Tuesday, August 24, 2010

Taxation for the Red States - Tax Equity Act

On August 4th the WSJ published an article in which the Democrats proposed a way to raise taxes for the Red States, and leave it the same for the Blue States.

"One irony of the tax increase that arrives on January 1 is that the it will hit residents of high-income, Democratic-leaning states like California, Connecticut, New Jersey and New York the hardest. This is a problem for pro-tax Democrats.

Enter New York Representative Jerrold Nadler, who wants to exempt his own six-figure constituents from the tax hike he supports. Mr. Nadler's bill would "require the IRS to adjust tax brackets proportionally in regions where the average cost of living is higher than the national average.""

I discussed taxes, with one of my anonymous friends in last Tuesday's comments. A couple of ways we could make taxation more fair include the Fair Tax and Flat Tax.

The idea of taxes based on the Cost of Living, is actually a great one if we could take advantage of the Flat Tax. Under the present tax code, it would put the burden on states where the cost of living in much lower then the coastal meccas described in the WSJ article.

Interestingly, many communities in Massachusetts have taken to charging residents for services used such as school busing and Kindergarten which is a another alternative. If we end up paying for our local services on an ala carte basis, the weight is distributed evenly amongst all users. It is a plausible concept for some services, but not all. I think that roads, fire protection, police protection would not benefit from this structure. Education certainly would!

Under the current tax laws, those of us that live in places with a high cost of living are being driven out by increased taxes. Each time the cost of living goes up and wages do not, a chunk of the middle class takes a big hit. The poor, were already poor, and the rich, though it affects them, can sustain some losses. Those on the border line have to make changes. Just as the time when gas went to $4.00+ a gallon, those living week-to-week were had to make changes. Many of the poor were already taking public transportation, and the rich  we not really bothered by it.

Some experts say that the cost of living is high in states like MA, CA, NY and NJ because of fiscal and political mismanagement.

According to the Washington Examiner:
"A big reason the cost of living is so high in Boston, Manhattan and San Francisco is because of high state and local taxes, union work rules, and heavy business regulation that make it more expensive to produce, sell and buy things.

Why should someone in Spokane or Knoxville or Topeka be penalized because New York and California impose destructive policies?"

I suppose this is partly true. I tend to think that it is more about supply and demand. These states generally have the hottest real estate markets, the highest paying jobs, along with cultural and educational opportunities found in few other places. Let's face it, New York's Broadway is more popular than whatever the theater district is in Cedar Rapids, IA.

The Tax Equity Act is a deal breaker under the present tax code, though it would benefit me personally. If we could enact either the Flat or Fair Tax, I'd be all for it. Why? Because it wold benefit poor Americans too. An averaged cost of living allows poor folks in the Blue States to receive some of the cost of living savings in the Red States. A higher cost of living increases the burden on them.

Unless we pay for the government services we use, taxation is not an exact science. The theory is that we pay taxes for education purposes over a lifetime, not just when our kids are in school.

It does appear that there are some alternative tax structures that might make is seem more fair. As my anonymous commenter posted last week: The government is able to steer industry and certain elements of society with taxes, tax breaks, and tax incentives. This is the idea behind Cap & Trade, energy saving tax rebates, and the cigarette tax; for example. Personally, I wish they would get out of the business of telling us how to live our lives, and stick to infrastructure, national security and stay out of the rest. I know, it sounds so libertarian.

As the irony of the tax increase that arrives on January 1 settling in on Democratic-leaning states like California, Connecticut, Massachusetts, New Jersey and New York; hitting them the hardest, keep your eyes open for movement on this potential bill.

How about you, what do you think is fair taxation?


Texascacti said...

Fair Tax is best because it unburdens us of the IRS and we pay it on NEW purchases only. Used goods are tax free. My understanding is that it could remove property taxes as well which are partially unfair to those who have no children and not paid directly by those who rent. Why should those without kids be forced to pay for the education of anothers progeny?

Charlie Chang said...

I am all for the fair fax. If a person doesn't like paying too much in taxes, then they ought not to buy too much.

And the people who complain about the rich and how they need to be taxed more can rest easy. As it turns out, rich people typically buy more than middle class, so the rich would pay more in taxes.

Fair tax is a way of choosing to pay taxes. It is a specific tax bracket for each person literally, all based on how you spend your money and based on your consumption .

We can put the Gov't out of business if we Americans would handle our money better and stop thinking the Gov't is going to take care of us.

Great blog and it gets me fired up to think of ideas of how the Gov't need to keep their grubby hands off my money.


Anonymous said...

"Death, taxes and childbirth! There's never any convenient time for any of them." - from Margaret Mitchell's "Gone with the Wind"

Another fun romp through Dollars, TaxUs! I'm going to start with a few clarifications.

First off, the WSJ article was an opinion piece, and the Journal is infamous for their loose use of Truthiness in same. Here's a link to that article that someone sneaks behind their pay wall.

Here's a link to Congressman Nadler's website proposing this act. http://nadler.house.gov/index.php?option=com_content&task=view&id=1223&Itemid=115

Although I myself am an urbanite, who's lived in both Red and Blue states, I am not in favor of this Act. There are currently exemptions in the Federal Income taxes for state and local taxes. Adding an urbanization clause complicates things, because most urban areas are more expensive for a reason:
Urban areas produce more wealth.

Anonymous said...

"A big reason the cost of living is so high in Boston, Manhattan and San Francisco is because of high state and local taxes, union work rules, and heavy business regulation that make it more expensive to produce, sell and buy things. Why should someone in Spokane or Knoxville or Topeka be penalized because New York and California impose destructive policies?"

Gee, so Boston is a dystopia which destroys all who enter, while Spokane is a sylvan paradise? That surely would explain why 4 million people live in Spokane, and it's the business and industrial hub of New England, yes? Oh, wait...

The cost of living is high for Boston, Manhattan and San Francisco because there is a demand for living there that exceeds capacity. And why that demand? Because they are centers of commerce, industry, eductation, art and intellectual growth. I've lived in Topeka, and it's nice enough for an agricultural center. The state's major college is 30 minutes away, so there's education as well. But culture? art? Nope.

So let me ask those of you who DO live in an expensive urban zone: why? why not move to a more affordable place? New Hampshire, the tax paradise? South Carolina, the Palmetto state?

Myself, I enjoy the local high employement, intellectual stimulation, great weather, generally well maintained streets, and amusingly nutty mayor of my city (our last mayor was a tool, the current a clown).

David said...

@Texascati - It is doubtful the Fair tax is going to happen. But I agree it a viable tax for those that purchase stuff.

The questions I have are:
-What is taxable?
-What about seniors that have paid in all their lives, and not they have to pay again?
-If we only tax new stuff, that makes used stuff have more value and reduces productivity. Is that OK?
How do businesses pay taxes? Or do just the consumers pay taxes? I suppose they are paying it already.

It does make anyone with disposable income have t pay including crooks and drug dealers.

@Charlie Chang - I'd like to see the IRS out of business, that for sure!

@Anon - I simply quoted the article. The point was the Dems brought this act up, and if we had a fair tax, it would work great. But I don't support raising taxes, though wold like to see the burden shifted a bit.

I also disagreed with the take that urban areas were that way because of politics. agree that it s supply and demand.

Why don't you just agree with me? LOL

photogr said...

Thanks to our current administration's ( and I use that term loosely) free spending spree the last two years. We are faced with a ridiculous debt that will take a century or more for us ( and those not born yet) to pay off.

There is no way to avoid new higher taxes no matter what you make in income. We can't depend on the current Washington administrators to be responsible in reducing lavish expenses ( the new Pelosi jumbo jet comes to mind). Their concept of tax more and spend more will leave this country in bankruptcy with in a very few short years.

Add to the fact there has not been any real emphasis on creating new jobs from this bunch, All I can for see is more unemployment that will rival the great depresion era meaning less and less will have incomes to pay taxes.

So where is the new taxes supposed to come from? Could a possibility of up to a 50% tax rates on income from even one's earnings at the poverty level come to mind?

Anonymous said...

@photogr - Of the 13 trillion dollars in the National debt, President Reagan put in 3 trillion, the first President Bush another 2, President Clinton 2 and the second President Bush 5. President Obama has put in 2, which is a higher rate than the other Presidents. However, Obama's increases are nearly all from the TARP (which was actually a Bush bill) and the Stimulus, a one time bill.

Once President Bush's 2001 tax cuts expire (as planned by the Republican congress in 2001 when they wrote the bill), an extra half a trillion with come into the economy, 90% of it from people earning over $1 million / year.

photogr said...

"an extra half a trillion with come into the economy, 90% of it from people earning over $1 million / year."

1/2 trillion comming into the ecomomy? I don't see it. The 1/2 trillion is going into Washington on more pork barrel spending based on past administration's actions.

I don't think 90% of this relief will come from people earning over 1 million dollars. Are there still any people left earning over 1 million dollars a year besides Corporate CEOs.

Anonymous said...

@photogr - I should have said, "half a trillion coming into the national Treasury", and not the economy. The Tax Foundation's website discusses this (http://www.taxfoundation.org/research/topic/171.html).

I would agree with you that most Americans with a SALARY of a million or more are Corporate Executives (including non-profits and private firms), along with a smattering of sports stars and Hollywood talent. But income also includes non-salary, like building condos and malls, which can generate huge income that's not salary. And brother, America is still a very wealthy land of opportunity. I myself am one of these.

"The 1/2 trillion is going into Washington on more pork barrel spending based on the past administration's actions."
Here we can agree in part. Note that the technical definition of "pork barrel" refers to legislative earmark spending, and that is less than 5% of the total. Stuff that is usually considered wasteful (like Foreign Aid, Arts/NPR, NASA, etc) is about 2-3 % of the outlay. Defence is 'way high up, with the US spending AS MUCH AS the entire rest of the world on defence. OTOH, we take it very seriously, and I think in general Uncle Sam does a good job running the world.

photogr said...


Yes America is still a land of opprotunity for those that will work hard and smart for it instead of getting hand outs. One of the reasons I was able to retire at an earlier age than most. How ever, I am concerned with the current administration with the ideaology they can tax their way out of the deficit and keep on spending.

Defense is rather high and always will be in order to protect our sovereignity. However, at what point does this spending become wasteful? We have all the latest expensive technology at hand and we still can't find one taliban leader ( Bin Laden)or protect our troops from IED bombs ( made with low technology) that seem to go off at will on a patrol.

Yes Uncle Sam does a pretty good job running the world. Why do we have to bear the expenses ? Doesn't the United Nations supposed to bear that expense? Certainly an organization that lacks fortitude to do any thing but rely on the United States to run every thing and bear the expenses.

Oh Yes. I might have listed the new Pelosi Jumbo jet at over 15 million dollars plus crew and expenses weekly as pork barrel in error. I should have said wastefull spending.

Anonymous said...

@Photogr - Well, I actually agree with a lot of what you say, specifics aside (ex, Bush bungled catching Osama, and Pelosi's jet is the speaker's jet, and could well be the Honorable John Boehner's jumbo next January). I might also point out that the Obama-Pelosi-Reid juanta actually LOWERED taxes - but again, that's a detail.

David's essay to me was about how to equitably levy taxes. Part of that essay was the acceptance that taxes can actually be fair.

Thanks for the wonderful conversation, and as always, THANK YOU DAVID, FOR A WELL MODERATED AND THOUGHTPROVOVING DISCUSSION!

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