Lowering Taxes to Raise Revenue

Photo by vistavision

The budget negotations in DC have basically come to an end, and one of the things that got nixed was a tax increase on those earning more than $200,000 a year. Many are upset by this; making the usual cries for fairness that go with arguments in favor of progressive taxation. I can’t speak to that, but I can respond to claims that higher taxes on upper income brackets are a practical necessity for addressing the District’s projected budget gap.

My argument is not a new one: lowering tax rates can, and in the District’s case, almost certainly will increase tax revenue.

The most famous case where this occurred is of the course the Reagan tax cuts, where the top marginal rate decreased but tax revenue increased. This could be attributed to a recovering economy, of course, but the distributional changes were interesting:

The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.

In other words, while the marginal rate decreased on top income earners, the percentage of tax revenue that came from those income earners actually increased–and this during a time when the overall amount of tax revenue had also increased.

I’m not going to pretend one example proves anything; I offer it up merely as evidence that the idea of lower tax rates yielding higher tax revenue is not at odds with reality.

It seems to me that the case for this in the District is particularly strong. DC’s political boundaries only account for one small part of the DC metropolitan region as a whole. As such, area residents are in a better position than most to “shop” for the most personally beneficial policy situation. Moreover, it should be obvious that the wealthier you are, the more options you have available to you. The “voting with your feet” option is more affordable to someone making more than $200K a year than to someone making $30K or $40K a year.

In short, raising the tax rate on people making more than $200K a year wouldn’t necessarily result in an increase tax revenue by a single dollar; it may just result in fewer people in that group filing their taxes in DC.

Moreover, I think a sufficient number of people who live in DC have relatives in Virginia or Maryland whose whom they could claim as their primary residence to make the tax base of the District more flexible than is typical.

The bottom line: I think that the most practical way for the DC government to increase its budget gap would not be to increase taxes on higher income earners, but to lower taxes across the board so that they are on par or slightly lower than the District’s neighbors. This would encourage many more people to file their taxes in DC.

Credibility

xkcd: Wikipedian Protestor

Credible commitment is the problem faced by anyone seeking to get something later from someone in exchange for giving up something now. Can the other party credibly commit, before the fact, to still go through with their end of the bargain when they already have what they want?

Now, it is in the interest of both parties for them to be able to credibly commit, because the first party is not going to do their part if they can’t reasonably expect the second party to go through with theirs. I’m not going to pay the car salesman if there’s no reason for me to believe that I’m going to get a car out of it. I’ll pay him because I expect that if he reneges, he will be punished for it. Maybe he will be fined in court, or have to serve jail time. Or maybe it’s just obvious that if he didn’t give people cars for their money, he wouldn’t have been in business for so long because he would have had a deservedly horrible reputation.

In any case, people are clever, and they’ve developed mechanisms to credibly commit in advance. Whether it’s through legal recourse, collateral, or any number of other means.

The problem is that government can always break its commitments.

When the government is the car salesman, it won’t be punished by the law–for the government is what enforces the law. It is much much harder for government actors to credibly commit than it is for private actors.

The best thing a government can do for its ability to encourage people to do business with it is to establish a very long track record of keeping its promises. The fact that the US federal government has never outright defaulted since Alexander Hamilton took on the debts incurred during the Revolutionary War has greatly augmented its ability to secure loans today.

So where do we stand in the District?

I saw this story today, which did bring up a credible commitment problem within the Council. But mostly it reminded me of an earlier story I’d seen:

Dozens of District residents who installed solar panels on their homes under a government grant program promoting renewable energy have been told they will not be reimbursed thousands of dollars as promised because the funds were diverted to help close a citywide budget gap.

When you are living beyond your means, it is no longer within your means to keep your promises. Does anyone think the Council’s promises will be worth much of anything in the future?

On Old and New, and Race Narratives

https://twitter.com/#!/bryanwdc/status/63066035712036864

As Martin Austermuhle wrote this morning, there are many narratives floating around to explain Vince Orange’s victory in the special election for the open at-large council seat. Nearly all of the ones that I have seen have, unsurprisingly, focused on race.

https://twitter.com/#!/mikedebonis/status/63074318338371585

There is little doubt that these elections highlight the changes that DC is currently undergoing. As the Post put it:

Orange struggled to win over voters in neighborhoods in the western part of the city, resulting in an electoral split similar to last year’s mayoral race, in which Gray unseated Adrian M. Fenty (D).

Again this is billed as white DC vs. black DC, but I prefer to think about it in terms of old DC politics vs. new DC politics. What these two elections have shown is that the newcomers are becoming increasingly politically aware and active, if not as of yet effective.

The narrative of old DC vs. new DC is not something that just cropped up to explain the election results after the fact, but played an enormous role throughout the campaign. Late in the campaign, Kwame Brown’s father Marshall, who was on Sekou Biddle’s campaign staff at the time, was quoted in a Washington Post article:

Marshall Brown, a longtime D.C. campaign strategist whose son Kwame is the council chairman, worries that the shift in population will result in a racially polarized electorate. “The longtime white population, the people who got involved in statehood, civil rights and environmental causes, thought of this as a black city,” said Brown, who is black. “But the new white voters aren’t involved like that. They want doggie parks and bike lanes. The result is a lot of tension.

“The new people believe more in their dogs than they do in people. They go into their little cafes, go out and throw their snowballs. This is not the District I knew. There’s no relationship with the black community; they don’t connect at church, they don’t go to the same cafes, they don’t volunteer in the neighborhood school, and a lot of longtime black residents feel threatened.”

Apparently the myopic little dog-loving, cafe-dwelling snowball throwing population actually does pay attention to District politics, or at least Biddle was certain they did–he fired Brown from his campaign the day that the article came out.

The day before the polls opened, I saw this on Twitter:

https://twitter.com/#!/IMGoph/status/62552847455223809

The message in question reads:

We will be out of town, however, I know you can help us with the  following:

If you can, please vote for Vincent Orange tomorrow and “please call your
DC folks to also to vote for him.”  This election, to me and others believe
that this will be the last time that folks of color will be able to
determine  our own “DC” destiny, openly, I think, personally.

All this talk is very strange to me.

Don’t get me wrong, I’m not naive–I am aware of the dramatic demographic shift that has occurred and is occurring in the District. But race, while the most visible element of this change, hardly tells all or even most of the story.

For one thing, I don’t think you can explain everything that has gone on in DC in the period from the riots to the end of the crack outbreak in terms of race. The implication of the listserv post quoted above is that during this period, District blacks were able to determine their own destiny. But what does that even mean?

The District gets a lot of flack because of its political troubles in general, and Marion Barry in particular. But just because Barry managed to get himself elected, and is still in office, doesn’t mean that everyone in his constituency wanted him to be there. For most of my life as a registered voter, I lived in Jim Moran‘s district in Virginia. I voted against him every chance I got, and yet he remained. I did not feel like I was determining my own destiny, with regard to Jim Moran.

Electoral outcomes are far more complex than the Will of the People, and election outcomes in the District are far more complex than race boundaries.

You can tell that Patrick Mara thought that it was all about race from the excuses he made not five minutes after it looked like he was going to lose.

https://twitter.com/#!/daveweigel/status/63069914029752321

This is absurd. Mara has clearly assumed that anyone who was white would have voted for him, if they hadn’t gone and voted for that other white candidate. (EDIT: a commenter argued that I was reading too much into Mara’s statement, especially given that he mentions Biddle, who is not white. Reconsidering the matter, I think he’s right; it’s unfair to characterize Mara’s statement this way)

The fact of the matter is that many of the people who voted for Weaver would never have voted for a Republican candidate, however watered down he was for his DC audience. And there are many people who may simply not have voted at all if the candidate that they did vote for hadn’t been running.

Mara’s frustration is understandable–he was just over a thousand votes shy of pulling off the impossible and becoming a Republican on the city council. But the Mike Debonis tweet quoted above is part of a frustrating trend of people who, unlike Mara, don’t have a dog in the fight and yet still boil it down to a “split white vote”.

Why would we ever expect “the white vote” to be anything other than split? As a libertarian, when it comes to policy matters I disagree with more people than I agree with–regardless of whether they are black, white, asian, or moon-beast.

DC is in the midst of a change in the perspectives being brought to the ballot boxes, and this will result in a shakeup of the political landscape sooner or later. But the end result will not be that white people in DC will be controlling their destiny at the expense of black people, who no longer can. Governance just does not work that way, in a democracy or in any system.