CTJ's Tax Justice Digest, December 1, 2006

Citizens for Tax Justice has released a new report describing the options to improve solvency of the Social Security program. The question has received attention lately since the President's allies in Congress will no longer be controlling the agenda or the committees that could delve into Social Security solvency. As discussed on CTJ's blog, Treasury Secretary Henry Paulson said last week that the Administration was willing to begin conversations with all options on the table and "no preconditions." The President's former chief economic adviser, Lawrence Lindsey has said that Bush "may be willing to raise taxes as part of a 'deal' on entitlement reform." As the CTJ report points out, raising the cap that limits how much wages are subject to Social Security taxes is one option that should be considered carefully.

Montana Governor Brian Schweitzer has a plan for disposing of the state's projected budget surplus. On the tax side, he is proposing a one-time property tax rebate for homeowners that would cost about $400 million. His proposal also includes more funding for education, mental health facilities, and corrections. Republicans are skeptical and may push for permanent (and potentially unaffordable) property tax cuts.

DC: Another "No New Taxes" Pledge Bites the Dust?

The fiscal storm clouds are already gathering for newly-elected District of Columbia Mayor Adrian Fenty. A Washington Post article reports that the city faces an unanticipated revenue shortfall of $300 million over the next two years. No big deal — except that as a candidate seeking to distinguish himself from a crowded Democratic primary field this past spring, Fenty took a "no new taxes" pledge, arguing that that the books could be balanced with that old favorite, eliminating "waste, fraud and abuse." The new projected shortfalls are, of course, only projections — but they serve as a dramatic reminder of the dangers of not leaving all fiscal policy options on the table.

New Hampshire's "View Tax"

New Hampshire's antiquated property tax system has historically done a poor job of accurately valuing homes for tax purposes. But Granite State tax administrators have been trying to modernize the system to eliminate this disparity. Unfortunately, this effort is taking place at a time when an influx of out-of-state families seeking vacation homes has driven up property values around the state. The result? Huge increases in property tax bills for many homes, and public outrage over the modernization effort. Taxpayers' wrath has been focused on an effort by tax administrators to quantify the market value of a home's visual surroundings — which is now being dubbed a "view tax." Lost in the wave of public anger over the view tax has been one simple fact: a properly functioning property tax should be based on a home's actual value — and the view from your front porch undeniably affects home values. The real story here, of course, is that New Hampshire is the only state that tries to pay for public services without either a sales tax or a broad-based income tax. This means that property taxes were pretty high even before the modernization effort began. Let's hope the new Democratic leadership in both houses of the state legislature can recognize this imbalance.

Did the Flat Tax Save Russia's Economy?

On a quick visit to Estonia this week, President Bush repeatedly praised the virtues of that country's flat-rate income tax. Several former Soviet countries have enacted such taxes in recent years, and right-wingers have made a habit of citing this move as a reason for the rapid economic growth in these countries. But anyone who sees a supply-side miracle in the economic growth of the new flat-tax nations should check out this excellent paper from Brookings economists Clifford Gaddy and Bill Gale. Gaddy and Gale find that the post-flat-tax growth in Russia's tax revenues most likely stems not from the use of a flat tax, but from the introduction of basic administrative steps such as income tax withholding and the use of taxpayer identification numbers. One can only hope that this will stop anti-taxers from trotting out the canard that Russia's flat tax was single-handedly responsible for saving the Russian economy.

Right-Wing Tax Foundation Argues for Deduction of Inflation from Capital Gains

Economists often say that income is anything that allows people to consume more. Under this definition, capital gains would seem to be income, and yet they receive a special preference in the tax code — they're taxed at just 15% under the Bush tax breaks, less than half of the 35% top rate on wages. Apparently there are those who believe capital gains are still taxed too highly. The Tax Foundation has released a report arguing that much of the gain a person enjoys when selling a piece of property is really just inflation and not a gain in any real sense. The Foundation recommends that Congress enact a bill proposed by Congressmen Mike Pence (R-IN) and Eric Cantor (R-VA) that would exclude the amount of capital gains due to inflation in calculating the capital gains tax.

Perhaps this would sound like a more reasonable proposal if capital gains, which are mostly enjoyed by the wealthy, were not already taxed at such a low rate compared to wages. But even more troubling are the strange outcomes that would result from this proposal. For example, if one person puts $10,000 in an interest-bearing savings account for 30 years while another person buys property for $10,000 and sells it at a gain 30 years later, only the latter would benefit from this proposed tax break linked to inflation. That's on top of the lower rate for capital gains. Why should income from the savings account — the little guy's form of investment — be taxed more heavily?