Friday, January 11, 2008

Getting Back to Taxes

Before I get started, apparently Mike Huckabee has a national tax plan that is interesting in that it proposes replacing the national income tax with a national sales tax. Some economists think this is a good idea in theoretical terms. My readers, I think, are already more well-informed about the evidence than is Mr. Landsburg, but he makes an interesting and sometimes very curious argument - one with a lot of holes in my opinion. I am not the only one. This is the same economist who claimed he bawled out a elementary school teacher for suggesting to his child that recycling is a good thing, claiming that he taught his kids not to recycle because he loved trees. His argument was that recycling lowered demand for trees and thus we should expect fewer trees - forgetting perhaps that what most people care about are not commercial tree farms but old-growth and wilderness areas, but I digress. Safe to say that I am not part of the Steven Landsberg fan club - I think he is an extraordinarily lazy thinker.

Now, getting back to my old posts on a state sales tax. I understand that sales taxes may be as volatile in the short-run as income, but income taxes are still more sensitive in the long-run. Does the long-run matter? I argued before that it does, but now I would like to take that a step further and bring in a stylized fact: Oregon is a high unemployment state. Here is a graph from the Oregon Employment Department.

Not only do we see Oregon as a high unemployment state but notice how much worse the downturn of 2001 - 2004 was on Oregon's Unemployment than the national average. So if we are worried about significant and sustained shortfalls in the revenues of the state government - you can see clearly why relying so heavily on an income tax was so costly for the state, and why I am pressing the long-run elasticity as a very significant number.

The related question also becomes: how much does Oregon's high income tax rate contribute to this high unemployment rate? I don't know the answer, but I am sure it is not zero. It may well be not terribly significant, but I am a bit worried about the connection and the data suggest a correlation at least. (Remember to be careful about this kind of evidence though, it could be that high taxes come about as a result of poor economic performance as states struggle to fund essential services) I will leave you all with some interesting maps from the Bureau of Labor Statistics. These are Unemployment rates by state, 2000-2006. Darker shading means a higher unemployment rate. Notice something about Oregon? It had higher unemployment, and took longer to recover than almost every other state. This could be purely coincidental, but it is worth further investigation.


Jeff Alworth said...


Fred Thompson said...

It is, perhaps, not entirely irrelevant that Oregon has not traditionally been a low employment/high unemployment state. Rather, Oregon's employment started to diverge consistently form national trends only after the state adopted its own minimum wage.

Oregon also depends heavily on international trade. Divergences used to be driven by the trade-weighted value of the dollar. Again, that is no longer the case.

As for revenue volatility, this is a complex issue (see
2p_archives.cfm>), but the property tax is a better bet than sales taxes. Besides, tax design and administration trumps tax type.