Gerardo E. Martínez-Solanas
Admin
| Posts: 315 |  |
|
Fairness in taxation - 2007/04/04 15:35
“No taxation without representation” is one of the pillars of US democracy. It gave way to the Declaration of Independence in 1776. This principle is born from a phrase by Boston politician James Otis, who said in 1765 that "taxation without representation is tyranny."
This principle means that citizens must be duly represented through democratic means for taxes to be legitimate. It implies that representatives in Congress are bound to the will of their constituents.
Democratic systems in the United States and many other countries have evolved to the point where these decisions on taxation are no longer the sole responsibility of parliaments or Congress, but follow instead a process of popular consultation through referenda. People’s representatives would thus apply or reject taxation projects in tandem with their electors’ will. In the United States this is mostly applied at the State, County and municipal levels.
Governments are needed to maintain law and order in a social group and to promote policies for the advancement and progress of the people they represent. To do so they need an income through taxation capable of covering public services and expenditures. The more the people expect from their government to solve, the more taxation is needed.
However, politicians –human as they are– respond primarily to their own interests. They want to promote their agendas and advance their careers. Their decisions are often flawed as a result. Furthermore, by seeking to promote their own agendas, they often manipulate public opinion with half truths or distorted data. Such is a drawback to the democratic process, but a natural one that we all have a responsibility to keep in check.
The most recent case in point is the proposal in the State of Florida to eliminate the property taxes applied to residential dwellings, to reduce expenditures to the levels of 2001/2003 and to compensate the needed public income with an increase in the sales tax (known in some other countries as Value Added tax or VAT). This proposal has such implications that politicians do not dare to make a decision at the State Legislature but would instead ask for approval in referendum.
This is happening because the “American dream” includes the ability for all to make an effort in life to have their own home. Many would never be able to achieve it, but the opportunities to do so have been available to all for many years. The present state of prosperity in the United States gave way to a real explosion of home property values during the last 10 years, such as tripling the cost of most homes by the end of 2006. That gave way to an inordinate increase of property tax income at the state and municipal levels. It also provoked irresponsible budgetary increases on the wave of such bonanza.
People at state and municipal levels have been asking their governments to add more and more services, expand through public works urban infrastructures, build stadiums, parks, auditoriums, etc., and many other costly projects. They must be paid. It is easy to forget in times of bonanza that many of these services are inefficient on the hands of public bureaucracies and that it is better to keep budgets low by taking private responsibility for many of those services.
The problem is that now property taxes at present values make impossible the American dream to own a house for many citizens that had such an opportunity in years past. This is compounded by the huge related increases on insurance rates. Both have more than duplicated during the last 10 years, while salaries and income have increased less than 40% during the same period.
Nevertheless, there is a propaganda campaign against the proposal mentioned above, on the grounds that a sale taxes increase would penalize the poor, that the elimination of property taxes would only benefit the very rich and that the budget reductions would force a considerable cut of the police forces, waste recollection, road and street repairs, etc.
On the last argument, one wonders why should the budget reductions affect primarily the most essential aspects of public expenditures and not other less essential projects and programs.
Regarding the effects of the tax proposals, the arguments are absolutely false on simple mathematical grounds.
First, sales taxes are deductible (at least until 2009) from the Federal tax. IRS forms provide a table that allows a couple with $40,000 annual taxable income to deduct some $720 for sales taxes. The tax payer can keep receipts and claim a larger deduction if they can prove it. Most do not waste their time in keeping them because they are aware that the allowed deduction is generous.
Assuming that budgets are not reduced to the 2001/2003 levels, Legislators estimate that sale taxes should be increased by 2.5 cents if the lost revenue from property taxes is to be compensated. According to the IRS estimates that would mean that the same couple of our example above would be allowed a deduction of $996, or $276 more paid in sales taxes during the year.
That means that less fortunate couples and families would pay much less sales tax because the less their income the greater the proportion they expend on essential items such as rent, food and medicines, which are not taxed. The richer ones, on the contrary, expend much more in luxury items, cars, appliances, jewels, etc., resulting in a considerable increase of the sales taxes they pay.
Both will experience increases in sales taxes to be paid, but for the lowest income population (below $40,000 per couple) the increase will only be between $120 and $250 per year.
Second, the elimination of residential property taxes would benefit all segments of the population, including the very rich, but much more so the poorest. A 3 million property assessed at 2 million pays some $40,000/yr of property tax. The very rich with second and third properties pay even more for those. Another $170,000 property, assessed at $100,000 may pay up to $1,500/yr of property tax. It is self evident that $40,000 savings from the elimination of this tax do not mean much for the millionaire but the $1,500 savings for the property owner of the basic home are essential. For the millionaire, such savings might come to one or two days of his/her income, but for the poorest it will be the equivalent of one month (or more) salary.
In addition, most among the poorest rent their homes. Rental home owners (who pay a higher tax than residential home owners) simply pass the cost of the property tax to their tenants. That means that the poorest pay more rent as a result of the onerous property taxes.
These figures are clear about the sound proposal before the Florida Legislature. The poorest segment of the population would save between $1,500 and $3,000 per year in exchange of higher sales taxes of $150 to $250 per year. That is to say that while property taxes make increasingly more difficult for the poor to have their own home, sales taxes only affect them on the level of their own consumption of non essential items.
In addition, the 2.5 cents sales tax increase is excessive as the present public expenditures are also excessive and such an increase is taking into consideration even higher budgetary projections for 2008 and 2009. If the voters force politicians to be reasonable and control the budget to the levels of 2001 to 2003 (already high), a sales tax increase of 1.5 cents would suffice. That would mean less than a $150 sales tax increase for lower income people.
Sales taxes are among the fairest of taxes when essential items are exempted. They only increase according to the individual’s ability to consume luxury items. Finally, coming back to the beginning, taxation is the responsibility of all. Therefore, it should be fair for all and in the benefit of society as a whole. The people should always be consulted by democratic means about their fairness and timing.
|
Foro / Forum 
