EYE ON THE PIE: Mirror, mirror, which is fairest tax of all?

January 15, 2007

With some hesitation, I take you inside the men's rest room at the Statehouse. There, I found a new member of the General Assembly combing his hair over his otherwise empty scalp and asking, "Mirror, mirror on the wall, which is the fairest tax of all?"

The mirror responded, "The sales tax is the fairest of them all." Startled, both the legislator and I looked around, only to hear another mirror say, "No, the income tax is fairest of them all." Then the third mirror growled, "At least with the property tax, you know who bears the burden of the tax."

Quickly, the representative of the people and I left for a nearby tavern.

"I never expected that kind of response," he said. "I guess the old-timers are right-the walls in the Statehouse do have ears. This question of tax fairness has been around so long that, anywhere you go, you'll get an answer. I'm just pleased the plumbing didn't respond."

"It is a complex matter," I said, sipping my brew, "because we have no clear idea of what we mean by 'fairness.' Some people will tell you that a 'good' tax hits rich people harder than poor people; they like the progressive income tax.

"Others say we need to use taxes to discourage certain types of behavior; these folks prefer taxes on alcohol and tobacco. They also see some immoral luxury in dining out and support higher taxes on restaurant meals.

"We love taxes on strangers. Thus, we delight in taxing hotel rooms, rental cars, and museum and theater admissions. All while we profess our commitment to tourism and the arts.

"Ghastly," my new friend said, downing his double bourbon.

"As you know," I continued, "there are those who want us to drive less and call for an increase in the gasoline tax, higher vehicle licensing fees, and the imposition of tolls on our roads. No doubt, there are Hoosiers who want snack taxes to fight obesity."

"I have noticed many bills being introduced this year to exempt certain people and activities from taxes. But I don't see many lawmakers proposing new or increased taxes," he said.

"And you won't," I declared. "No elected person wants to have his or her name attached to a new or increased tax. But no lawmaker should be allowed to introduce a tax reduction without indicating how the resultant shortfall will be made up."

"But what was this remark of the last mirror about knowing who pays the taxes?" he asked.

"That mirror," I replied, "must have been moved from a rest room for economists or lobbyists, people who speculate about the 'incidence or burden' of a tax. Many folks think a tax is paid by the person who hands out the money for it. A sales tax, however, reduces the sales of the item or activity taxed. Slap a 20-percent tax on hotel rooms in Indianapolis and see how many conventions come here. The hotel owners and their workers will suffer from such a tax being shifted back on them.

"Put a tax on haircuts, permanents and nail treatments and you'll see fewer people looking 'simply gorgeous.' Part of the tax is shifted onto shop owners and their employees and part to customers as higher prices. The problem is that nobody knows how much of a tax is shifted either forward or backward.

"Most economists believe that the property tax is shifted entirely to the property owner because the tax liability is capitalized instantly into the value of the property. The idea is that, once you know the taxes to be paid on a piece of property, the offers to buy that property will reflect the future stream of tax payments. Others will tell you this is true only in limited circumstances and that property taxes also can be shifted to renters."

"I don't want to hear any more," the legislator said.

"Of course not," I agreed. "You did not come to serve in the Legislature to be bothered by the unknown. You'll vote for changes in our state's taxes, blindly following the demands of your caucus. What actually happens as a result of your actions is for the next Legislature to worry about."

My new friend departed without a word. I think he was offended. He left his drink on the table and the bill for me.

Marcus taught economics more than 30 years at Indiana University and is the former director of IU's Business Research Center. His column appears weekly. To comment on this column, send e-mail to mortonjmarcus@yahoo.com.
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