Sunday, February 23, 2014

How Come Cutting Taxes For The Rich Stimulates The Economy, But Cutting Taxes For The Poor Doesn't?

     I see that Sioux Falls Democratic state rep Marc Feinstein's annual effort at eliminating the state sales tax on food went down the tubes again at this year's legislative session.  Seems like its biggest obstacle is concern in our Republican-dominated legislature  that the proposal doesn't include a guaranteed way of replacing those taxes, thereby making the plan revenue-neutral.  Feinstein's plan would have raised sales taxes by an equal amount on non-edible purchases, but that didn't pass muster.  Apparently there was no evidence showing that the replacement sales tax would make up for the revenue losses incurred by eliminating the tax on food.  So for now, South Dakota will remain one of a handful of states with this most regressive of all taxes, regressive because it takes a bigger share of a poor person's income than a rich person's. Why? Because the poor spend more proportionally on food than the rich. Some, me included, call this unfair.
     But forgetting about the fairness/unfairness component of it for a moment, let's consider its repudiation of core Republican taxation philosophy.  As a lifelong Republican myself, I've always believed wholeheartedly in the traditional GOP  notion that cutting taxes ultimately leads to more tax revenues for the government.  Why?  The general principle is that  setting money loose into the private sector is a much more efficient way of getting that money to grow the economy than by gobbling it up as taxes.  Though this is standard Republican economic fare, even Democratic icon JFK enunciated it when he cut taxes way back in the early 1960s.  Similar measures in the early 1980s and early 2000s occurred, all of them with a stimulative effect on the economy. Though not directly related to sales taxes,  the well-known "Laffer Curve" (created by University of Southern California Economist Arthur Laffer back in the 1970s) showing the connection between tax rates and tax revenues is often used to support the general notion that taxes can have a detrimental effect on tax revenues if imposed beyond certain levels.  John F. Kennedy, speaking of his proposed tax cuts in 1962 said, "the soundest way to raise (tax) revenues in the long run is to cut the rates now." 
the soundest way to raise the revenues in the long run is to cut the rates
Read more at http://www.wnd.com/2004/07/25640/#VQSQDgOBLpAmrXCW.99
the soundest way to raise the revenues in the long run is to cut the rates
Read more at http://www.wnd.com/2004/07/25640/#VQSQDgOBLpAmrXCW.99
the soundest way to raise the revenues in the long run is to cut the rates
Read more at http://www.wnd.com/2004/07/25640/#VQSQDgOBLpAmrXCW.99
     Based on real-life experience and academic support, the idea of lower taxes leading to more government revenues is one that I've always supported, and the same goes for the leadership of my party.  As I also subscribe to the simple notion that all taxes are income taxes, I believe the principle applies to sales taxes.  This leads me to wonder why the principle isn't applied to eliminating sales taxes on food.  By doing so, it puts more cash into the hands of our economy's most energetic component--consumers.  What's particularly puzzling is why the Republicans who dominate South Dakota's state leadership don't see it the same way, consistent as it is with their party's central economic principle.  We always brag about South Dakota being a low tax state as a means of enticing investment into it, but never seem to apply  that pitch to the ordinary Joes and Janes who might be likely to move here only to find out that they're stuck with taxes on their food, unlike most of the states that they'd consider moving to in the rest of the country.
     I think we need to get our story straight when it comes touting our tax burden.  No personal and corporate income taxes make for a good story--but when it comes to telling potential investors that their employees will have to pay a greater share of their incomes on food than their bosses, we seem to clam up.  Not a good thing, actually.  Somebody with some clout should look into this. 

6 comments:

  1. I am temporarily a registered Republican. I always register as a Republican during primary season, since it is my only opportunity to have a meaningful vote in elections for state offices. I always switch back right after voting. However, if you keep writing these columns, I might stay Republican.

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  2. I appreciate the comment, Wayne. I intend to remain a Republican and support the ideals of Republicanism. There is plenty of room for common sense and pragmatism in the GOP. The "my way or the highway" extremists will never go away, but I hope to be part of the movement that puts them back on the fringes. Nice to see you here.

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  3. I believe that opposition to this stems from the positions of the many small towns that barely eek out a financial existence in SD. In many of these towns the largest sales tax producer is the local market, In some cases almost the only sales tax producer.

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    1. A point that bears consideration. I have some business in a town of just over 800 people. I'm pretty sure the city's portion of the total sales tax I collect is 1%, but will have to review the monthly form to confirm that. I would think the smaller towns derive the lion's share of their revenues from the various overlapping taxing districts in their respective counties, but can see where sales taxes are a significant component of their budgets. Your point is well taken.

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  4. John, What is really the most amazing part of this to me, is that this is the same State, that although all of the bordering states charge at least 5% sales tax on new vehicle purchases, SD only charges 3% even though if the buyer of the vehicle in SD lives in one of those other states, they have to pay the 2 percentage points that they save here to the state in which they live. Go by your new car dealerships and notice how many vehicles have a price tag of over 60k.

    While I like your analysis of the Laffer curve, I wonder at what point that cutting of taxes becomes self defeating. Obviously everyone has to eat so removal of the tax on grocery store food would potentially all come back into the economy. But if one buys stocks in the stock market, which is something that those at the bottom of the income ladder probably cannot afford to do, there is no sales tax on that purchase. So with the investment in the companies that have now offshored their jobs, there is no return to the treasury on their income and there are no jobs created to help pay the income tax bill that would balance the budget. I probably have not done a very good job of laying out my question, but at what point do income tax cuts become self defeating?

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  5. Hi Lanny, building on your first point, it's particularly disheartening to learn that SD's long list of sales tax exemptions, mainly for business and agricultural special interests, total about $582 million a year, per this morning's Rapid City Journal. This is actually astounding to me. There has to be some room for shifting sales tax revenues away from foods and toward some of these breaks. As to the Laffer Curve, you aren't the first to question my use of it. My daughter, a UC Berkeley-trained Economist shares your view, lol. I don't particularly accept its conclusions
    but intended it for an illustration of how Republicans connect tax revenues to economic growth, and given the Republican stranglehold on SD state government, I question why they don't apply that principle to state taxes.

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