According to Brimley, Garfield, and Verstegen (2012, p. 114-116) there are Six Criteria for Evaluating Taxes. Some other economists look at political/social criteria such as transparency, but these six are generally considered important factors for evaluating taxes. An interesting paper (though not this one) might be to evaluate a school, a district, or even a state based on these criteria. Maybe a taste of the same medicine would reveal some of the festering problems with our educational system?
- Fairness or equity
- “Taxes are considered fair if they contain feature of progressivity with a larger percent falling on individuals with higher incomes.” Based on this philosophy, the tax burden should fall to the greatest extent to those persons with the highest incomes and the greatest ability to pay.
- Adequacy of Yield
- A tax system should not be peppered with nuisance taxes that provide very little revenue while still antagonizing the tax base. “It is therefore important that taxes be applied to productive sources” like income tax, property tax, and sales tax.
- Low costs of collection
- The cost of collecting taxes should be relatively low to protect the revenue they create from administrative absorption. For the most part, personal property taxes are too costly to collect with the exception of large items that are easily identifiable like boats, cars, and homes. While homes are generally not going anywhere, boats and cars must be licensed at the point of purchase and each year they are used. “Such a system provides considerable revenue to government.” New cars come with a high burden of taxation for the buyer, but over time, the registration and license taxes reduce quite considerably.
- Shifting taxes should be minimized. This means that the persons who are supposed to be paying the tax are indeed paying the tax because they are able. One example of shifting tax away from the point of impact to a point of incidence might be when a tax is levied on a particular business or product, and then that tax is merely passed on to the consumer. Perhaps the business was the intended point of impact, not the consumer.
- “The intent of taxation is to divert private funds into the public sector to produce necessary goods and services, rather than to alter the behavioral patterns of taxpayers. A neutral effect is preferred.” The implementation of neutrality is easier said than done. “When taxes influence where and what consumers purchase, such as the home people buy and the location decision of business, they are not neutral.” One example of the lack of neutrality in the city of Los Angeles can be seen in the entertainment business. Known as the entertainment capital of the world, Los Angeles has lost portions of its entertainment tax base because of high tax rates that targeted production companies. In retaliation, productions have been steadily moving out of Los Angeles and out of California in search of lower tax burdens.
- Since the purpose of taxation is to divert private funds to the public sector, it is important that governments can depend on the revenue coming in each year. “Consistent or stable revenue streams allow governments to predict future income and expenditures with some accuracy and assure that revenues will be available to meet their needs.” With consistent revenue, governments should not need to levy new taxes and propose new bonds. An exception to this idea is when expenditures rise without the tax revenues rising. At that point new streams of revenue must be sought or expenditures must be cut.
According to Brimely et al (2012), property taxes constitute almost all of the local tax revenue for schools. Unfortunately, the property tax, though historically reliable, transparent, and easy to collect, is less equitable than one might expect. One major reason for the unfairness of the property tax is municipal overburden. This term describes the fact that cities have higher education bills with more students, higher urban costs, more pressure to pay for more government programs, and more students with higher educational challenges including language issues and poverty repercussions. Yet, with all of these escalated costs, cities tend to have an eroded tax base with a depleted middle class and fleeing industries. How could a city like Detroit, Michigan increase property taxes on a city that has been plagued with foreclosures during the last eight years? In addition, property taxes are inherently regressive, resulting in a higher tax burden on the segment of the population that has the least ability to pay (O’Leary, 2009).
A Sales Tax may seem like the fairest way to tax a population for a massive government service such as education; however, the sales tax is one of the most regressive taxes. According to the Oklahoma Policy Institute, “Almost any tax on necessities is regressive because lower income people must spend a larger share of their income on these necessities and thus in taxes” (“Characteristics of an Effective Tax System,” 2014). However, others argue that a higher, flat sales tax should replace income and property taxes because many purchases are voluntary, and people with more money will naturally spend more in taxes as they buy more high-end items (Fay, 2014). Unfortunately, in a state like California which has one of the highest sales taxes in the nation, when the Great Recession hit in 2008, the economic downturn resulted in detailing revenue. At the same time, government assistance, often provided through the educational mechanism, increased.
Without a one-size-fits-all tax, it appears that a mixed bag of taxes may provide the most reliable stream of income for education; however, now that the courts are legislating educational reform from the bench, school districts are going to need increased budgets. How will the state and the local leaders respond? According to the Laffer curve, there is a point where raising taxes will begin to result in a loss of revenue. According to Mitchell (2012), “Yes, the politicians usually can collect more revenue, but the concomitant damage to the private sector is very large and people have lower living standards” (p. 2). What’s best for education is a steady, transparent stream of revenue that invests in our students every year, year after year. Unfortunately, the people with the most direct contact with these students are the people with the least contact with the money and the budgeting.
Brimley, V., Garfield, R. R., & Verstegen, D. A. (2012). Financing education in a climate of change. Boston: Pearson Education.
Characteristics of an effective tax system. (2014). Retrieved November 1, 2014, from http://okpolicy.org/resources/online-budget-guide/revenues/an-overview-of-our-tax-system/characteristics-of-an-effective-tax-system
Fay, B. (2014). Types of taxes and income, property, goods, services, federal, state. Retrieved November 1, 2014, from http://www.debt.org/tax/type/
Mitchell, D. (2012, April 15). The Laffer Curve shows that tax increases are a very bad idea – even if they generate more tax revenue.Forbes.com.
O’Leary, M. (2009, February 28). Lawmakers considering tax options. New Haven Register. Retrieved October 30, 2014.