15 July 2008

Turnout and Taxes

Why are federal taxes less regressive than state taxes?

One of the better explanations for the regressivity of state taxes is as a natural political consequence of majority voting for the lawmakers who enact taxes.

Why would federal taxation be less regressive under that model? Because voter turnout is higher for federal elections (and voters are more informed about these elections) than is the case in elections involving state and local officials.

Since voter turnout and voter knowledge about elections is highest among higher income voters, voters who vote in federal but not state elections and voters who are well informed about federal but not state elections, will have lower incomes on average. It follows that federal elected officials should tend to be more concerned about the well being of low income voters than state and local officials. This concern translates into federal tax policies that are more progressive than state and local tax policies.


Michael Malak said...

Interesting, and I share the same agitation about taxing income earned -- especially, for example -- below the poverty line.

But a nit about language -- I have yet to encounter a state that has a regressive income tax. It's usually flat. So it would be more proper to say that state taxes are flatter than federal taxes.

E.g., some states do have a technically progressive tax structure, but close to flat. Such a tax structure is objectionable, but I would never call a progressive tax structure "regressive", even in the comparative.

Andrew Oh-Willeke said...

Most state tax systems as a whole are regressive, largely due to heavy reliance upon sales and excise taxes (property taxes are mildly regressive without exemptions and mildly progressive with homestead exemptions). Indeed, one of the better rough indicators of the degree to which a state has progressive or regressive taxation, is the ratio of income tax revenue to sales tax revenue.

Coupled with less progressive income taxes than those of the federal government, the net result is a regressive taxation system.

Michael Malak said...

Again, the only property taxes and sales taxes that I've seen are flat taxes, not regressive.

The fact that food, clothing, and shelter are human rights and compels us to, at a minimum, do no harm by taxing income below what is required for susitenance, does not mean we should relabel flat tax as regressive just to get our point across.

The only regressive tax I've ever seen are one-size-fits-all fees such as license plate renewals. But such fees are small compared to other taxes, and they are special-use, so I would not throw a whole state into the regressive pile just over license plate fees.

Andrew Oh-Willeke said...

The regressive aspect of sales and excise taxes (e.g. tobacco, alcohol, telephone services) flows from what is taxed, not the rate of taxation. A far larger share of lower income household spending is on sales taxable items than is the case in higher income households. Higher income people, for example, spend much more of their income on services which are not subject to typical American sales taxes (the typical European value added tax has a much wider tax base and hence is less regressive).

The value of the properties that people live in more nearly tracks income, but the relationship breaks down for those of high income, who devote less of their resources to housing on a percentage basis, and for those of low income, who devote more of their resources to housing on a percentage basis (property taxes are passed on to renters by landlords so renters bear the incidence of them).

Michael Malak said...

OK, I can buy that the sales tax is regressive from the point of view that you presented: that because lawyer and accountant services are not taxed, the sales tax rate, while ostensibly flat, is actually regressive when comparing the averaged rate on a basket of a poor man's goods and services to the averaged rate on a basket of a rich man's goods and services.

I'm not buying that property tax is regressive. It's flat. That shelter is a human right makes the flat tax unjust, but not regressive.

Andrew Oh-Willeke said...

No need to take my word for it. There is a large economic literature in both academic and policy circles on the incidence of taxation, and related issue of its progressivity and regressivity. This is one of the two or three main topics of inquiry in the subfield of economics known as "public finance."

A good short overview of the literature of the incidence of sales and property taxes can be found in the January 2008 article "The Property Tax Incidence Debate and the Mix of State and Local Finance of Local Public Expenditures" by George R. Zodrow, available for free online.