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Executive Stimulus Order Reveals the Weakness of State Revenue Mechanisms

By: Matthew Downhour (September 2020)

With Congress unable to come to an agreement to continue stimulus, President Trump has attempted to fill the gap with executive orders to extend unemployment benefits and lift payroll taxes. His attempts to take such a role in fiscal policy is naturally constrained by the constitution, and the result is necessarily ‘sloppy’. Whether they will pass constitutional muster and have the desired effect, these measures reveal deep problems with both state and revenue systems.

First, the failure of congress to act is largely rooted in disagreements about whether or not to ‘bail out’ states whose fiscal positions have been devastated by COVID 19 and the resulting containment measures. The reason for this is largely because the vast majority of states depend on income or sales taxes as a crucial part of their budgets. Since employees have lost their jobs and stores have lost their revenue, these fickle revenue sources have been deeply impacted by the current crisis and tested programs have experienced spending spikes. Not only have current revenues fallen, but it is also clear that raising tax rates on either sales or income would further damage their stricken economies.  The Federal government, is far from immune, but because of its excellent credit and position as a sovereign monetary system can largely ignore deficits – at least in the short term.  If this were not the case, the Federal government would be in a similar COVID crunch.

Fundamentally, this reveals a need for a better local and state revenue mechanism.  One that will be more stable than income/sales taxes and the collection of which has less of a detrimental impact on revenues.  The answer is, of course, a tax on the unimproved value of land. While land values will likely also drop in some places due to COVID, the drop will be far less dramatic than the immediate collapse of incomes and sales that accompanied the COVID-19 lockdowns.  In the long run, the taxing of land cannot cause there to be less of it, and if the land tax drives down the purchase price, there may be winners and losers but the community, as a whole, is no worse off.

This is all the more salient in light of the second half of Trump’s executive order – suspending or deferring payroll taxes.  The president’s statement declared that the deferral would provide “additional incentives for work and employment, right when the money is needed most.”

This shows an implicit understanding of Henry George’s statement in Justice the Object, Taxation the Means: “We impose some taxes for the purpose of getting rid of things, for the purpose of having fewer of the things that we tax. … Why should we tax any man for having exerted industry or energy in the production of wealth?”

If lifting a payroll tax is good for the economy now, why do we have the tax in the first place? If we admit that a payroll tax deferral will incentivize companies to hire workers, and individuals to take jobs, isn’t that already an admission that payroll taxes, which at 1.24 trillion dollars make up nearly 6% of our GDP, are a disincentive to working and to employment?  Why then do we collect them?

In the short run the answer is obvious – they fund programs that people generally approve of and are an important part of our social safety net. Medicare, Medicaid, and Social Security are wildly popular.  Nancy Pelosi and Chuck Schumer declared that deferring payroll taxes will “endanger seniors’ Social Security and Medicare”, and in the present system this is true.  If payroll taxes are forgiven after being deferred (by no means a certainty), the result will be a further undercutting of the budget position of these programs.

In economics, as in life, there are trade-offs. Perhaps a drag on the economy is generally worth the greater stability for seniors – indeed, most people would agree that it is. Given that an executive order deferring payroll taxes undercuts that stability in exchange for uncertain benefits, Democrats likely have a point in opposing this particular action. But more broadly, if it were possible to stop inflicting this drag on the economy in general, it seems both sides would agree that would be desirable.

This is, to a great extent, possible. George’s essay details some successful ways markets have adapted to taxes.  If you tax floors of a building, you have fewer floors; if you tax windows, fewer windows, and ships, fewer ships.  So, the simple question is – what don’t we want?  Most people following the scientific consensus would agree that we don’t want carbon dioxide emissions or other air pollutants.  All of this is quite reasonable to tax, and the revenue here could certainly be useful (and in some countries has been remarkably successful).  But in the end, the goal of a carbon tax is less carbon, and the goal of a pollution tax is less pollution, and thus the rates will be set to accomplish these goals, not maximize revenue.

If taxes on those things we don’t want are insufficient, then the next option is a tax on those things in which we will always have the same quantity. The most obvious category here is land. Georgism agrees that cutting a payroll tax would be an excellent way to ‘incentivize labor and employment’ – but unlike the temporary measures pushed by the current administration (and historically used by others), seeks to provide a viable alternative revenue source to maintain the programs currently funded by payroll taxes. Because the value of land fluctuates less with economic ups and downs compared to sales and income taxes, there would be less need for ‘emergency’ transfers of funds or borrowing.  This would, hopefully, obviate the need for executive orders and other non-legislative fiscal adjustments.

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