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Tuesday, July 31, 2007

IN government just not getting it....

The situation now in Indiana (or at least Indianapolis) has become one of those rare instances in which the general populace actually agrees with mainstream economists on something (which is something I myself am increasingly rarely doing these days). Protest after protest of people have urged their local and State officials to repeal property taxes in favor of a modest increased income tax and a real progressivity-adjusted increase in the sales tax.

Property taxes are outdated and an inefficient and unfair form of taxation in that it has a tax base that is 'based' on one asset - which just so happens to be the most important asset an individual can have. It is inefficient because it distorts investment decisions and unfair because it hinders people on fixed incomes. But in Indiana, it's not really taxation itself that people don't like (provided its used wisely), and indeed, most people could care less about what kinds of taxes are efficient or not. The reason people are upset in Indiana is due to the poor transition of the property tax calculation and the fact that residences are paying more for relatively few local and State services.

It used to be that property tax was calculated as cost-depreciation. Now (as of a couple years ago), property taxes are based on market assessment of the area of the property. What this has done is it has caused large % increases in property taxes for homeowners in high-value areas, as well as homeowners with older homes (which are often owned by the poor). Combine this with the fact that there are so few market transactions of corporate real property, that commercial and industrial taxes have remained flat - pushing an even greater burden to residences (oh, and the inventory tax was abolished last year which aided that change even more).

But I digress from my main point. It is exciting that people are demanding such a substantial change (which unfortunately in Indiana would require a constitutional amendment). But then, that seems to be hoosiers' MO: wanting to do what is right for the long-term. The problem is that is also hoosiers' MO to hate change. As such, the State is constantly in this catch-22 where people know what they should do, but seldom end up actually doing it. What people want is simple: more efficient government (read CHEAPER) and a repeal of property taxation

This unfortunate dichotomy is explained best by today's recent plan to 'fix' the property tax problem issued by the State's GOP. Here is their plan:

*Taking $100 million of the state's surplus to fund an additional
property tax credit for all homesteads

* Changing the rebate checks, passed by this year's legislature, to

* Extending the filing deadline for homestead credits for this year's
tax bills to Sept. 30 or 45 days before a county issues its final tax
bill to be paid this year, whichever is later;

* Letting local government decide how best to target the $300 million
in property tax relief the legislature approved this year instead of
giving all homeowners those rebate checks

...All short-term fixes. Delving into the State surplus, changing rebates to credits, etc. are all small fixes or to the current issue (and at worst is just passing the buck) but they don't respond to hoosiers' concerns about the philosophy of taxation in general. People want a quick fix, but they also are demanding real change so that their hard-earned property isn't taxed to the point where people can barely afford to live.

That concern is not being met by either party. Democratic House Speaker Bauer, in addition to much of the above GOP solution, wants the State to start financing local child welfare costs for those counties that use local income taxes to replace property taxation to a small degree. But that is just shifting cost from one bureucracy to another - and, secondly, income taxation is not nearly as 'productive' (or fair in my opinion) as sales taxation. In any case, neither plans get at the psychological and sociological issue that different forms of taxation can effect. Taxing a house IS different than taxing a wage or taxing general consumption. It is targetting at its worst. And few legislators seem to get it.

Tuesday, July 24, 2007

Not econmics, but not politics either - just funny

I didn't watch the Democratic YOUTUBE debate last night (I was too busy reading Harry Potter), but, in reading the transcript, I almost fell off my chair... This was the opening segment:

"ANDERSON COOPER, CNN host: Our first question tonight is Zach Kempf in Provo, Utah.

QUESTION: What's up? I'm running out of tape; I have to hurry.
So my question is: We have a bunch of leaders who can't seem to do their job. And we pick people based on the issues they that they represent, but then they get in power and they don't do anything about it anyway. You're going to spend this whole night talking about your views on issues, but the issues don't matter if when you get in power nothing's going to get done.
We have a Congress and a president with, like, a 30 percent approval rating, so clearly we don't think they're doing a good job. What's going to make you any more effectual, beyond all the platitudes and the stuff we're used to hearing? I mean, be honest with us. How are you going to be any different?

COOPER: Senator Dodd, you've been in Congress more than 30 years. Can you honestly say you're any different?

SEN. CHRISTOPHER DODD: Well, I think so.
First of all, thank you for inviting us here in The Citadel. It's great to be here at this wonderful college, university.
Certainly, I think it's a very important question one ought to be asking because, while hope and confidence and optimism are clearly very important, I think experience matters a great deal -- the experience people bring to their candidacy, the ideas, the bold ideas that they've championed over the years, whether or not they were successful in advancing those ideas and able to bring people together.
I'm very proud of the fact that, over my 26 years in the Senate, I've authored landmark legislation, the Family and Medical Leave Act, child care legislation, reform of financial institutions.
In every case, those are new ideas, bold ideas, that I campaigned on and then were able to achieve in the United States Senate by bringing Republicans as well as Democrats together around those issues.
That's what's missing, more than anything else, I think, right now, is the ability to bring people together to get the job done."

Just because you say something is a "new idea," doens't make it one. I love platitudes ;)

Tuesday, July 17, 2007

Payroll vs. VAT (consumption) tax

There is an excellent discussion going on over at Mankiw's place regarding the relative effects of payroll vs. consumption taxes on tradeoffs like labor/leisure, spend/save, etc. Some of the comments are particularly thoughtful and in-depth.

Thursday, July 12, 2007

Property Taxes skyrocket in Indiana - time for a Fair Tax

I just got my property tax bill last week. It jumped 70%. That is pretty typical for most that live in my county - though some unfortunate souls just a couple miles south of me saw their taxes rise by 200% or more! Now the people are up in arms.

I have said it before and I'll say it again, we need to get rid of hyper-inefficient forms of taxation like that of property, corporate income, and payroll taxes. We need to support the more efficient tax on lifetime wealth - that is - the sales tax. Why disincentivize someone to own a home? Why disincentivize a company to purchase a new factory or certain types of equipment? Why should corporations have to pay taxes, and then have their owners turn around and pay taxes? Why should people be burdened with form after form after deduction after exemption, etc.... What can we do to ease the US's obsession with consumption? What can we do to increase overall investment and reduce interest rates in the US? What can improve our trade balance without threatening countries like China? What......what..........what other than a sales tax, a FAIR TAX.

It's time for Indiana to support the Fair Tax, and it's time to urge our immediate neighbors and our country to support it as well.

We don't need worthless short terms fixes like Mayor Bart Peterson just espoused - a 'fix' that will have us paying more than we bargained for NEXT year, and years after that. We need a real solution and we need to start getting real.

To prove to you that I'm not biased about this, you should just know that if Fair Taxation were adopted in Indiana and the US, I would be out of a job (albeit temporarily) since my work deals with tax credits. And tax credits are great, and can be useful, but the best incentive you can give a company is tax transparency, and a corporate income tax rate of 0%.

In the long-run, a sales tax that replaces other taxes (and yet maintains progressiveness via a rebate) is more efficient, lowers the tax burdens of most all groups of people and corporations, and is transparent and easy to follow.

In the short-run, why not at least offset some of the property tax jump with a small county-run sales tax. Of course, this kind of thing has been talked about before in Marion County - but sloppier minds always prevail sadly.

In the very short-run (this year, ie now) there are no easy answers - but I think at least a pause, a breath, and a proper reassessment are in order.

No wonder China is least-cost producer in so many areas...

...they use cardboard as an input to food....


UPDATE 07/19/07:
CNN is reporting that this story was a hoax. I guess that's a relief.