Friday, December 21, 2007

Tax Reform in Oregon: A Research Agenda

So far I have discovered that revenue stability may be aided marginally by a sales tax during extended downturns in the economy, but that short-term volatility is generally not much better and may even be worse than income tax revenue. So I am now pretty well convinced that if decreasing volatility it the main motive, sales taxes don't appear to be much of an answer. I do believe they can add, largely through diversification, slightly more stability to the tax structure, but this is not likely to reduce overall volatility significantly. Also, sales taxes are regressive and even with exemptions of things like food and medicine they remain recessive. The only way to preserve a non-regressive tax structure is through the implementation of other methods like tax credits or graduating the income tax. I certainly don't believe, and never have, that a sales tax should replace the income tax. My working hypothesis is that a lower income tax with a sales tax is beneficial to Oregon and I am trying to see how that hypothesis fares.

My goal here is only to explore the economic aspects of tax reform, not political aspects, so I will not digress into questions of political motives, political viability, etc. I wish only to see if economic theory and empirical evidence supports the notion that tax reform could be potentially beneficial to the Oregon economy. Though I started this series of posts with the statement that I thought sales taxes would be a good addition to the tax structure, I have no particular bias, and if, after subsequent research, I find that the supporting case is weak, I am just as happy with that conclusion as any other.

Now that my toe is wet, it seems I have a lot more work to do. Here are a list of pertinent economic questions that seem important to explore, to the extent possible, to help figure out what is best in terms of tax reform (in no particular order):

-How sensitive are personal and business location and investment decisions to high income taxes and high sales taxes?

-How big a portion of sales tax revenue would be generated from tourist dollars as opposed to 'domestic' spending (i.e. is there a free lunch)?

-Is there a relationship between tax progressivity and economic growth?

-Is there relationship between tax systems and overall tax rates and economic growth?

-Is there a dead weight loss associated with the difficulty of consumers and businesses having to deal with transactions with sales taxes?

More questions will arise, but if there are others you can think of in the interim, do chime in. 'Tis the holiday season, but I shall try to start delving into the research soon and shall report on what I find whenever I have something of any importance.

No comments: