Tuesday, October 02, 2007

Oklahomans Can Start Working Again; Our Income Taxes are Low

Recently former U.S. Senator and current University of Oklahoma president David Boren made a statement calling for a halt to attempts by the Oklahoma state legislature to cut taxes even further. His reasoning was that the existing tax cuts have already eaten into the budget so much that funding for public institutions like the University of Oklahoma has suffered. He went on to use an economic rationale, saying that more investment in higher education creates a knowledge-based economy that will produce long term benefits including new business and good jobs. Which is sort-of true, but also so obviously self-serving.

If the comments were directed at anyone, they were directed at representative Randy Terrill, the Republican chairman of the House Revenue and Taxation Committee. Terrill thinks the state income tax is still too high, although currently there are no proposals to lower it further after the already-passed legislation takes effect in 2008, but there are proposals that would repeal state taxes on overtime pay and groceries. Last Thursday, state representatives heard from advocates on both sides of the issue; David Blatt, a public policy analyst from Tulsa, argued against further income tax cuts, and Phil Kerpen, national policy director for the conservative tax-slashing organization Americans for Prosperity, argued for further income tax cuts. It was Kerpen who made an absolutely terrible analogy between cigarette taxes and income tax.

States tax tobacco heavily because they want to discourage its use, and the income tax rate can work in the same way.

"It makes perfect sense: If you tax people more, then they have less reward for working, saving and investing, so they'll do less of those things,” Kerpen said.

I don't understand the analogy at all. I don't think the tax rate factors into anyone's decision on whether or not to work. I dare Phil Kerpen to show me the gentleman who chose to wait until the state lowered their income tax rate by half a percent in order to take that job at Starbucks, or the lady who quit her job at Wal-Mart when the state decided to impose a tax hike to fund roads and bridges. People are going to have to work to earn a living, whether the state income tax is at 5% or 15%. People, however, don't have to smoke.

One final note: according to this chart on MSN, Oklahoma has the 40th highest state taxes in the nation, on average. So it's not like our taxes are outrageous or anything. Plus our oil-rich state economy has been doing really well recently due to high energy prices.

- QP


Jacob said...

The controversial Laffer Curve is based on the same notion that higher tax rates discourage productivity (which, it supposes, after a certain point will decrease revenue). You mock the idea of someone (perhaps while purchasing his formerly taxed groceries) making an employment decision based on such income tax changes. You're likely correct, if the person is working at Starbucks. But if the person is a corporation choosing which state to set up business in, marginal differences in tax rates do tend to factor into these decisions.

The limitation seems to be not in the analogy itself, but in the fact that it is motivated by its applicability to one interest group (the wealthy can and do switch states based on income tax rates) but sold to another (the poor are basically unaffected by differences in tax rates, and are less mobile anyway). This is a recurring theme in every honest discussion of income tax policy.

Steve said...

If I ever need a corporate tax lawyer, I know who to call. You're of course absolutely right about the economics of mobility. Corporations have the ability to set up shop wherever they want for virtually the same costs, but it is crazy expensive for an individual to take a job in another state, even if that state's income tax is a couple of percentage points lower. Unless they live in, say, Texarkana, or Kansas City. And even then, you're limited to just two choices.

We don't (and can't) have a perfect free market capitalist economy for reasons like this.

Jacob said...

I'd be the worst corporate tax laywer ever. Anyway, I just want Alyson to think my brain is hot, too.

Anonymous said...

Done and done. Sadly, I've learned that no matter how hot I think someone's brain is, they're not going to let me touch it. :(