Medicaid Expansion

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Melvin Udall
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So you hate the children? I

So you hate the children? I'm shocked, shocked, I tell you!

Toolsmith
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Education departments have

Education departments have done plenty of damage, and no good at all. The results over the past 40 years speak for themselves.

Zero-fund the Education dept and put all that money towards other purposes...

Economike
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"Ummm, no, he increased

"Ummm, no, he increased spending (particularly defense spending) and cut taxes at the same time. But also consider that unemployment was around 7-8%, which is a situation that lends itself to massive fiscal stimulus (slack in the labor market)."

anon -

It's difficult to find agreement on economic topics that coincide with politics, isn't it? Even a lot of famous economists can't get beyond their preferred political narratives when addressing political topics. And political narratives are not falsifiable; they serve to confirm our biases.

So if you believe that "fiscal stimulus" - and not a supply-side tax cut - caused the income growth of the Reagan years, I'm not going to convince you otherwise with anything I might offer as evidence. There are few controlled experiments in economics, and I admit that "fiscal stimulus" can be teased plausibly out of the facts - the facts one might choose to notice. I happen to think that "supply side tax cut" better explains the economic growth of the Reagan years. I'd cite increased rate of GDP growth and decreased federal spending as a proportion of GDP. "Fiscal stimulus" doesn't account for those.

At least with "supply side tax cut" we have a plausible economic mechanism to account for results. The premise is to reduce costs of new income-producing activity among those taxpayers most able and likely to respond to such incentives, and we can judge results with changes in tax revenues. On the other hand, with "fiscal stimulus" the premise is that government's taking income (or borrowing) from one group and giving it to another somehow creates demand for more economic activity, which leads to more economic activity, because there's a multiplier when government expends but, apparently, not when it appropriates. Or something.

"Nothing is exchanged. If we tax something that non-residents buy more of (say, hotel stays, or beach parking passes that residents can buy at a discount), then they are being taxed at a higher rate than residents."

If we agree that "nothing is exchanged" then we agree that non-residents don't bear residents' tax burden, because burden is not nothing, and therefore not exchanged.

No doubt, the question whether a state's tax burden can be borne by non-residents is subtle. My contention is that, as an economic proposition, the burden of taxation for any state's residents cannot be assumed by non-residents, except for the fanciful exception that non-residents send checks directly to the state government. It's obvious, as a matter of course, that non-residents often pay taxes in other states. That's tax incidence, and it's not at issue.

My question is - "When non-residents pay taxes in Maine is the tax burden for Maine residents lightened?" That is, when non-residents pay Maine taxes, are residents correspondingly relieved of tax liability? I think the answer is "no."

Let's consider the workings of interstate commerce with a hypothetical. States impose taxes within their several jurisdictions, and businesses within states sell goods and services to residents of other states. So, for example, Iowans pay taxes to the state of Iowa and Iowans sell corn to businesses in other states. Within this framework, is there any way that Iowans could contrive to get out-of-staters to bear Iowa's tax burden? Someone might argue that since Iowa residents derive income from corn sales to non-residents, it follows that corn sales to non-residents result in taxes paid to Iowa and, therefore, non-residents bear some of Iowa's tax burden. And someone might add, Iowans enjoy an abundance of cropland from which they can collect rent from other states that can't grow corn. I hope we can agree that the intuitive answer is "no." Obviously, since Iowa corn merchants are selling a commodity in a competitive market, they can't extract a premium from sales that will relieve Iowans of their tax burden. Are clear on this idea?

OK. On to the next hypothetical. Resort hotels in Miami sell meals and lodging to non-resident tourists, collecting taxes for the state of Florida. In this case, can we say that non-residents relieve the tax burden of Floridians? My argument is that this transaction - the taxable sale of an in-state service to a non-resident - is not essentially different from the Iowa corn sale. Consider that Miami resort operators are in an international business at least as competitive was corn marketing. The taxed margin on sales due to the state of Florida is reflected in the total price paid by tourists, who are sensitive to price changes on the margin. Like the Iowa corn merchants, the Miami businesses are unable to charge a premium on sales which in turn relieve the Florida tax burden at no cost to Florida residents. (At this point, someone will object "But most tourists ignore such costs." And the response is "Yes, but that's not relevant. The point is that tourists on the margin of the tax cost will choose not to vacation in Miami. Or spend less there.")

You can see where I'm headed with these hypotheticals: they apply to Maine. As I cited a few posts back, ".... the incidence of taxes is not the same thing as their burden. The burden always falls on those who cannot escape it, rather than on the legal entity targeted by governments." Yes, non-residents often volunteer to vacation and to live in Maine, but they do not relieve Maine residents of their tax burden. Like tourists in Miami, the cost of Maine taxes to non-residents is a part of what they're willing to pay to be in Maine. And this added cost is equal to income that Maine residents forego.

Watcher
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Economike, non-residents

Economike, non-residents certainly lower my taxes. The Town I live in and our school district are funded by property taxes. Non-resident property owners pay more in property taxes than the year-around residents. They have more expensive houses on the ocean for the most part. They also pay oodles of bucks on sales tax on the State level. Without them, the Town and the State would still need the same amount of taxes but the residents would have to make up the difference.

Toolsmith
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So the final cut is: Taxes

So the final cut is: Taxes collected from out-of-state persons are actually being deleted from in-state resident income - without the tax, the in-state resident could charge more (the amount of the tax) for their services. So, the lost income cancels out the tax revenue. Problem: the in-state resident would only pay a fraction of that as tax on income, so how does this balance? It's not 1-for-1.

So , we'd be better served by making Maine a tax-free haven for out-of-state visitors? I can see that this would make it easier to compete with NH, which IS a tax-free haven for out-of-state visitors!

Economike
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"Economike, non-residents

"Economike, non-residents certainly lower my taxes. The Town I live in and our school district are funded by property taxes. Non-resident property owners pay more in property taxes than the year-around residents."

"So the final cut is: Taxes collected from out-of-state persons are actually being deleted from in-state resident income - without the tax, the in-state resident could charge more (the amount of the tax) for their services. So, the lost income cancels out the tax revenue. Problem: the in-state resident would only pay a fraction of that as tax on income, so how does this balance? It's not 1-for-1."

I could be wrong about this. Perhaps non-residents really do relieve our tax burden in Maine. However, that idea strikes me as a belief in a free lunch - getting something for nothing. Intuitively, I can't see non-resident contribution to Maine tax revenue as a pure windfall to Maine residents. Here's what I believe about tax burden:

".... the incidence of taxes is not the same thing as their burden. The burden always falls on those who cannot escape it, rather than on the legal entity targeted by governments."

It's obvious that the incidence of Maine taxes - property, sales, and occasionally income taxes - applies to non-residents. We can readily see that non-residents pay to support our schools and roads. If we take a static view of the situation, looking at what is right now, then we can conclude that non-residents bear part of our tax burden.

But economic reasoning is to find what is seen and not seen. (If you're interested, do a web search on "broken window fallacy.") I'm asking "How did we get here? Where do we go?" I'm trying to imagine tax policy dynamically.

It's apparent that for non-residents the payment of Maine taxes is part of their costs for vacationing and/or residing part-time in Maine. Non-residents can choose to escape these costs. As I define tax burden, non-residents don't bear Maine's tax burden. This is my explicit bias: Maine can collect taxes from non-residents, but it can't impose them.

For one last time (I apologize for droning on) let's imagine another hypothetical.

Intending to get non-residents to bear more of Maine's tax burden, a legislator proposes to create a meals-and-lodging tax of, let's say, 50%. Of course, everyone in the tourism business sounds off: such a proposal will nearly kill Maine's tourism business. Non-residents will not pay this exorbitant tax. The point of this fanciful hypothetical, as we work backward to the current situation, is that there exists a trade-off - an exchange - between the taxes Maine imposes and the willingness of non-residents to pay them. I should add that this exchange is not necessarily one-for-one. As in my airport-car-rental example, taxation often involves deadweight costs.

There is not "no exchange" here. The question is "What is exchanged?"

mainemom
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Lots of opinion on the tax

Lots of opinion on the tax incidence of vacation homes. I might as well jump in.

Think of a second home in Maine as a luxury good, without regard to where the owner/buyer's primary residence is.

Demand for luxury goods such as a second home is highly price elastic. If the luxury good were a 5 carat diamond then the purchase and sale price would be the only decision point, yes? One and done. With a second home, however, every year the owner has an obligation to the local taxing authority. That's a yearly decision point. Think of it as a rent. The local resident two blocks away who has kids in school and a job a short commute away also has that rent obligation to the town, but he is much less able to avoid it than the neighbor whose property is a second home. He has to live somewhere, right? There are transactional costs to selling up and buying (or renting) elsewhere, and intangible costs to changing schools and other personal circumstances. For the local resident, the property tax obligation is much less price elastic than it is for the onwer of the second home.

Tax incidence is the division of a tax burden (in this case, the local property tax burden aggregated throughout the town) between sellers and buyers. Tax incidence shifts depending on price elasticity. Here the seller is the taxing authority, who collects the yearly "rent." The buyer is the homeowner, who pays the yearly "rent." When demand is less price elastic (the local resident who has strong ties to the town) the incidence falls more on the buyer (the local resident) and less on the town. When there is increased price elasticity (the luxury good: the second home), the tax incidence falls more on the seller (the town), and less on the buyer (the second home owner). He can bail (if he can find a buyer willing to pay the yearly tax. If he can't, then the selling price has to fall in order to clear the market, and the town's yearly "rent" on that property must come down as well).

That's the theory, anyway.

Economike
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Thanks, mainemom. That makes

Thanks, mainemom. That makes perfect sense to me.

And you've found my missing theoretical link: the margin of tax incidence and burden. "When the demand is less price elastic...." etc. That is, taxes tend to burden the less mobile.

mainemom
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I suppose a flaw in the way i

I suppose a flaw in the way i explained it is that the "seller" is also the taxing authority, whereas usually the seller is someone else. So, it's important to think of "the town" as the people who comprise it, not the tax collector.

When policy makers think they can arrange state tax policy to export the tax burden to non-resident owners of second homes, the people who make up the local taxing authority ought to beware.

Economike
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Yes.

Yes.

Thanks to your helpful ideas, I think I can revise my assertion that "non-residents can't bear tax burden." That's too absolute. It's more accurate to say that there's a continuum of tax burden. Residents fall toward the 100% end and non-residents fall toward the 0% end.

anonymous_coward
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@Economike: "So if you

@Economike: "So if you believe that "fiscal stimulus" - and not a supply-side tax cut - caused the income growth of the Reagan years, I'm not going to convince you otherwise with anything I might offer as evidence. There are few controlled experiments in economics, and I admit that "fiscal stimulus" can be teased plausibly out of the facts - the facts one might choose to notice. I happen to think that "supply side tax cut" better explains the economic growth of the Reagan years. I'd cite increased rate of GDP growth and decreased federal spending as a proportion of GDP. "Fiscal stimulus" doesn't account for those."

I don't dispute that tax cuts create growth, I think all economists would agree on that. What I am disputing is the notion that you make up the amount you spend by increased revenue.

Part of it is that high income tax cuts are relatively inefficient economic stimulators, since you are handing money to individuals that have a lower margin propensity to consume (compared to poor people, who spend every additional dollar they get).

The other part (and why state tax cuts are even weaker stimulators) is that a big portion of tax cuts leave the area where they are cut, since some things are bought from out of state/country, and money that is saved might go to an investment that ends up abroad. (This is obviously less of an issue for federal tax cuts compared to state.)

BTW, and I don't understand why conservatives confuse the terms, but when I learned it in economics 101, "fiscal stimulus" was a blanket term for both tax cuts & increased federal spending at the expense of borrowing. Somehow the conservative press has attempted to associate it only with spending. Tax cuts without a commensurate reduction in spending = fiscal stimulus.

"Obviously, since Iowa corn merchants are selling a commodity in a competitive market, they can't extract a premium from sales that will relieve Iowans of their tax burden. Are clear on this idea?"

Yes, but coastal Maine isn't exactly a competitive market. People that come to vacation here have usually been coming to vacation here for eons and are unlikely to change if the cost increases. In other words, we would be engaging in rent seeking. (Also, at least in my own personal experience, I tend to be less price sensitive when I'm on vacation. Don't know if that is a real phenomenon or not in the aggregate.)

(As I've mentioned before, an increase in taxes on something like lodging might cut into spending for other things, like lobster rolls, but I would like to see some hard data on that before I agree.)

anonymous_coward
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It's also worth noting that

It's also worth noting that property tax is one of the few taxes that is not a tax on a transfer, it's a tax on wealth. If the wealth is owned by out of state people, then they are literally bearing the burden directly.

Economike
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Thank you for your thoughtful

Thank you for your thoughtful reply, anon.

Just a few comments -

I don't think all economists will agree that tax cuts create growth. I'm no economist, but I don't think that. For any tax cut, we need to consider its incentives and offsetting disincentives. All else equal, no tax cut is "free" - that is, net growth. When government reduces revenue but not expenditure, it must promise (to its creditors) to raise revenue later. Look up "Ricardian equivalence" if you're unfamiliar with this concept.

But, as I have cited, some tax rate cuts actually raise more revenue than would the pre-tax-cut-rate. You seem to think this impossible. Can you think of any reason why, at least in theory? If we can devise a rate cut that will incentivize effort and investment in new production, why not the long-term result of raising income to the point where tax revenues on that new income exceed status quo ante revenues? The better-informed will recognize this as the dynamic described by the Laffer Curve, which is nothing more than the law of diminishing returns applied to tax policy.

More important, I dispute the notion that economic growth is caused by "stimulus" as if an economy were a giant GDP factory waiting only to be primed into growth by additional demand brought on by government borrowing to send consumers on a spree. This scenario is a parody of Keynesian economics, which in its orthodox framework limits the growth effects of stimulus to recovery from a recession. If stimulus worked as you imagine - borrowing to boost consumption to stimulate growth - Greece would be Europe's economic powerhouse..

Economic actors are not fooled in the way you imagine, seeing new spending while blinded to its source. Rather, economic growth is a consequence of capital formation. Supply-side tax cuts succeed when economic decision makers - those forward-thinking producers with a "lower marginal propensity to consume" - are encouraged by rate cuts to work and invest more because they anticipate that their taxes won't rise later to pay for the rate cut now. If by economic growth we mean a level of production above the status quo ante, tax rate cuts necessarily must incentivize those with the least marginal propensity to consume: those who can put their capital at risk. Change happens on that margin.

And yes, of course "stimulus" can be a tax cut, such as a drop in the payroll tax. And about as "stimulating" as government expenditure.

As for Maine property tax, you are right to note that non-resident property owners are far less sensitive to price changes than buyers of commodities. This does not mean that Maine coastal property falls outside a competitive market, merely that the burden of taxation varies according to mobility. I'll give Mainemom the last word on this subject.

Melvin Udall
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I tire of reading lengthy

I tire of reading lengthy dissertations, as enlightening as they can be.

I just wish to add one point....anyone who uses static analysis to evaluate such tax cuts and other policies is prima facie not credible. People change their behaviors to pursue their best interests as a response to any meaningful policy changes (including taxes), resulting in anything but a static response.

I speak from experience...among other things in the field of owning rental properties. In my case, the change affected the availability of rental housing beyond basic tax considerations.

Economike
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I'll be brief. I promise.

I'll be brief. I promise.

Mel - You've identified the problem of central planning.

People do not know what they prefer until they go to market and learn what their choices are.

No one knows - in advance - what individuals want.

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