The benefit of a low, stable tax base

Democrats have one attitude towards taxes:  raise ’em.  The higher they are, they think, the more money that government will have to redistribute to those the Democrats deem worth. They never seem to grasp that low, stable taxes are infinitely more beneficial to the economy, in both boom times and bust.

Obama, of course, is foremost amongst those who have a rather signal inability to grasp cause and effect.  Despite his Harvard degrees (or perhaps because of them, given the state of modern education), Obama blissfully assumes that governments generate money — which is true, so long as government first sucks the money out of its citizens.

As it is, those of us who have some grounding in reality know that people make money, not governments.  Over the long haul, lowering taxes so as to allow people to make money actually increases the money supply and (wow!) increases the government’s tax take.  Thus, 50% of $100 is always going to be less than 10% of $1,000.  (Maybe Obama’s problem is that he never learned the difference between percentages and absolute values.  Nah!  I think he’s just an ideological fool, but that’s me.)

Anyway, why am I going off on this point?  Because it turns out that low, stable taxes are as beneficial in bad times as they are in good.  I know this because of a nice, clearly written editorial in today’s IBDeditorials section celebrating the 30th Anniversary of Prop. 13, the homeowner’s revolt in California.  (Incidentally,) I’ve always had a love-hate relationship with Prop. 13.  My Dad, who was a public school teacher, was royally screwed by the passage of Prop. 13, which forced his school to close.  My personal emotions don’t like it, even as my intellect and sense for the public welfare support it.)

In any event, it turns out that, because of Prop. 13’s stabilizing effects, even in an economic downturn, with the real estate market quite sour, local communities that rely on property tax revenues are not only not losing money, but gaining money:

The key to this puzzle is, as the Los Angeles Times notes, the role of Proposition 13 “as an economic stabilizer.” Passed by voters in 1978, when an earlier real-estate boom juiced assessments so fast people were in danger of being taxed out of their homes, Prop. 13 now is shielding cities and counties from the latest downdraft.

It does this by assessing homes at their sale prices and limiting annual increases to 2% after that. A house bought for $500,000 in 1995, for instance, would be assessed at no more than $647,000 in 2008, even if its market value was well over $1 million.

Prop. 13 also caps property tax rates (other than voter-approved bond issues or special levies) at 1% of assessed value. These limits produce a smooth, gradually rising, revenue stream. Without them, local governments would be lurching from boom to bust.

Like any force for fiscal discipline, this stabilizing effect is appreciated much more in the busts than the booms. Prop. 13 has been seen ever since its passage as a drag on the growth of government. Its assessment formula also has been widely criticized as unfair.

Warren Buffett thought it odd, for instance, that a home he had bought in the early ’70s in the seaside suburb of Laguna Beach had a 2003 tax bill of $2,264 despite a market value of about $4 million. (Someone buying that house now, assuming its price holds, would pay at least $40,000 a year).

The point that Buffett and so many others missed is that Prop. 13 is designed to protect homeowners of modest incomes from the caprices of real-estate bubbles. It keeps crazy price action from turning into confiscatory taxation.

I get that.  I wonder if Obama can?