TAX WASTE, NOT WORK
An idea gaining some currency in countries around the world and from a number of economists is called " resource-based tax shifting."I will mention a number of different rationales for the idea, but I want to focus in particular on why it might be a good idea for labor. I'm writing an article on this topic for Mother Jones, which should be out in the January/February issue.
Even people who pay a lot of taxes have little basic understanding of the tax system. So it's important to realize a couple of trends that have gone on for the last several decades, especially since 1980. The most prominent is that the tax burden has shifted to labor. This does not mean the tax system is less progressive. It's still a progressive tax system. But since 1980, income taxes have come down for every income group, on average, including the wealthy, including the 1993 tax increases.
Income taxes have come down for every income group-the poor to the rich-but payroll taxes have gone way up. The combined payroll tax rate, which is listed as FICA on your paycheck stub and is split between employee and employer, was 12.3 percent in 1980, 15.3 by 1991, and that's where it is now. The payroll tax is largely a regressive tax because it is capped: The majority of the tax applies only up to wage and salary income of $65,400. After that point, only the Medicare portion, which is a combined 2.9 percent, is applied to the rest of your income. There are also no exemptions at the bottom like you have for the income tax, so the payroll tax has become the largest tax for 70 percent of U.S. families and for most small businesses.
It's amazing how people who pay very little in income taxes still hate the income tax, even though the payroll tax is the greatest burden. Here is why. The vast majority of economists regard the employer's side of the payroll tax-the part that the employers pay-as really borne by workers in the form of lower wages. It's not really paid for by businesses. About 30 percent of our economy doesn't pay any income taxes at all, and another 40 percent are in the 15 percent, marginal tax bracket, so the 15.3 percent payroll tax is greater than the 15 percent income tax, and you've got at least 70 percent of Americans paying more in payroll taxes. This shift of the tax burden toward labor is not a conspiracy by elected officials. It's unavoidable by governments and industrial economies throughout the world. Because of the Internet, because of computers, because of many different reasons, capital has become instantaneously mobile throughout the world. Hit a button on a computer keyboard, and you can transfer millions of dollars anywhere you want. Consequently, governments have to rely on taxing labor more because if they tax capital too highly, investment will go elsewhere.
But the choice is not only between taxing labor and taxing capital. You also have resources. You have land and other things to tax which are more mobile than labor but less mobile than capital. Imagine a continuum; capital is instantaneously mobile, and labor is really hardly mobile at all, and in between them you've got resources and land, some of which is mobile but not as quickly. We don't do a very good job of tapping that resource. That's one reason why this idea is important for labor.
Here's the basic underlying tenet of the tax shift idea (and it's the only sort of tax reform proposal that can achieve support from both Republicans and Democrats). The underlying principle of tax policy is that we're going to get less of things that we tax more and more of things that we tax less. Think of that for a minute, and it makes perfect sense. Everything we do in the tax code that makes it complex for a lot of people-whether it s education credits or IRAs or mortgage interest deductions-is designed to get more of something or less of something. We raise taxes on things we want less of, and we reduce taxes on things we want more of.
If that's true, then we ought to find a way to increase taxes on bad things and reduce taxes on good things because we want more of good things and less of bad things. So let's think about what are good things. It's not just an issue of capital or labor. There is a debate in Washington every couple of years when there's a new Congress about whether we're going to reduce the capital gains rate or reduce the tax rate on working families because they work hard and have a high payroll tax burden. I tend to be more of a centrist on labor versus capital, so I don't object to things like corporate income tax reductions. But I am prepared to say that work and saving and investment and entrepreneurship are all good things. It isn't that one is better than another. We ought to find ways to reduce taxes on all of these things that are good and replace that revenue with new revenues derived from things that are logically bad-waste, resource inefficiency, carbon dioxide emissions linked to climate change, pollution. Instead of dealing with them through very costly regulation, which hurts small businesses and big businesses alike, let's use market forces to change the prices of these goods, and let the market clear and deal with these problems.
What are some advantages to this? It could appeal to people on the Left because we're lowering taxes on working families by simply reducing the payroll tax, and we can help protect the environment. People on the Right will be happy, too, because you can achieve reductions in pollution or deal with some environmental problems through the market, as opposed to through regulation. You can also reduce capital gains rates and corporate income tax rates without worrying so much about rising deficits. Although it's not perfect, you can achieve a political coalition.
There are other benefits as well. For example, reductions in payroll taxes could help create small business jobs because that's the largest tax that labor-intensive small businesses pay. The fact that energy will be more expensive will help businesses and firms make more energy efficiency investments. We can also reduce the amount of pollution, which is much less of a problem than it was in the early 1970s, but it's still a problem.
Your Total Tax Burden
Another thing that makes sense from a civic perspective is the idea that we should be taxed less on the fruit of our toil and more on the cost we impose on others. Even conservatives care about the environment. What they don't like is the costs that are imposed on businesses by the sorts of regulations we're used to having.
In the last five or ten years there has been a lot of attention in the economic literature on this sort of thing. The idea of using taxes to deal with externalities such as pollution has been around since the thirties, but only in the last few years has the idea to impose these taxes and recycle the revenues back to the firms and workers started to get some attention. The reason is a very interesting debate in the economics profession called the double-dividend debate.
I'll explain this briefly. Generally, the debate is over the strong versus the weak double dividend. The weak version of double dividend says that any tax change like this will impose some cost on the economy, but the effects of reduced climate change and less pollution will be so great that, on net, you'll have a positive effect. That's the weak version. The strong version of the double dividend argument says that because you're reducing these other taxes that have high distortionary costs-like payroll taxes, income taxes, capital gains taxes-and replacing them with taxes that are corrective, that don't have these distortionary costs, you can end up with economic gain, not even including the environmental gains. So you get gains on both sides. If that's right, wouldn't it be easier to address climate change? All these lobbying groups in Washington are saying how costly it would be for the American economy to deal with something like global climate change, so if you can address the problem in a way that won't impose huge economic costs, there's no argument. So it's very important to do more research on things like the double dividend and how a tax shift will affect job creation, or how it will affect savings and investment.
The real question is: If this is such a good idea, how come it hasn't happened before? That's a good question. There are generally four good reasons why. One is regressivity, or worries about regressivity, meaning that the burden will be borne more by the poor than by the rich. Another is that there will be significant economic costs. The third is that it means an increase in the tax burden. And the fourth is that we (the United States) have just been very timid to be the first.
Under this proposal, all four of these main past critiques will either be mitigated or totally disappear. (1) It's not regressive because you can include payroll tax reductions, other increases in the earned income credit, or other ways to deal with regressivity. (2) It's not going to yield great economic costs or job losses. (3) It's not a tax increase by definition because you're shifting the burden in a revenue-neutral way. Some people will pay more; some will pay less, and you will certainly see some shifts within the business community about which sectors are paying more. But in terms of the total tax increase and the burden of taxation on the economy, it's not an increase. (4) The timidity argument is gone now because several countries have already done things like this. These sorts of shifts are happening around the world.
As climate change becomes more of an issue, people are looking for ways to reduce consumption of fossil fuels that lead to the greenhouse gas emissions that are linked to climate change. But if you are a climate change skeptic, there are still lots of reasons to think this is a good idea. You don't want to just impose a carbon tax by itself, for example, because that's going to impose significant costs. But if you want to try to address the potential risk of climate change in a relatively less costly way, then you don't have to be a big believer in global warming to see that taxing good things less and bad things more makes perfect sense.
I want to make one last point. The Clinton administration is now working on how to address the climate change issue. There's a big conference coming up in Kyoto, Japan, in December, and it's very likely that they will just set some minor caps on emissions and allow firms to trade them but not charge for these permits; for example, just give the rights away. There are even some environmental groups that are supporting this. I think it's very short-sighted because even if they aren't charging for these permits, even if they just give them away, the laws of economics dictate that because of scarcity, prices will still go up throughout the marketplace. The idea to use revenue recycling or to use a tax shift means that you can charge for these permits instead of giving them away for free, and then you can help offset the increase in prices by recycling these revenues back to firms and workers. There's really no way of avoiding some economic cost if you give the rights away, but if you charge for the rights, if you recycle the revenues, it's a much less costly way of dealing with environmental problems. It also brings more common sense to the tax code.
-This edited article is taken from M. Jeff Hamond's presentation in a panel discussion entitled "Economic Alternatives" at the Economic Conference on Labor and Community Development, August 30, 1997, in Santa Rosa, California.
M. Jeff Hamond is Director of Fiscal Policy Research at Redefining Progress, a private, nonpartisan, public policy organization located in San Francisco and Washington, D.C. He is the principal author of Tax Waste, Not Work: How Changing What We Tax Can Lead to a Stronger Economy and a Cleaner Environment. Mr. Hamond graduated from Tufts University and holds a Master's Degree in Public Policy from the John F. Kennedy School of Government at Harvard University. Before joining Redefining Progress, he was Economic Policy Analyst for the Progressive Policy Institute (PPI).
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