Monday, April 27, 2009

The four Rs

Reform, revenue, regressivity, and recessions.

Taxation is always difficult. No one loves it. Those of us who believe in active government recognize its necessity, even if the yahoos on the right continue to scream for starting with cuts long after the budget has already been seriously slashed. Their thinking is a Markov chain - they can't remember any cut as long as there's something, anything left that might conceivably be cut.

Massachusetts is considering three ways to raise transportation and other revenues:

  • Toll increases on the Turnpike, which the MTA board passed because it was the only act in their power to avoid default and then rescinded while the branches government dickered
  • Increased gas taxes on everyone, most notably Gov. Deval Patrick's 19c per gallon increase
  • Increased sales taxes on everyone, Speaker Robert DeLeo's proposal (now passed by the House)
All these revenue sources are regressive and unfair in some way. Even though the impact of each instance is small, in total they're substantial, and they disproportionately affect those who are least able to pay them. Toll increases would extract further unfair revenue from a minority subset of beneficiaries of the Big Dig.

Gov. Patrick is right to emphasize reform at the same time as revenue. It's not only good politics; it's good government. I know for a fact that the legislature is aware of this. My State Rep told me so in no uncertain terms yesterday as she dreaded the trade-offs of today's vote.

I told her I supported the gas tax. Why if it's so regressive? It's better targeted than a general sales tax, and it has other positive effects on the environment. But it's far from ideal, a confirmation as if we needed another that politics is always the art of the possible.

What no one has proposed is a progressive income tax. One reason is that Article XLIV of the Massachusetts Constitution forbids a typical progressive income tax on ordinary income.

Of course, raising taxes of almost any kind in the kind of economic downturn we're facing has very adverse effects. We don't want people to tighten their spending even more and add to the depth of the recession. But, again, the Massachusetts Constitution requires a balanced budget every year.

The best proposal would take a leaf from Obama's book. It would reduce the 5.3% tax rate to 5% for the poor and middle class, but it would raise the rate on the affluent.

Not only is this a more progressive tax, a revenue-neutral change to a progressive tax would actually be stimulative, too, since poor and middle class taxpayers are more likely to spend their cuts and thus contribute to aggregate demand in a time when the fall of demand risks a feedback cycle of further economic shrinkage. Even a revenue-increasing proposal actually has a chance to be net stimulative, though that aggregate effect would depend on actual numbers.


globeisatrocious said...

Of course the poor will blow it on Wingo, check cashing services, cigarettes (though Obama's tax increase on these will recoup some of this), cheap alcohol, crystal meth and tacky lawn ornaments.

The rich will make wise, proper investments that will grow the economy.

Sounds like a Constitutional Convention is in order, to carry this beyond the navel gazing.

Anonymous said...

The Massachusetts voters have voted on this Constitutional amendment several times over the last few decades and it has consistently failed. The Massachusetts voters don't trust the Legislature to use this power wisely. Since the solution to every problem is raise taxes and then never get around to any reforms, can you blame the voters for their misapprehension?

lovable liberal said...

Anonymous, that's the conventional wisdom, and it may be correct. I don't know how the moneyed interests manage to convince everyone else to keep their taxes low, but they do.

globeisatrocious, you reveal so much about yourself that you don't need rebuttal. Wise investments! ROTFLMAO!