The economic analysis of taxation has plenty of jargon, statistical analysis, and complicated graphs, which can make it seem very mysterious to ordinary people.
But the core principles are actually very easy to understand.
Simply stated, the more you tax of something, the less you get of it.
For instance, politicians often argue that there should be higher taxes on tobacco and alcohol in order to discourage smoking and drinking.
Given my libertarian proclivities, I obviously don’t like them trying to control our private lives, but they are right about higher taxes reducing cigarette and booze consumption.
To be sure, politicians don’t care about our health. They simply want more money in order to buy more votes. And they also don’t seem to care that punitive tax rates increase smuggling.
But I’m digressing. Let’s get back to the economics of tax policy.
Since my goal is to improve understanding, I prefer clear and simple analysis and explanation.
It also helps to have lots of real-world evidence.
For example, a report by Erica Werner in the Washington Post shows how taxes affect behavior.
A tax on mansion sales in Los Angeles was intended to raise millions to fight homelessness. It hasn’t quite worked out that way. Instead, wealthy Angelenos rebelled, putting the brakes on sales of homes priced at $5 million and above — those targeted by the initiative — with the result that the tax has raised far less money than expected since taking effect April 1. …The measure imposes a 4 percent tax on properties listed between $5 million and $10 million; at $10 million and above, the tax bumps up to 5.5 percent.
People are responding in predictable ways.
In the months before the tax took effect, high-end real estate sales exploded in L.A., as homeowners maneuvered to unload costly properties ahead of the new levy. The Los Angeles Times reported that celebrities including Brad Pitt and Mark Wahlberg were among those selling homes in the days leading up to April 1. …In the final days of March, some real estate agents even threw in free luxury cars to get clients to close sales before April 1. …Other tricks include separating properties into lots, or dividing a property between two spouses as “tenants in common” who can then sell their shares separately. …In the first quarter of the year, there were 248 sales of commercial and residential properties priced at $5 million and above in Los Angeles, according to Nathan Stark, an account executive at Chicago Title. Since April 1 through mid-June, there were only 34 sales. Stark and others argue the tax is counterproductive, since the city is losing out on transfer tax revenue it would be collecting if sellers weren’t holding back.
One realtor has a very sober-minded view of the issue.
Revelins has a home listed in the Venice Beach neighborhood of L.A. for $4,999,000 — a price tag she freely admits is aimed at avoiding the $5 million trigger for the new tax. …“That property is worth a little bit more,” Revelins said. “But if we listed it at $5.2, they would have to pay $200,000″ in taxes, money that Revelins says the city would squander.
We also see evidence of a Laffer Curve-type effect.
Proponents initially hoped the tax would raise some $900 million a year… But…the city administrative officer pegged first-year revenue closer to $670 million. …Mayor Karen Bass included just $150 million from the tax as part of…her first budget proposal. Through the end of May, the tax had raised a total of $15.5 million.
For what it’s worth, I’m sure the tax eventually will raise several hundred million dollars each year.
But I also feel confident that it will never raise as much as politicians expected.
That’s the main takeaway when you look at real-world incentives and real-world evidence.
P.S. The story includes this blurb about a referendum that might help reverse California’s economic decline.
California voters will vote on a 2024 ballot initiative that would give them greater say over taxation in the state, and require two-thirds support for local tax increases, retroactive to Jan. 1, 2022.
Since California voters supported Prop 30 back in 2012, I’m not overly optimistic about a return to common sense.
———
Image credit: ErikaWittlieb | Pixabay License.
