes, etc. all considered) average and marginal tax rate for high income households? How close are we to that? The answer is not always "more," and every single element of the tax code should not be evaluated by its contribution to greater progressively alone. The progressively of the entire tax and transfer system matters, not each provision in isolation.
Most of all, economic analysis should focus on incentives. There really is nothing a-political to say about redistribution, but there is plenty a-political to say about incentives.
My main objection to the state and local tax deduction is that it gives a distorting incentive to state governments. With a 40% top federal marginal tax rate and a deduction, when a state like California raises taxes on "the rich," by $100, that rich person pays $40 less in federal taxes. People who live in other states, in the end, pay $40, without the chance to complain. Rich people in the California have less incentive to complain. (Or to move to Nevada. In droves.)
I'm of the opinion that marginal tax rates are too high, when you put all the taxes together, so I might favor the deduction for that reason. Again, that's an incentive argument, and I have less of an opinion about average tax rates. But in my judgement, I'd rather see marginal rates decline because state governments face the full cost of their decisions and face the economic effects of high marginal rates. Deductibility is also useful to make sure that the total tax rate does not exceed 100%. Even the most left-wing person must admit that disincentive effects kick in somewhere!
This is a complicated topic, at the best of times. No doubt there is some effect in the way of transfers between households occurring in the deductibility of state income and property taxes for federal income tax returns, but how does one quantify the impact of that? The flip side is the absence of state income taxes in just a handful of states--the states of Washington, Nevada and Texas come to mind as three examples. It is not a large proportion of the 50 states and the District of Columbia, so it is not as if the deductibility is only to the benefit of the states of New York and California--there are many more states with state income taxes than there are states without state income tax regimes.
ReplyDeleteThe decision to limit the amount of deductible benefit for state income taxes and state property taxes does not eliminate the deductible benefit itself. For those in lower income brackets, the deductibility is still available, I believe.
I haven't read the Brookings article and probably never will given time constraints and other more pressing matters, but I would not ascribe the motivation of their position to partisan vs. non-partisan vs. neutral (objective) motives. Rather, there are sound economic reasons for limiting deductibility of any expenditure or expense, and placing a cap on deductibilty of state income and property taxes probably goes to distributional issues as well as being socially beneficial in limiting consumption behavior over investment at risk that the well-to-do have as options or alternatives that households in lower income stratas do not. A review of Frank Ramsey's writings might help put those issues into an appropriate framework.
This is a complicated topic, at the best of times. No doubt there is some effect in the way of transfers between households occurring in the deductibility of state income and property taxes for federal income tax returns, but how does one quantify the impact of that? The flip side is the absence of state income taxes in just a handful of states--the states of Washington, Nevada and Texas come to mind as three examples. It is not a large proportion of the 50 states and the District of Columbia, so it is not as if the deductibility is only to the benefit of the states of New York and California--there are many more states with state income taxes than there are states without state income tax regimes.
ReplyDeleteThe decision to limit the amount of deductible benefit for state income taxes and state property taxes does not eliminate the deductible benefit itself. For those in lower income brackets, the deductibility is still available, I believe.
I haven't read the Brookings article and probably never will given time constraints and other more pressing matters, but I would not ascribe the motivation of their position to partisan vs. non-partisan vs. neutral (objective) motives. Rather, there are sound economic reasons for limiting deductibility of any expenditure or expense, and placing a cap on deductibilty of state income and property taxes probably goes to distributional issues as well as being socially beneficial in limiting consumption behavior over investment at risk that the well-to-do have as options or alternatives that households in lower income stratas do not. A review of Frank Ramsey's writings might help put those issues into an appropriate framework.
"I'm of the opinion that marginal tax rates are too high, when you put all the taxes together, so I might favor the deduction for that reason."
ReplyDeleteYes, but ... We have fallen trillions of dollars in debt, and every bond that issued to fund that debt is a bill of exchange drawn on the taxpayers.
Some poor male child of an intact female adult canid is going to have to pony up. It is just that the drawee has not yet been named. And everybody is thinking up good reasons why it ought to be some other body.
Don't tax you.
Don't tax me.
Tax the man behind the tree.
"Difficulty of rolling over the debt"?? What difficulty? If would be creditors significantly up the rate of interest at which they are prepared to hold debt, all govt and central bank have to do is pay they off creditors when debt matures and tell them to go away. And if the consequent rise in the stock of base money proves inflationary, then raise taxes and confiscate some of that money from the private sector (as I've been pointing out on my blog for years).
ReplyDeleteOf course tax rises may be POLITICALLY difficult, but so far as strict economics goes, there is no problem there.
And as for the idea that those tax rises would cut living standards, NO THEY WOULDN'T. Reason is that the sole purpose of those tax rises is to hold demand down to the maximum that is compatible with acceptable inflation: i.e. full employment and living standards remain untouched.
Your point is good-- the progressivity issue isn't the main one. The basic question is: Why should people from states that choose to have low taxes bear more of the federal tax burden than people from states that choose to have high taxes?
ReplyDeleteYou just proved that there was a debt crisis after WW2. Oh wait, there wasn't
ReplyDeletehttps://underground.net/wheres-the-money-coming-from-by-stuart-chase-1943/