Friday, February 06, 2009

Temporary taxes 

Steve Perry provides a useful set of notes on where "revenue enhancement" might come from for the Minnesota budget. In the list he includes an observation I had been meaning to make on a surcharge:
A temporary across-the-board income tax surcharge: This has been done before. Back in the early 1980s, then-Gov. Al Quie, a Republican, imposed a 10 percent surcharge on all income brackets. I've been surprised to see how many Democrats like this idea--in some cases preferring it to more progressive upper-bracket hikes. It's not clear why; maybe it's because there's no progressivity in the proposal, and Democrats have learned to fear any proposal that posits higher rates for the rich. In any case, the going estimate on additional revenues to be raised with a 10 percent surcharge is $1.5 billion for the biennium.
Temporary tax hikes are usually less distortionary than permanent ones. Rich folks don't move south to duck a one- or two-year increase in tax rates. I know a few people who were around when Gov. Quie agreed to the surcharge (Lori Sturdevant wrote about it last September) and their take on the current situation is that it feels like it was the right thing to do then and not as bad an idea as many now. (I wonder how Mitch Pearlstein would view it?) Of course one should fear that the other experience with "temporary" tax increases: In 1971 the sales tax was "temporarily" raised to 4%; it never came down. (It's worth viewing revenue commissioner Dan Salomone's presentation to get a longer perspective.)

On the other hand, in order for there to be no distortion we would have to believe there were lots of savings laying around that could pay higher tax bills, that it would not eat into any incipient recovery in economic activity in 2010. But the savings now is an attempt to rebuild busted portfolios, and taxation of savings at this time emisserates the middle class. It would be far better to cut spending. But if you are going to tax, recognize that Minnesota's tax system is highly cyclical and that recessions are temporary. Temporary measures should as a matter of principle be preferred.

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