What makes a good tax?
Taxes are an important component in funding social services in California. As an educator, it is important to understand the tax system as well as how to evaluate a new tax that is being proposed. So what makes a good tax or tax system? The theories of a good tax system as described by Brimley, Verstegen, and Garfield in Financing Education in a Climate of Change include six basic principles.
- Fairness (equity) – Tax systems are considered fair when the burden falls heavier upon the wealthy than the poor. An equitable or fair tax system would levy the highest taxes on the population that has the greatest ability to pay based on income.
- Adequacy- Taxes should be applied to sources that have the potential to produce the most revenue. Tax sources such as income, sales, and property have the most revenue potential.
- Low Collection Cost- The cost of any tax collection should be low to both the individual and the government. Only large personal property items would be included such as homes, boats, and cars.
- Impact- Tax shifting should be minimized. Taxes should fall on the intended group. If a tax is levied on the soda industry (point of impact) and then passed along to the consumer (point of incidence) tax shifting has occurred.
- Neutrality- Taxation should not deter or alter an individual’s behavior. If behavior is influenced by probable taxation, neutrality is not achieved.
- Predictability- Taxation should produce predictable consistent revenue. This tax revenue will bring private revenue into the public sector and should be able to be planned for on a yearly basis. With predictable revenue budgets can be planned without needing new and additional taxes.
The benefits of public education impact all of society and therefore should be available to all citizens regardless of social class or wealth. Under this type of system, that benefits larger society as a whole, education must be funded by the government. The historical method of funding education locally has created many dilemmas regarding equity and adequacy in public school programs. Taxation remains a consistent source of revenue with income, sales, and property taxes being the most predictable (Brimley et al., 2012). Even with predictability there are issues with equity. In a high socio-economic area, like the Silicon Valley, property values are high and many companies are worth millions of dollars. The amount of revenue collected from this type of area differs dramatically from a large urban city that consists of few large businesses and many homeowners living at or below the poverty line.
According to William Chen, 48% of the State of California’s tax revenue in 2011-2012 came from personal income tax. Another 36% came from sales tax, 8% from additional taxes, while only 7% came from taxes on corporate income. Almost all of the local tax revenue came from property and sales tax. Personal income tax best meets the five criteria for being a good tax system and will therefore be ranked the highest. It is the most equitable. Personal income tax is based on income bracket and therefore individuals are taxed based on their ability to pay. Sales tax is not equitable. Sales tax relies upon expendable income. A family has to have buying power in order to contribute to sales tax revenue. It is also not predictable. A family may not make the same purchases year to year. Depending upon the community the amount of sales tax revenue collected can vary greatly. Property tax is another source of revenue that lacks equity. The value of property differs depending upon what community a person resides. Because property and sales tax are tied directly to local tax dollars it further illustrated the burden placed upon low-income communities to provide high quality education. Low-income families pay a greater percentage of their income on basic necessities that translate to sales and property tax, (Redmond, 2012). The lottery tax would be ranked lowest based on the six criteria. Lottery revenue has been described as regressive in nature and produces less than 2% of the state overall revenues (Brimley et al., 2012). The newly imposed educational funding model (Local Control Accountability Formula, LCFF) creates an opportunity for students whose education has historically not been equitable to have an opportunity at an adequate education moving forward.
Brimley, V., Verstegen, D., & Garfield, R. (2013). Financing education in a climate of change. Boston, MA: Pearson.
Chen, W. (2015, April 15). California budget and policy center. Retrieved May 19, 2015, from http://calbudgetcenter.org/resources/californias-tax-dollars-are-about-evenly-split-among-personal-income-sales-and-property-taxes/
Ed-Data. (n.d.). Retrieved May 19, 2015, from https://www.ed-data.k12.ca.us/Pages/SchoolDistrictBondAndTaxElections.aspx
Redmond, T. (2012, May 30). San Francisco Bay Guardian. Retrieved May 19, 2015, from http://www.sfbg.com/politics/2012/05/30/are-california-taxes-fair