Cato Ad Infinito

Phil Gasper ptrg at sirius.com
Tue Aug 18 17:07:38 PDT 1998


Max Sawicky writes:


>The most important point, however, is one that
>CTJ does not incorporate in their analysis because
>of their choice of methodologies. The use of
>annual incidence exaggerates the progressivity
>of income taxes and the regressivity of sales
>taxes. Income varies more than the sales tax
>base from year to year, so the variance of
>tax liability is higher, hence an appearance
>of greater inequality. Income not spent on
>consumption, and thus subject to sales tax,
>in the year it is saved will be subject to tax
>later, along with accrued interest, when it is
>spent (as most of it will be). In present value
>terms, there is less difference in incidence
>than meets the eye.

The last time I heard this kind of argument was when assorted Republican heavies were talking about scrapping federal income tax and replacing it with a national sales tax. But the claim that in the long run everything evens out, doesn't wash. Because the wealthy can defer spending, they can also defer paying taxes of many thousands of dollars a year, and they don't just stick this money in their mattresses. By the time Mr. Moneybags gets round to spending his ill-gotten gains, the investment income from the deferred taxes alone will be well in excess of any sales tax he has to pay (even after capital gains tax), so the effective tax rate on the wealthy never catches up with that on the poor.

Max continues:


>Of course, income taxes "can be" progressive,
>but so can consumption taxes, as you said.
>The reality that must be faced, however,
>is that neither tend to be.

This is plain disingenuous. Over the past few decades the tax burden has been shifted from the wealthy to middle- and low-income tax payers by making income-taxes less progressive and relying more on sales taxes and other forms of regressive taxation. Despite that, it still remains true that income taxes are substantially more progressive (or at least less regressive) than sales taxes. And its much easier to institute a progressive income tax than a progressive sales tax. (The advocates of a flat-rate income tax argue for the elimination of all or most deductions and the same rate for all on the grounds of simplicity. I'm all for simplicity, but you can achieve that by eliminating the deductions and coupling that with a sharply graduated rate structure.)

Max:


>On the whole, too much is made of tax incidence,
>especially at the state level, where income taxation
>is woefully inadequate to finance the public sector,
>and not enough of expenditure benefits. This
>defensiveness (a reluctance to defend public
>spending) does more harm than is offset by the
>advocacy of redistributive taxation.

Is this what they are saying at the EPI these days--it doesn't matter who pays the taxes, just so long as they get paid? With friends like these, no wonder liberalism has got itself a bad name.

Phil Gasper ptrg at sirius.com 415-522-1895



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