In the U.S., people can deduct state and local taxes from their gross
income when they calculate their federal tax liability. To be more
precise, they can deduct SOME forms of these taxes. State income taxes
and local property taxes are definitely deductible; state sales taxes
are not.
Rational voting models would make us expect state and local voters to
alter their state and local tax systems accordingly. Most obviously, it
argues strongly against state sales taxes. Why pay $1000 in sales taxes
when you could pay $1000 in state income taxes instead? The state's
budget can stay the same, even though voters' after-tax income goes up.
In practice, though, I doubt whether more than 1-in-20 voters has ever
thought of this when contemplating different forms of state and local
finance. Actual policy debates seem to focus more on "fairness" and the
like. How many state and local politicians have bothered to point out
this basic point when addressing the general public?
I believe that in the 80's, teachers' unions and similar groups attacked
Reagan's proposal to get rid of the S&L tax deduction. But is there any
reason to think that ending deductibility would really have this
effect? And if so, why is such a large fraction of state funding based
on sales taxes?
--
Prof. Bryan Caplan
Department of Economics George Mason University
http://www.bcaplan.com [EMAIL PROTECTED]
"He was thinking that Prince Andrei was in error and did not see the
true light, and that he, Pierre, ought to come to his aid, to
enlighten and uplift him. But no sooner had he thought out what he
should say and how to say it than he foresaw that Prince Andrei,
with one word, a single argument, would discredit all his teachings,
and he was afraid to begin, afraid to expose to possible ridicule
what he cherished and held sacred."
Leo Tolstoy, *War and Peace*
