Monday, March 27, 2006

A Tax Increase; or how to encourage more Iowans to leave the workforce

Some tax increases are just fine, according to Democrats in the Iowa Senate. Reported in the QC Times

DES MOINES — Democrats gave new details Thursday about how they would pay for elimination of the tax on pensions and Social Security. The plan would cut taxes for all low- and moderate-income Iowans, while raising taxes for the wealthy.

“Let me put it this way. Pension and Social Security taxes will be gone and everybody that makes under $100,000 a year will see a significant tax break,” said Senate Democratic Leader Mike Gronstal of Council Bluffs.

Democrats would pay for their plan by eliminating a tax break that allows Iowans to deduct their federal income taxes from their state income taxes. This would save the state more than $430 million, which Democrats would use to reduce or eliminate taxes on retirement income and reduce tax rates on the lower and middle end of the salary scale.

Gronstal said the proposals would be “revenue neutral,” meaning the tax cuts would be offset by raising taxes in other areas. Further details were not available.

Republican leaders oppose the idea. They would rather pay for tax cuts by reducing the rate of new spending, which Democrats say would lead to cuts for K-12 schools.

Rep. Jamie Van Fossen, R-Davenport, chairman of the tax-writing House Ways and Means Committee, said Democrats are trying to kill the idea of a retirement-tax cut by weighing it down with provisions that Republicans find unpalatable.

“They are proposing this because they know it is a poison pill,” he said.

The House passed a bill in January that would phase out the tax on pensions and Social Security and eliminate the income tax for low- and middle-income Iowans 65 and older.

“Poison pill” politics aside, this is bad public policy. The Senate Democrats are offering up the pension and social security tax cut to seniors in exchange for the removal of federal deductibility on state income taxes for families with incomes over one hundred grand. They might get a little class warfare mileage out of it, but it’s obvious that nobody in that caucus seriously considered the interaction of tax rates and labor economics.

Tax and labor interaction is described in this National Bureau of Economic Research, Digest Report, December 2004: Effects of Taxes on Labor Income.

"Higher tax rates on labor income and consumption expenditures lead to less work time in the legal market sector, more time working in the household sector, a larger underground economy, and smaller shares of national output and employment in industries that rely heavily on low-wage, low-skill labor inputs."

The Democrats want to tax Iowa families with incomes over $100,000; Iowa families will look at the options, figure out they’re spending most of the second income on taxes, childcare & other work related expenditures, and will opt out of the six-figure-two-income world.

Every politician, MSM outlet and important Iowan with a microphone waves the red flag about Iowa’s labor supply crisis. So why do the Iowa Senate Democrats want to create tax policy that will encourage a certain group of individuals to exit the paid labor force?

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