A New Fount of Misinformation
While there’s a good case to be made that benefits could be derived from reform of the tax code, The Tax Foundation is not the group to do it. While serious, reasonable economists consider reform (or as Frank Luntz would have everyone calling it, “simplification”) of the tax code to be a potential way to increase economic efficiency, this goal has been co-opted as a way of lobbying for more tax cuts. How to tell the difference between those who actually seek tax reform, and those who are using it as cover for more tax cuts? One way is to examine the degree to which the arguments become stupid and distorted.
The Tax Foundation certainly appears to be an example of the latter case. They’ve launched a new weblog that serves up example after example of distortion and weak commentary, and by casting a critical eye across the entries, their goal becomes obvious. A few examples…In a post on “Taxes and the Underground Economy,” Andrew Chamberlain displays a table from Searching for the Hidden Economy (an interesting read):
His interpretation of the table: “What explains the wide variation? One factor is burdensome taxes and regulations that push otherwise legal activities underground…”
While it’s true that one explanatory factor is tax burdens, that’s far from the only explanation– and the article he points to notes economic research showing that it’s much less of a factor in the United States. In fact, one of the economists quoted in Chamberlain’s post suggests that the United States’ underground economy might not be so bad after all:
Schneider, the Austrian economist, is of two minds about the U.S. underground: “A very difficult question,” he says. “I think a shadow economy of 10 percent, which leads to additional value added has an overall positive effect on the welfare of the United States.” But a case can be made that tax losses from even a 10 percent shadow economy are too great for the state to ignore, he adds.
So– if we consider the most important negative effect of a shadow economy on the U.S. to be its effects on tax revenues, what can be done? Let’s pretend that we could cut the size of the shadow economy in half by cutting taxes. For the tax cut to have a net positive effect (increase revenues), it would have to be smaller than 4.4%. That is, of course, assuming that a 4.4% tax cut could somehow succeed at reducing the size of the shadow economy by half, a laughable assumption.
In another post, Chris Atkins asks, “Should Idaho Dedicate Tax Revenues for Education?” His answer, as one might guess, is no:
The Idaho Education Association will apparently push an education funding ballot measure in 2006. The measure will reportedly ask voters to dedicate an arbitrary percentage of state revenues to education funding. Idaho’s sales tax, which is set to return to 5 percent this summer after a temporary increase to 6 percent, is a likely target.
Before voting “yes” on a proposal like this, Idaho voters should take a hard look at Colorado’s Amendment 23. Approved by Colorado voters in 2000, Amendment 23 requires Colorado to increase education spending by population plus one percent every year and sets aside 7.2 percent of personal income tax revenues to fund education.
The impact on Colorado’s budget has been severe. When Colorado revenues plunged during the recent recession, Amendment 23 required the state to keep increasing spending for education. This squeezed the rest of the budget, leading to less money for higher education, transportation, health and public safety. Such a squeeze would put more pressure on lawmakers to raise taxes in Idaho to continue funding all needed state services.
This, of course, is just poor analysis. While Idaho’s proposal may well be a terrible one, this is not a particularly sound argument. Colorado’s measure ties education spending to population– so if revenues fall by half, education spending as a share of the budget (if population remains constant) doubles. Idaho’s measure won’t be structured this way. Since Idaho’s measure is based on revenues, spending can rise and fall with capital inflows, a far less restrictive policy.
Curtis Dubay offers similarly weak analysis when posting about “Fixing Social Security and Encouraging Growth“. He says:
“Representative Robert Wexler (D) of Florida announced his plan to save Social Security yesterday. Mr. Wexler proposes to raise the payroll tax by 6 percent. According to the Associated Press story:
Mr. Wexler’s bill calls for a 6 percent tax on all income above the current $90,000 cap. Three percent would be paid by workers and 3 percent paid by their employer.
An expansion of the already existing payroll tax is poor tax policy from an economic perspective. A payroll tax is a direct tax on labor, especially since it is levied on both the worker and the employer. Essentially, the payroll tax makes it more expensive for businesses to hire workers, and lessens the reward for participating in the labor market for individuals. The result is a smaller labor force. Economists understand this phenomenon as ‘the more something is taxed, the less of it there is’.”
Reading this, one hopes that Mr. Dubay is not one of the Foundation’s better economists. First, one must wonder how a payroll tax is a direct tax “especially” because it is levied on both the worker and the employer (as though there is no substitutability between the two halves). Second, Mr. Wexler is not “propos[ing] to raise the payroll tax by 6 percent”, as Mr. Dubay has it. For no worker would the payroll tax be raised by 6 percent. Currently, the payroll tax is set at 6.2% up to $90,000, with all income above $90,000 going untaxed. By removing the cap and taxing the 90,001st dollar and above at 6 percent, he’s raising the tax by 0% on workers making less than $90,000, and by less than 6% on all workers making more than the current cap. A worker making $250,000 a year would see his marginal tax rate rise by less than 4%. Third, does Mr. Dubay really believe that a significant number of individuals making more than $90,000 a year will drop out of the labor force as a result of a tax increase of 0-4% for most of them? Dropping little economic concepts that don’t particularly apply into an analysis might strengthen the convictions of someone who has already drank the Kool-Aid, but to a thinking reader, it comes off as pathetic.
It’s a shame that the discourse on tax reform has been poisoned by groups like this, who seek to advance tangentally-related (and less worthy) goals. It’s a little like having the KKK on your side (no, I don’t at all consider the Tax Foundation to be the moral equivalent of the KKK)– no matter how right you are, nobody will support a position held by the KKK. If tax reform becomes a mere synonym for tax cuts, and if those pushing a “tax *cough*cuts*cough* reform” agenda continue to present such weak arguments, tax reform will never become a reality.
Update 5/25: A fair bit of warning– When critiquing Mr. Dubay’s comment, I used the same language as he did, making statements along the lines of “raise the payroll tax by 6 percent,” et cetera. This language is actually incorrect. To clarify, the payroll tax rate would be raised by six percentage points, not six percent. This correction should carry throughout the section. Further, my calculation in the same section omits the 6.2% employer contribution to Social Security. This omission, however, does not actually affect the results of the calculation that follows.