This three-part series on tax policy concludes with a discussion of stability, purpose and balance. (Read Part I and Part II.)

Stability
Progressive taxes tend to be the most volatile, that is they tend to go up and down with the economy.  When rich people are doing well, they really rake in the cash but the drop off in bad times is precipitous. This outcome is unsurprising as the income of wealthy taxpayers is more sensitive to the performance of volatile assets.

For this reason, the least progressive taxes tend to be the most stable during recessions. While this is an argument against solely relying on taxes on the wealthiest taxpayers, it is not one against progressive taxation. As one senior legislator explained to me, a good way to look at taxes is that they are a portfolio. You have to have a mix of progressive and stable non-progressive tax revenue sources. Spending below the State’s means in good times (i.e. a rainy day fund) is also good insulation against inevitable downturns.

Purpose
The central purpose of taxes is to raise revenue to pay for government services. More broadly, they should be designed to encourage economic prosperity. On occasion, they can also help to encourage or to discourage an activity (e.g. smoking, energy use). Their purpose is not to punish people for doing well—something sometimes forgotten in the new focus on economic inequality.

At the same time, this does not prevent tax policy designed to protect people with lower incomes (i.e. low taxes) or make it easier through spending to make it possible for people who work hard to live decent lives (e.g. health care, earned income tax credits, educational spending).

Balance
Relatedly, part of the danger of increased polarization can be a lack of proportion in approach. Funding government services costs money. Few enjoy paying taxes but they are the price we pay to have police, fire, schools, roads, etc. While the conservative desire to shrink government is perfectly legitimate that desire goes far overboard with those who attack all taxation and view any taxation as virtually illegitimate.

On the other side, some progressives seem to talk about corporations and profits as if both are inherently illegitimate rather than as employers or engines of economic activity. Moreover, the goal of progressive tax policy should not be endlessly higher taxation or to kill economic growth. As former President Bill Clinton loved to remind Democrats, low unemployment was the best anti-poverty program.

The second in a series on tax policy. (Read Part I here.)

Redistribution at the State Level
Different counties have different per capita tax bases. As a result, it makes sense that school aid to Maryland counties should take wealth into account with the key caveat that each county must raise its fair share of taxes. This is one of the key ideas behind the much-debated Maintenance of Effort law. Poor counties cannot simply pocket aid from the state without raising their fair share in terms of their tax base. Nonetheless, school aid should not be on a simple per student basis.

Additionally, in estimating the amount redistribution between counties or individuals, we need to take into account both taxes and spending. Expenditures on colleges and universities disproportionately help middle-income and wealthy taxpayers.

Redistribution at the County Level
In all the discussion of economic inequality, it often seems lost that the greatest redistribution occurs towards those with children in the public school system. Educational spending takes up an enormous share of county budgets and overwhelms spending in other areas. This is why double-income no kids families are such desirable residents—they contribute a lot in taxes but demand less in the way of services. Sure, we all benefit from having an educated population but paying for it is a transfer from those without to those with kids.

Subsidy Abolition
The competition among states through subsidies for large companies is execrable. Conservatives should hate them because they are economically inefficient and businesses should go where it makes sense. Progressives should hate them for the additional reason that they result in levying higher tax rates on businesses that do not have the leverage to advocate for them. It’s probably just a pipe dream but the states should negotiate a compact to end them.

Internet Taxes
We subsidize businesses located out of state by de facto exempting them from state taxes. (De facto because you’re supposed to pay state and local taxes on these purchases but nobody does.) The effect is that brick-and-mortar stores that actually employ people in Maryland must collect taxes but Internet businesses located elsewhere do not. This makes no sense to put it mildly and is increasingly economically distortive as more business occurs in the form of e-commerce.

The first in a short series on tax policy.

Progressive Taxation Overall
Some progressives believe that every single tax must be progressive. Instead, progressivity is more properly measured by an examination of overall taxes rather than each tax separately. In other words, regressive taxes—such as the gas tax or car registration tax—are fine as long as the overall system remains progressive.

Federal Taxes Should be the Most Progressive
The ability of many businesses and individuals to move pits states and localities against one another in terms of the tax burden. While not all businesses can easily change locale, others may choose where to locate based at least partly on state and local taxes. In contrast, it’s harder for many businesses to escape the United States even in our increasingly globalized economy.

Even Flat Taxes Can be Progressive
If you have a flat tax rate of 5% that only kicks in after the first $50,000 in income, the percentage of total income paid will vary dramatically based on income. People who earn less than $50,000 will pay nothing, while people who earn $70,000 will pay $1000 (5% of the $20,000 above $50,000) or 1.4% of total income. In contrast, people with incomes of $120,000 will pay $3500, or 2.9% of income. Someone with an enviable income of $1,000,000 per year would pay $47,500, or 4.75%.

In the years when Maryland became the wealthiest state in the country, we had a very flat tax that was not at all progressive because the top marginal rate kicked in with only a few thousand dollars of income. Today, we have gone in the opposite direction with progressive taxation with a variety of marginal rates.

Broad Based is Best
The temptation to encourage or to discourage different activities through the tax code is great. But loopholes or variation in tax rates are economically distortive and make the code more complex. Broad based taxes also spread the pain of taxation across different businesses and fields of economic activities.

Externalities are the Exception
The key exception to broad based taxes should be when economic activity dumps costs unfairly on the public sphere. Pollution is the key example as polluters dump the cost of cleaning up their mess on everyone else. As a result, levies on these sorts of activities can help discourage them or pay for cleaning up the mess at time even if broad-based taxation should remain fundamental.