Guiding Principles for Taxation

With Oregon facing a $1-billion-and-counting budget deficit in the next biennium, the temptation exists for legislators to close the gap with tax increases. Before any conversation about raising taxes occurs, however, state officials should first agree to a set of guiding principles of taxation.

The paramount function of taxation is to raise money for core government functions, not to direct the behavior of citizens or to close budget gaps created by overspending. Taxation always imposes some damage on an economy’s performance, but the harm can be minimized if policymakers resist the temptation to use the tax code for social engineering, class warfare and other extraneous purposes. A simple and fair tax system is least likely to impede Oregonians’ economic interests, allowing more prosperity for more people.

Principles of Taxation*

The fundamental principles presented here provide guidance for a fair and effective tax system; one that raises revenue for core government functions, while minimizing the burden on citizens:

“¢ Simplicity — The tax code should be easy for the average citizen to understand, and it should minimize the cost of complying with the tax laws.
“¢ Accountability — Tax systems should be accountable to citizens. Changes in tax policy should be highly publicized and open to public debate, not pushed through a legislative session without broad public input.
“¢ Economic Neutrality — The tax system should exert minimal impact on the spending and business decisions of individuals and businesses.
“¢ Equity and Fairness — Fairness means all taxpayers should be treated the same. The government should not use the tax system to pick winners and losers in society, or unfairly to shift the tax burden onto one class of citizens. The tax system should not be used to punish success or to “soak the rich.”
“¢ Competitiveness — A low tax burden can help Oregon’s economic development by retaining and attracting productive business activity. Our revenue system should be responsive to competition from other states.
“¢ Balance — An effective tax system should be broad-based, avoid special exemptions and utilize a low overall tax rate with few loopholes.
“¢ Reliability — A stable tax system is better than an unstable one. Revenue sources that grow faster than the economy in good times, or sink faster in bad times, should be avoided.

While these guiding principles are important, there are inherent problems with any tax system. Basically, taxation reduces spending on private sector goods and services traded in the marketplace. The benefits of free exchange — to both the purchaser and the seller — are reduced when trade is restrained by taxation. The ways that taxes restrain private economic activity vary. Income and property taxes reduce taxpayer incomes, lowering their demand for goods and services. Sales and excise taxes increase costs to suppliers, reducing their willingness to provide goods at any given prices. In any case, taxes reduce private trade and curtail job creation.

Benefits of a Low Tax Burden

Since taxes lower the economic welfare of citizens, policymakers should try to minimize the economic and social problems that taxation imposes. The benefits of a low tax burden include:

“¢ Faster economic growth — A tax system that allows citizens to keep more of what they earn spurs increased work, saving and investment. A low tax burden would mean a competitive advantage for Oregon over states with high-rate, overly progressive tax systems.
“¢ Greater wealth creation — Low taxes significantly boost the value of all income-producing assets and help citizens maximize their fullest economic potential.
“¢ End micromanagement and political favoritism — A complex, high-rate tax system favors interests that are able to exert influence in the state capitol, and who can negotiate narrow exemptions and tax benefits. “A fair field and no favors” is a good motto lawmakers might adopt for Oregon’s tax system.

Tax Transparency

Oregon’s tax system should be transparent to individuals and businesses. Since businesses don’t really pay taxes, but simply pass taxes on to individuals such as customers, employees and shareholders**, a transparent tax system will avoid taxing business above documented provision of government services. If lawmakers want to raise or change any tax, they should be clear about which individuals they ask to bear the burden.

Conclusion

Before the 2009 legislature makes any decisions on tough tax and budget issues, it should adopt guiding principles of taxation based on simplicity, accountability, equity and economic neutrality. It should seek to lower the overall tax burden to promote prosperity and opportunity in the economy, and it should embrace tax transparency, making it clear whom it is asking to pay for any tax changes. With these policies in place, Oregonians will be more likely to believe that their government is treating them as fairly as possible.
_____________________________________________________________
This commentary is adapted with permission from “Principles of Taxation for Elected Officials,” by Paul Guppy and Jason Mercier, Washington Policy Institute, October 2008.

*The text in this section is adapted from: “Principles of Sound Tax Policy,” by Dan Mitchell, Heritage Foundation, Washington, D.C., November 2001; “Guiding Principles of Taxation,” Tax Policy and Research, Montana Department of Revenue, October 2001; and “Some Underlying Principles of Tax Policy” by Richard K. Vedder and Lowell E. Galloway, Joint Economic Committee, United States Congress, Washington, D.C., September 1998.

**”Business Taxation: A Loose Cannon on a Dark Night,” by William B. Conerly, Ph.D., Cascade Policy Institute, January 2008.


Steve Buckstein is founder and senior policy analyst at Cascade Policy Institute, Oregon’s free market public policy research center. He also serves on Governor Ted Kulongoski’s Revenue Restructuring Task Force.

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  • Dean

    That all sounds great when you talk equality, but the reality is, the people living in Dunthorpe and Lake Oswego should contribute to the less fortunate in Lents as well as the people living in outer SE PDX and along the light-rail lines. Those folks are and have always struggled to put food on the table, pay housing, utilities, taxes etc.

    • Anonymous

      Gee dean, I don’t want to be equal with the guy who won’t get up and get a job.

  • Rupert in Springfield

    A good set of guidelines, however I would add one. Taxes should not be used for enforcing the moralities of others. While this does tie in with the avoidance of using taxes for social architecture or class warfare I think it should be explicitly lined out as there is often a divergence between the two.

    Examples

    Social architecture – Tax breaks if citizens spend their money on college. This really is pure social architecture, its hard to see a moral component here.

    Enforcing morality – “Progressive” tax systems, Alcohol and tobacco taxes. There is no reason other than someone’s moral notion that a person making more money should pay for the upkeep of someone making less. If I choose to work 80 hours a week and reap the economic rewards of such endeavour I feel nor moral compunction whatsoever to pay a higher percentage of my income to the government to support someone who chooses to work part time. Indeed, I would argue it is societally corrosive to take such an approach as it rapidly results in a kleptocracy once a majority forms that pays nothing and takes everything. With something like 40% of the populace paying nothing in Federal taxes we are rapidly approaching that point. Robert Heinlein and Benjamin Franklin have reminisced on this, and it has been the downfall of many a democracy historically. Given the consequences, this version of one group forcing its morality on others is the single biggest threat society faces as far as morality enforcement goes.

  • davidg

    As I read the principles, I wondered if Steve was intending to write some kind of parody. None of the principles he cites is followed at either the state or federal level. A good argument can be made that the principles he proposes are exactly the opposite of what is practiced – by both Democrats and Republicans alike.

    The article concludes on the pious notion that people want fairness in taxation. What does that mean? Listening to debates on taxation, it seems the only fair tax is one that someone else pays. Each of us feels we pay enough now. If there is to be a new tax, it should be on someone else. Tax the rich (i.e., anyone richer than me), the corporations, the oil companies, the smokers, the gamblers, the SUV drivers, or some other miscreants; but not me.

    Taxation always has been and always will be a battle of interest groups against each other. The concept of winners and losers is inherent in the process. It may be good public relations to try to obscure the reality, but that won’t change the reality. Why not just acknowledge it and then proceed?

    • Steve Buckstein

      David, as I read your critique, I was reminded of a brutally frank description; not of taxation, but of democracy. It goes: Democracy is two wolves and a sheep deciding what to have for lunch.
      #3.1 Steve Buckstein on 2008-11-21 13:15 (Reply)

  • dean

    I just want to point out that the dean up above is not me, the real and usual dean. Apparently a new dean has emerged. Oh my Gawd!

    But since I’m here, I’ll take issue with Steve B’s premise. First, we tax for all sorts of reasons. One is to fund things wanted or needed but not provided by the private sector. Another is to “share the wealth.” I know that is not popular around here, but it is part of why we tax and why we tax progressively. Third, “overspending” is in the eye of the beholder. A government can “overspend” by spending more than it has, and can close that gap by raising taxes. Clinton did this and ended up with a budget surplus that Bush later squandered. A government can also overspend by being wasteful or maintaining programs long after they have served their purpose. In this case cutting spending makes sense.

    The principles Steve presents sound lofty, but don’t represent what most Americans believe. All taxpayers are not treated the same, and I don’t know very many people who think they should be. Richer people pay higher income tax rates not because we want to punish them, but because their income is way past the point of where they have to make hard choices, like food, shelter, or medicine. So there is a Robin Hood aspect to taxation, and we just elected the dude who said “sharing the wealth” was a good thing. And as it turns out, even rich people voted for him by a majority.

    Beyond that, tax burden can’t be abstracted from society. Sure, a low tax burden is great, but if it results in a lousy education system and a poorly educated populace, one has Mississippi, which has BOTH a low tax burden AND a lousy economy. On the other hand, there are very high tax places with very high quality of life and very strong economies: Sweden, Denmark, and Norway to name a few.Sweden has outperformed the US on economic growth for a number of years running now. All have much lower poverty than we do, lower crime, and so forth.

    • PureORShirley

      thanks steve it’s nice to know that someone knows the truth and will speak it.

  • Jerry

    When times are tough that is when taxes must be raised so that we make sure no one gets ahead on their own. That would not be fair.
    We must be fair.
    Raise them and raise them now.

  • eagle eye

    This commentary is apparently taken from an outside text, so not really tailored to Oregon.

    One thing it completely leaves out is the services people want in the state. Like so much of the libertarian view, it completely ignores most of the reasons that people want government.

    Something particular to Oregon: if not for the absurd kicker — “give nary a thought to the rainy day” — we wouldn’t be facing the choice between higher taxes and service cuts.

    I’ve seen Oregon go through many cycles of this farce, have learned to ignore it.

    • Larry

      EagleEye has not seen a tax that does not appeal to him; a government program not worth funding. So, of course, he hates the ‘kicker’, which just kicks back overpayments of taxes back to those taxed.

      The kicker is a ‘rainy day’ program. The government spends the amount that they budgeted and that they said they would spend. If tax receipts are more than anticipated, budgeted and planned for spending, then the government ‘kicks’ back the excess to the taxpayers, many of home invest it (or save it) for a rainy day.

      How much of EagleEye’s kicker has ever been returned to the government? How much of other liberal ‘kicker’ complainers have ever returned to the government any part of their kicker?

      • eagle eye

        Fair enough, now the taxpayers will have the choice either to “kick back” more money in the form of higher taxes to the government, or do without services. They will have to “tighten their belts”, and it serves them right.

        • Larry

          I agree 100%. Either add more taxes or accept government cutbacks in services. Tighten our belts.

          And we can at least be glad that Gov Kulo is forced by law to balance incoming monies (taxes & fees) with outgoing monies (services etc), unlike the federal government.

          The fatcat Wall Street bailout (Billions for Bonuses) is pathetic. The jetsetting fatcat Detroit bailout (Billions for BloatedSUVs) is pathetic. I am not happy that this generation is screwing the next two by this massive devaluation of the dollar.

          • eagle eye

            Larry, I would actually be in favor of moves to make Oregon government more efficient. Except that the right-wing types never follow through. They manage to constrain state revenues (Measure 5/school funding; blocking tax increases; kicker). But they never manage to come up with attractive (see Saxton) or even rational (see Sizemore) candidates to follow through with practical measures to make government work more efficiently. So the state elects ever more Democrats, who have little interest in making things work better. (To his credit, Kulongoski did manage to reform PERS to a great extent and also imposed a salary freeze the last recession.)

            By the way, the dollar has been quite strong lately, in the financial crisis. Who knows if this will continue, but it’s an interesting phenomenon to behold right now.

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