The Tax Ouroboros

Behold the ouroboros:

ouroboros.jpg

The serpent swallowing its own tail, symbol of infinity, cycles, and —

circular arguments. As in Newsday’s snippy editorial the other day:

The Big Three in Albany have begun their annual shadowbox to shape the debate over the state budget. In this corner, we have Assemb. Speaker Sheldon Silver (D-Manhattan) proposing to raise income taxes on million-dollar earners, in order to fund a budget that is 5.1 percent higher than last year. And in this corner, the governor and Senate Republicans are winding up to knock that idea out.

Raising taxes is the easy way out. State officials should begin to live within their means, just as the rest of us do when our household budgets get tight. Spending should be the first place they look.

Silver’s proposal, which was suggested by the Working Families Party, would raise $1.5 billion a year by increasing the tax rate on high earners to 7.7 percent from 6.85 percent for five years. Of course, millionaires can afford it. But that’s beside the point. New York taxes are sky-high. The local tax burden is the biggest in the nation by a large margin. And the Tax Foundation, a research group in Washington, ranks New York’s business tax climate as the third-worst among the 50 states.

Notice that Newsday acknowledges that New York’s local burden is the biggest in the nation. And the local burden would be high because?

<Gulp> Income taxes on high incomes went down, down and down over the past 15 years! That meant less revenue into the State. And less revenue into the State meant higher local taxes to make up the difference, as local costs went up higher than the State could or would support them.

So Newsday swallows the rusty old antitax argument by opposing a proposal that might actually begin to make the local situation better.

In fairness, Newsday does conclude its editorial with this:

There may well be a case to be made at some point for raising taxes on the highest earners. But Silver hasn’t articulated it yet.

Well, here’s a case made at the beginning of the last recession. Nobel laureate Joseph Stiglitz, along with Peter Orszag from the Brookings Institution, argued that

… in the short run (which is the period of concern during a downturn), the adverse impact of a tax increase on the economy may, if anything, be smaller than the adverse impact of a spending reduction, because some of the tax increase would result in reduced saving rather than reduced consumption.

They went on to explain:

A reduction in government spending on goods and services is thus likely to be more harmful to the economy in the short run than an increase in taxes or a reduction in transfer program spending. Within the sphere of changes to taxes and transfer programs, the impact on the economy depends primarily on the propensity to consume — that is, on how much of an additional dollar of income is spent rather than saved — among those who receive the transfer payments or pay the taxes. The more that the tax increases or transfer reductions are focused on those with lower propensities to consume (that is, on those who spend less and save more of each additional dollar of income), the less damage is done to the weakened economy. Since higher-income families tend to have lower propensities to consume than lower-income families, the least damaging approach in the short run involves tax increases concentrated on higher-income families. Reductions in transfer payments to lower-income families would generally be more harmful to the economy than increases in taxes on higher-income families, since lower-income families are more likely to spend any additional income than higher-income families. Indeed, since the recipients of transfer payments typically spend virtually their entire income, the negative impact of reductions in transfer payments is likely to be nearly as great as a reduction in direct government spending on goods and services.

Newsday suggests that “state officials should begin to live within their means.” In Albany speak, the state “living within its means” almost always translates into “balancing the budget on the backs of the poor.” Morality aside, that’s a good way to swallow yourself up.

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