By John Seiler| Watchdog.org
Theoretically, there’s a possibility the state might come out ahead if it could, for example, swap the current income tax for a sales tax. That is, the income tax would be ended entirely and replaced by a sales tax that brought in equivalent revenue.
The problem with theories is that they often get distorted in practice. This is especially true with taxes.
One thing we know about governments is that they love taxes—know how get as much as they can and have the rhetoric down pat. Tax increasers usually are incrementalists. So it’s the old story about the frog in the pot of water: until the water reaches the boiling point, the frog thinks he’s enjoying a Jacuzzi.
When the income tax was imposed on the United States in 1913 after passage of the 16th Amendment, the original top rate was just 7 percent of $500,000 of income, about $20 million in today’s inflated currency. The middle class, and most of the rich, didn’t pay it at all. During World War I, just a couple years later, that was jacked up to 77 percent. And the rate has bounced around ever since.
The 1913 income tax was supposed to preclude the tariffs imposed on imports of foreign goods. That lasted a few years. But the 1930 Smoot-Hawley tariff greatly increased tariffs to 50 percent, a major cause of the Great Depression. When the high tariff was brought back, was the income tax then cut? On the contrary, the top rate was more than doubled, from 25 percent in the late 1920s a 63 percent in 1932. That also helped put the “Great” into the Great Depression.
But even good tax changes can include poison pills. In 1986, President Ronald Reagan’s tax cuts lowered the top rate from 50 percent to 28 percent. But Senate Majority Leader Bob Dole, R-Kan., forced Reagan to include an increase in the capital gains tax from 20 percent to 28 percent. The “28 percent” symmetry was deemed important. And the capital gains tax increase was supposed to bring enough revenue supposedly to “pay for” the cut in income tax rates.
Ironically, the cap gains tax increase actually lowered revenue from that source by more than half in 1987 as people found ways around it.
As to the stock market, the increase in cap gains generally was offset by the excellent income tax cuts. However, the real estate market was slammed by the capital gains tax increase because investors no longer could write off as much of their property value increases. The disaster cascaded into the Savings and Loan associations that held much of the paper on homes. That in turn was a major cause of the Savings and Loan crisis of the late 1980s and early 1990s, which led to an $87.9 billion bailout.
President George H.W. Bush increased taxes in 1990 in part to pay for the bailout. Both the bailout and the tax increases crashed the economy and led to his defeat at the polls in 1992 to Bill Clinton.
My point is that, when you start shifting taxes around, it’s like the break in a pool game: even the best players sometimes don’t know where the balls are going to end up.
For Montana, even if the income tax were ended entirely in favor of a sales tax, in a couple of years the tax increasers could say, “Well, we just need a little more revenue. How about a new 2 percent tax just on rich people? Those who have been given the most should give back a little.” Then the number keeps going back up. And you have two high taxes.
I could be wrong. Maybe that won’t happen. But maybe it would.
Historically, the best policy for tax cutters is to avoid the Rube Goldberg reforms and just go for simplicity: Whatever taxes there are, cut existing rates. Cut them incrementally. Montana’s top income tax rate currently is 6.9 percent. OK. How about 6.5 percent? Do I hear 6 percent?
Cut till it’s zero percent.
After all, New Hampshire has no income tax and no sales tax. Its economy is soaring without an energy boom. Why not Montana?