BuckeyeBlog

Sen. Obama has called for eliminating the income tax–for a select group.

Whatever the merits of that idea, some have objected to his setting an abrupt threshold for qualifying for the freebie:

Tax experts across the political spectrum also fault the Obama plan’s abrupt $50,000-a-year threshold. As described by the campaign, seniors making, say, $48,000 would pay no income tax, while someone with income slightly more than $50,000 could pay several thousand dollars in income taxes. Seniors nearing the $50,000 threshold would have incentive to quit working.

Some of these experts say there would be a phasing in/phasing out to eliminate this problem. The issue is far more broad than this, however. Every government benefit tied to some measure should have a similar phase in and phase out. The idea that we’re going to set a “poverty level” and then give benefits according to some multiple of it, is silly. Most of these things ought to be done away with altogether, but if we’re going to have them, then let’s phase them in gently, so that there are no silly discontinuities and the associated goofy incentives, where one person in line earned $39,001 and doesn’t qualify, while the next earned $38,999 and does qualify. For another great example, check out this health care clinic in Dayton, which just “missed the cut” for more than doubling its federal subsidy.

Ohio University’s Richard Vedder received the Adam Smith Free Enterprise Award from the American Legislative Exchange Council today, and he and Rep. John Adams, R-Celina, speak about ALEC, higher education, the income tax and transparency.

Next time you find yourself reading about principles behind tax policy, note the principle of “equity.”

What this usually means is you want to use the tax code to redistribute income. The richer you are, the more you pay. From each according to his means.

What these folks don’t tell you, though, is that this is precisely what a percentage tax accomplishes. Pay 10 percent of your income, rich or poor, and guess what? The richer you are, the more you pay. Earned $10,000? You pay $1,000 in tax. Earned $1 million, a hundred times more? You pay $100,000 in tax, a hundred times more.

What big government folks want is more than that, however. They want an acceleration in percentage, which is to say, not only do you pay more, but the government has a free hand in making you pay more than that still. Earned $10,000? You pay nothing, and in fact we’ll give you some tax credits. Earned $1 million? You don’t really need all that; why don’t we take 40 percent of it?

The Wall Street Journal nails this today, covering one of the most important perennial stories, the income taxes paid relative to income earned. Guess what? The rich pay far more than their share, and you won’t squeeze more out of them. They’ll just leave.

(And for everyone who says, “Gee, you can’t live on $10,000,” fine. Tax the low earners the same as everyone else, but put your redistribution schemes into the expense side of government by writing them a check. That way even the poor will be unhappy when taxes go up, and even the poor will be unhappy when they see how much of their money is spent on things they don’t agree with.)

One of the first things to do in looking at questions of revenue or expense is to forget the loose change and focus on the guts. (Of course there are also powerful arguments for looking at the margin, too, but one thing at a time.) When it comes to state of Ohio taxes, state revenue is basically half sales tax and half income tax.

So when legislators propose to eliminate the income tax, are they proposing to eliminate half of the state’s revenue? Some Ohio legislators seem to think so.

“Certainly there is going to have to be some replacement revenue for us to be able to move forward,” [said Rep. Jay Hottinger, R-Newark] . . .

Asked if it was really possible to eliminate the income tax, [Rep. Matt Dolan, R-Novelty] said, “Given the conditions today, no. But I think it’s very possible we could get Ohio competitive into a 3 to 3.5 percent range.”

This isn’t really the question. It’s all a matter of timing. Are proponents of eliminating the income tax proposing to cut 50 percent of state revenue tomorrow? Not very likely. While it’s true that they could double the sales tax and keep overall revenue the same immediately, a more likely approach would be to simply tighten up the growth belt.

Assume actual state spending grows 3 percent a year, not a bad estimate, given that the last two budget cycles have been historically low at something approaching 2 percent per year, not including about half of the state’s overall budget, which tends to grow faster. Assume that revenues grow at the same rate. The rule of 72 says that state expenditures will double in 24 years. All that would be required is to shift the growth in sales tax every year to a reduction in the income tax. Voila - the income tax is eliminated in 24 years, and sales tax rates haven’t changed.

The only thing that’s changed is that government shrank as a share of the overall economy. That’s a good thing, not a bad one. But even if one chooses the path of those who believe in government over individuals, the income tax could be eliminated by raising the sales tax rate gradually while reducing the income tax rate gradually. In that unhappy circumstance, government would hold the same share of economic activity, but at least that share wouldn’t grow, and again the income tax would be gone.