How Progressive?

by Art Woolf

The Blue Ribbon Tax Commission authorized by last year's legislature has been meeting but has received almost no media attention, with the exception of one article and one editorial in the Rutland Herald.

The editorial, in today's paper, makes several assertions. One in particular caught my eye:

Progressive taxation is as American as apple pie. It is what separates a nation like the United States from the typical Third World oligarchy where inherited wealth grows without check and the rich few hold all the power.

Rather than separating the U.S. from a Third World oligarchy, the truth is that progressive taxation is what separates the United States from the other rich nations of the OECD (the rich, industrialized nations of the world), who have social safety nets and government programs that are the envy of many in Vermont--"free" college education, "free" health care, paid time off for parents after the birth of a child, "free" daycare, etc.  Except in the OECD they are not funded by progressive taxes.  They are funded by broad based taxes on the middle class. 

In the U.S., the richest 10% of the population pays 45.1% of all the taxes.  In Sweden, the richest 10% pay 26.7%.  The average of the OECD nations is 31.6%.  Even when you account for the fact that the richest 10% in the U.S. earn  more income than the richest 10% in any other industrialized nation, the U.S. still comes out on top (details here). 

The editorial notes that business leaders who testified before the committee were concerned about high levels of business taxes and highly progressive income taxes and

warn that if Vermont continues to punish success, the state could kill the goose that lays the golden egg.

The European nations with high taxes lessen that problem by taxing the middle class and have relatively low taxes on businesses.  The U.S. has one of the highest corporate income tax rates in the industrialized world.   Most of the OECD nations rely on relatively high value added taxes.  In Quebec, for example, the tax is about 13%.   A large share of these consumption taxes are paid by the middle class (since most people are in the middle class.) U.S. states, similarly, rely on sales and consumption taxes to a relatively high degree, which is why their tax structures are relatively less progressive than the national tax structure.

The editorial is not correct when it says that

States tend to tax less progressively than the federal government, in part because special interests often are able to work their will in state capitals

Yes, they tax less progressively than the federal government, but it's not because of special interests.  It's because they want a more balanced and diversified tax base, so they tax the sales of goods and services, much the same as the OECD nations use the VAT. 

One of Vermont's problems is that many people want the state to look like a European-style welfare state.  But unlike those welfare states, which avoid "killing the goose" by avoiding high taxes on business and high income earners, Vermont wants its welfare state to be supported on the backs of a relatively small number of mobile taxpayers.  That's not a prescription for prosperity.

 

Comments

[G.Cross]

Just to help balance a bit the cherry picked data Art selects for his piece, consider the following quote from the October 21, 2008 speech of the Secretary General of OCED when he first introduced the study in question:

"Three policy areas are particularly important in making sure that everyone in our societies can benefit from economic growth:

1. Education. Better education is a powerful way to achieve growth which benefits all, not just the elites. And it is the key to upward social mobility. If access to early childhood education or to tertiary education depends on the depth of parents’ pockets, it is very hard for the child of poor parents to do well. If quality education depends on the neighbourhood where you live, this will also impact the capacity of people to improve their lives.

2. Make Work Pay. However necessary, reforms in education take a long time before their full impact is felt. In the immediate future, we need policies that address directly the increasing earnings inequality. There are a number of good examples. In-work benefits – such as the Earned Income Tax Credit in the United States, the Revenu de Solidarité Active in France and the Working Tax Credit in the United Kingdom -- help reduce poverty by encouraging more people to work while, at the time, giving working families a boost in their income.

3. Tackle Child Poverty. Growing Unequal? shows that children gained less from economic growth than other groups. Poor children do not eat well, do not learn well and have low chances of escaping poverty when they grow up. This is unacceptable.

The countries that do best in keeping child poverty low are those which help mothers work. Yet many families are struggling to reconcile family and work responsibilities. Services intended for children and their parents often do not reach those most in need. The OECD recently published a report called Babies and Bosses which shows how sensible investments in child care, parenting support and in promoting flexible employment can help solve this problem. These investments promise high returns and low risks, a combination which no doubt appeals even more to governments now than it did a few months back."

[David Jaqua]

"reforms in education take a long time before their full impact is felt" ... "These investments promise high returns and low risks, a combination which no doubt appeals even more to governments now than it did a few months back"

Act 60, enacted in 1997 or 12 years ago, has made Vermont's primary education system the most progressive and generous in the country.

George, can you quantify or at least articulate the returns on this investment to date?

[Chris Campion]

George, I would argue that we already have in place a tax structure that makes work pay - pay in terms of the federal government collecting a larger portion of your earnings the more you earn. Otherwise, you're talking about creating a national structure that not only punishes those who choose to work more, but one that actually sets compensation limits and re-distributes them to others, as a centralized planning agency sees fit.

From each according to his need, indeed. Why do so many advocate the abdication of their liberty in pursuit of what they deem to be equality? You're no more free when you're beholden to the earnings of others, as doled out to you by your friends in the federal government. Do we all get a slice of cake to go with the re-distributed wealth?

[G.Cross]

Act 60 is very simple. The voters in each school district set a budget. That budget is converted to an expenditure per equalized student. That expenditure establishes a homestead tax rate. That rate is modified (equalized) based on the common level of appraisal for each community. Thus, the same equalized pupil expenditure results in the same equalized tax rate. The non-homestead property across the state is taxed at the same tax rate everywhere, equalized for local property values. This is what Act 60 was all about, fairness in terms of school tax.

Now, the problem today is that some folks, especially those in communites that were able to spend big dollars per pupil with a very low tax rate, don't like the idea of equalization, fairness. I don't like the idea of unfair taxation that results in some communities having to have a very high tax rate in order to raise a very low per pupil budget. Act 60/68 is fair, but probably not perfect. The old system was less perfect!

There is no doubt in my mind that reducing the number of school boards via consolidation of school districts would result in some, probably minimal, cost savings. Perhaps more importantly, but by using the assessed value of the combined communities for the equalization process it could begin to level out the CLA issues which are the bane of some. There certainly is great room for discussion about creating larger school districts. As long as the fairness aspects of Act 60/68 are continued in any reduction in the number of school boards (consolidation), I would be a supporter.

[Ed]

George Cross just said, "Act 60 is very simple."

Let me repeat that comment again, for those of you who missed it:

"Act 60 is very simple."

Is that what the NEA's six figure spinmaster is now feeding you George? Either you're high on drugs or you've moved to Brattleboro - either way, you're divorced from reality.

[Mark Shepard]

Monopolies are never fair. They may create equality, but never fairness and always lower value.

I guess it depends on what you want. I prefer a better value over equality.

[G.Cross]

One more time Ed, "Act 60 is very simple." There are folks who like to make simple things very complicated because they are not in agreement with the basic concept. It is the old trick of promoting confusion to avoid the facts or to simple provide cover for one's lack of understanding.

By the way Ed, I grew up in Brattleboro, maybe that is why I have all these progressive instincts. There was probably something in the water even back then.