Seattle P-I columnist Bill Virgin makes some interesting arguments about reforming the tax system. But I think he misses the mark in some important ways.
The column’s basic points are these:
- no tax scheme will make everyone happy;
- reasonable people will disagree about what constitutes a “fair” tax system; and
- it’s a dangerous temptation to overload the tax system with loopholes, and with schemes to change people’s behavior.
The first point is obvious enough. On the second, I’ll just say that there’s pretty broad public agreement, not just in Washington State but in every industrial democracy in the world, that tax burdens should be roughly proportional to people’s ability to pay. But Washington’s tax system has been found to be the most regressive in the U.S.: the poorest 20 percent pay 17.5 percent of their income in taxes each year, while the top 1 percent pay just 3.3 percent. No, there’s not perfect agreement about what constitutes a fair tax system; but that doesn’t mean that you can’t make a very strong case that Washington’s just isn’t fair.
The third point boils down to 2 separate ideas: complicated tax systems are bad, and tax systems that try to guide behavior are a mistake. I generally agree with the first idea, but I think the second completely misses the point.
All tax systems change behavior. Sales taxes reduce consumption. Income taxes reduce activities that generate income. Cigarette taxes reduce smoking. Taxes on built property reduce the intensity of development. And so on. These changes—called “deadweight losses”–are a well understood feature of any tax system.
So if you’re going to change behavior no matter what tax scheme you choose, you might as well be deliberate about it, and tax things that people generally don’t want—say, pollution, or traffic congestion. Those kinds of taxes have a double benefit—not only do you raise revenue to solve pollution or congestion problems, the tax system actually discourages the problems in the first place. The result: less of the things we don’t want, and lower taxes overall. (See our book Tax Shift for more on this topic.)
Now, admittedly, political logrolling could make some tax shifting schemes as complex and loophole-riddled as today’s tax code. But it’s simply wrong to say that the choice is between taxes that change behavior, and taxes that don’t. The choice is between taxes whose effects range from random to deleterious, and taxes that do good by design.