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Tuesday, November 27, 2012

The Deduction to Chop: Everyone has Something to Say About the Fiscal Cliff

Here’s a letter that I wrote to the Washington Post that didn’t get published:

In “The deduction to chop,” Charles Lane’s column on November 20, he raises an interesting point.  Allowing deduction of State income taxes on Federal returns clearly favors residents of States that impose income taxes; and the higher the rate, the more advantageous is the deduction.  In general, it seems to be the blue states that get most of the benefits of this deduction.  He might have written a balanced column instead of a conservative puff piece, if he had also mentioned that the return of Federal taxes to the states greatly favors the red states, i.e., blue state residents tend to get a per capita return of Federal taxes in the form of grants and expenditures that is less than 100% on the dollar while red states tend to get more than 100%.  New York, California et al, are supporting the red states.  Maybe it all comes out in the wash, but, if so, then in terms of equity the state income tax deduction is “the deduction not to chop” until the whole framework of public expenditures is overhauled in a major tax reform that recognizes needs at all levels of government.

It’s not a very exciting letter, but I had to write it, because I don’t think anyone should be discussing “public finance,” who doesn’t have a thorough understanding of this field of economic theory.   A good place to start learning would be the Wikipedia entry below.

I didn’t read very far, but the first few paragraphs seemed promising.  

Even Milton Friedman could admit some role for government.  The example I remember, probably from Capitalism and Freedom, is lighthouses.   We have to have them, but there is (or was) no practicable way to collect user fees, so the public has to provide them.   What Grover Norquist, the Tea Party and too many people on Capitol Hill and in voting booths don’t seem to understand is that our world has gotten increasingly complex as we continue to urbanize and develop new technologies.   Now it’s not just lighthouses but also airports and air control systems and interstate highways and on and on in every area of human activity.  The most obvious one is healthcare.  It used to be, if you called the doctor, he came and did what he could, which wasn’t much, and if you couldn’t pay, he probably let it go, because it wasn’t much, and most people could and did pay, or they didn't call the doctor and got well on their own, or not.  Now, if we have developed life saving technologies, can we deny them to those who cannot pay for them?  If we can, I don’t want to live in that society.  The percent of GNP that is collected in taxes and spent on public goods can only increase over time.  The only alternative is to deny to a substantial portion of our population the fruits of economic and scientific development.

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