A Policy Interlude

I'm acknowledge that I said I wasn't going to talk politics for the next few months, but that doesn't mean I would discuss policy.  What intrigues me policy-wise recently was the Governor's latest budget proposal the introduces the idea of broadening the sales tax to clothing purchases over $100 and many services.  The idea would be the impose a 5.5% sales tax these goods and services, which would be a lower rate than 6.875% rate.  In fact, I took a look at some of the services and the revenue projections and found the following figures for the next biennium:

SPAM: $870k

Personal instruction (golf lessons, dance lessons, music lessons, etc.): $15 million

Legal Services: $102 million (consumers); $223.9 million (businesses)

Architectural and Engineering services: $243.5 million

You can find the projections here.

Being an individual who's taken extensive study in economics and public policy, I am one who's predisposed to the idea of broader based, lower rate taxation.  I've generally favored sales taxes over income taxes because it provides greater incentives to save and forces folks to make decisions based on economic consequences and not tax consequences if the sales taxes is truly broad enough.  

However, I've decided before I just sent you a myopic opinion I would go a trained expert in such matters.  I asked a professor I took classes from at Carleton College, Professor G., trained at the University of Chicago (where Nobel Laureates abound) about the idea of taxing legal services. Here's the discussion.

‪me: You think sales taxes on legal services is prudent public policy?

‪Professor G.: In a state in which voters have apparently decided that we need medical assistance for the poor that is paid for by a tax on a small minority of us--health care professionals, to be specific (I admit a personal interest in this since my wife pays 2% on her gross per MNCare tax)--I am not sure why other services should not share in the fun of tax form preparation.

In all seriousness, as an economist, I'm generally for broader taxes an lower rates. So, in that vein the expansion to legal services could make sense.

However, from what little I read today whether the present proposal DOES make sense isn't clear. (Broadening tax base doesn't mean targeting a few places--it means broadening.)

Of course, by that logic perhaps we should apply sales tax to educational services as well....

‪me: I certainly agree with that I'm thinking the broader the application, the more likely individuals will make decisions based on the economic consequences, not tax consequences

‪Professor G.: Sounds like you took Econ 111!

‪me: An ode to the St. John President

I would like to know how would we rebut the arguments of regressivity of the sales tax

‪Professor G.: I don't know about rebutting it. It's a pretty fair observation that sales tax is regressive in average and flat on the margin.

‪me: well, addressing the regressivity issue

‪Professor G.: Economists who favor a replacement of income with consumption taxes usually do so by noting savings (and investment) is good.

The distributional impact of the sales tax is usually addressed with the idea of a lump-sum negative tax a la Friedman.

‪me: so some EITC rebate

‪Professor G.: Yes, except without the phase out that effectively lifts the marginal tax rate near 100% for some low income regions (talk about regressive!)

So there you have it, an esoteric discussion on tax policy that I hope is enlightening.

P.S.  Yes, I acknowledge that a certain poll question recorded the most votes.  I will address that issue at a later time.