Monday, April 15th is Income Tax Day.  I expect many of you are devoting part of your weekend to filling out tax returns now that March Madness (with a bit of April thrown in) has come to its final conclusion.  Some of us actually enjoy the challenge of preparing our taxes, but most people dread the looming deadline.

My field of specialization as an economist is state and local public finance, so I take a deep interest in tax policy. Earlier this month I participated in an educational program for the North Carolina League of Women Voters on tax policy, and I have a return engagement in May as they try to figure out what constitutes good tax policy.  

Some forty years ago economists formulated the basic guidelines. A good tax system should be adequate, generating enough revenue to pay for the services that citizens need and want.  It should be equitable, fairly distributing the cost of government among citizens according to their ability to pay.  The revenue should keep pace with inflation because when prices rise, it affects the goods and services purchased by government. It should be designed to encourage people to do “good things” like buying electric vehicles and insulating their homes and getting an education and contributing to charity, and discourage them from doing “bad things” like smoking and driving gas guzzlers. Or things that the government wants them to do, like spend their tourist dollars in your state and resist the urge to shop in other states with lower sales taxes.  All those incentives come under the heading efficiency.

Back in the 1800s, an economist named Henry George was a big proponent of the single tax on land. Most contemporary economists would disagree, affirming the need for a variety of taxes.  Why? You have probably heard of portfolio theory, the basic idea being that you can reduce your risk without reducing your return on investment by having a variety of assets in your portfolio instead of just one. Some assets are reliable and steady in the earnings, others have the possibility of great returns.  Some are stable and steady in value while others are volatile. Some are easily converted to cash (liquid) while others are not. !) Some taxes are better suited to the federal level, others to the state level (all but five states have sales taxes), and mostly the property tax and fees for services at the local level. !) Some taxes are better suited to the federal level, others to the state level (all but five states have sales taxes), and mostly the property tax and fees for services at the local level.

Like an investment portfolio, a tax system needs to resist using too many kinds of taxes, because that would increase the state’s cost of collection and the individual’s or firm’s cost of compliance. (Cost of compliance is what you are encountering this weekend.,)

The income tax keeps pace with growth and inflation but drops sharply in recessions. It can be made progressive so that more of the tax burden falls on those more able to pay.  The sales tax is more stable and ensures that everyone contributes, but it is more burdensome on low-income households.  The property tax is the best source for local government because you can’t escape paying it by moving away—the land doesn’t move with you!  It is also used to pay for local services that benefit local property owners, including education, road maintenance, streetlights and law enforcement. Excise taxes target particular products or people—gas taxes paid by drivers are used to maintain the roads they drive on, tobacco taxes discourage smoking, alcohol taxes discourage drinking (maybe). Business taxes (and tax breaks) figure into state to state competition to attract and retain business firms.

 Justice Oliver Wendell Holmes said that “Taxes are the price we pay for a civilized society.” I mentioned that to one of my conservative economist colleagues and he said, “The price is too high.”  “Or perhaps,“ I said, “The amount of civilization is too low.” 

How much civilization do you want, and how much are you willing to pay for it?  Think about that the next time someone seeks your vote with a promise of a tax cut.  What services are we going to give up, or what debt burden will we increase to pass on to our grandchildren?