August 29, 2011
High Taxes Are Not the Problem
Missing in the national debate on taxes is the simple observation that taxes are nowhere too high. Of course, saying so could kill the political ambitions of even a decorated combat veteran with a squeaky clean personal life and broad public policy experience. But it is the truth, and it needs to be said plainly.
I believe that the rightful anger over taxes is not so much that taxes are too high, but rather that taxpayers do not see a matching benefit from their tax dollars. The simple value proposition from government drives the anti-tax mood in the country. There is much research to support this observation, and the problem is not going away.
At the federal level, only about half of households pay income taxes, but most workers now contribute effectively 12.5 percent of their income in payroll taxes. (This was temporarily reduced from 14.5 percent under last year’s budget agreement.) More than 60 cents of each tax dollar is spent shifting money from one group of businesses and household to another group. Even if many of the recipients are those most of us would agree to support, say Social Security recipients, poor kids or disabled veterans, the value proposition from this is thwarted by fraud, misuse and abuse. Of course we do not all agree on what is most important spending—but in the end, it is not the taxes, but the perceived value of the services they provide that falls short.
States across the country also struggle with the same issues. Places like Illinois, California and New Jersey suffer public services whose value does not match their cost. We are in far better shape in Indiana.
At the local level, Indiana’s tax reforms of 2008 were all about the value proposition of local public services. The resulting legislation is making our local governments go through a painful 12-step program to fiscal sobriety. More than one community has fallen off the wagon and reverted to the mistaken notion that local government exists to provide employment for political supporters. In those places, the value proposition remains elusive. The continuing flight of businesses and residents is the surest sign that the value of local government is wanting.
Fixing the problem at all levels is a matter of altering the scale and scope of government. In many places government is too big to be efficient. In other places, governments are too small. There is a growing body of research identifying where the sweet spot of efficiency lies, but it takes a crisis for government to act.
The greater problem is not size but scope. In too many places, government does things the private sector does better and cheaper. Maintaining roads, collecting trash and dozens of other activities are jobs for private businesses. Property tax caps in Indiana should force governments to make these changes, but most local governments still suffer a hangover and are not yet ready for step one. Cutting taxes is like closing the saloon—it might appear to solve the problem, but it is not enough to ensure fiscal temperance.
About the Author
Educational Attainment, the 21st Century Fund and the Future of SchoolingIndiana ranks 42nd in educational attainment.
Big Savings for Ending Prevailing WageMy statistical models show that repealing state prevailing wage laws save taxpayers money.
Re-Thinking Economic Development A large share of the most mobile families—perhaps half—no longer need to live near where they work.
Money Illusion and InflationPrice fluctuation could cause inflation to last longer, but it didn’t cause the inflation, it simply extends the pain.View archives