Friday, May 21, 2004

More Voodoo Economics: Setting tax rates appears to be an art, not a science.

The state of Virginia, where I live, just revamped its tax code, raising taxes significantly to help get rid of massive deficits that have plagued the state budget for the past few years. Days after the new tax system was approved, updated budget figures show the state will get a surplus -- regardless of whether taxes are raised.

It just makes me wonder why the folks in Richmond didn't wait for the budget figures to come out before approving the new tax system. State taxes are pretty low for this region of the country (which is one reason I chose to live here), and the mounting deficits were a problem that needed to be addressed.

But if the state is already making a surplus, perhaps we should rethink some of these new taxes. For one thing, when I moved here five years ago, the state government promised to get rid of the car tax. Every year I have to write a check to the state, the amount determined by the value of my car -- that's on top of car registration, inspection, and all that. Nevermind that I never drive my little junker. The car is paid off, but I will pay taxes on it indefinitely. It appears now Virginia can fulfill its pledge to get rid of the car tax.

Of course, we face the opposite issue with the federal budget. Bush campaigned in 2000 that the federal government should lower taxes because of the budget surpluses. I agree, the government should not be in the business of making a profit.

Then when the recession hit, Bush argued that tax cuts would help revive the economy. Again, I thought that was a valid argument, because temporary, manageable deficits are one of the few tools government has to help the economy rebound.

But then Bush proceeded to not only slash taxes, but also to dramatically increase federal spending, including a Medicare prescription drug package that could have waited. The economy is picking up, and federal revenues are increasing, but not at the rate that the government is spending. Plus, we're in a war, and we need a strong budget to pay for this conflict.

Thankfully, a few moderate Republicans understand the predicament we're in and have decided to hold off on supporting the new spending bills until the we slow the rate in which we're cutting taxes. They don't even want to raise taxes. They're just advocating fiscal responsibility.

The two examples show there is no easy way to determine an ideal tax rate. Instead governments should concentrate on reigning in excessive spending, and then figuring it out from there.