Originally published at the Mises Institute.
Understanding taxes is pretty simple. When the government takes a dollar away from a citizen, it makes him and society poorer. When it takes less, the opposite happens.
We have to give it more thought to understand why government pulls in more after cutting tax rates. Moreover, there are different dynamics at play depending upon whether you’re talking about taxes on income, or taxes on property.
When public coffers fill up after income tax rates are cut, it’s usually a sign of good things.
In the immediate sense, economic activity picks up because people have more in their pockets to spend. Even more so if the code is simplified. We then save more money (AND time) on preparation assistance like Turbo Tax.
It bodes even better for the long-term.
These positive actions send a signal: “this administration plans to take less from you.” It allows for more planning into the future. That results in more investing, and risk-taking by entrepreneurs.
Those are the two biggest factors that determine how much prosperity society enjoys. And when we’re more prosperous, we’re earning more. And when we’re earning more, we’re paying more taxes, even if rates were lowered.
A gusher of tax revenue might also be indicative of good things on the local level. The number of households in a jurisdiction could have grown, which would enhance the workforce. It also might be the result of new-business formation.
The governing jurisdiction could even knock a few cents off the tax rate and shield more in home values via increased exemptions.
Why though, would property taxes rise way more than the population and the number of taxable units? Inflation and rising prices. The cause of those? Poor monetary policy and the fallout from the domineering pandemic shutdowns, respectively.
The lack of support for a strong, stable dollar on the federal level has been a regrettable reality this entire century. It makes it more susceptible to weakening, which subsequently means it takes more to buy things.
It also compels investors to seek out safer returns via established assets.
Gold is usually the traditional option. The sneaker resale market arguably emerged as a new, albeit temporary way to preserve value recently. Another reliable way has always been housing, and sure enough, many home sales in the last few years have been to investors.
Enter local and state governments in the age of the coronavirus.
As long as federal ‘aid’ was flowing in (CARES, ARPA), they felt little urge to remove their boot from the neck of productive citizens and businesses. Some of those folks’ work(ed) in the home-building industry, where materials were caught up in the subsequent supply bottlenecks.
These policymakers were/are either oblivious to econ 101, or have been happy to rake in the excess cash produced by the shortages and inflated values they helped create. (The standard retort was “if it saves just one life,” never mind the horrid tradeoffs they ignored.)
But who doesn’t want to see their wealth increase, right? The problem in this case (home values) is that it’s not necessarily linked to an increase in earnings. Therefore, there’s not a corresponding rise in the ability to pay the consequential hike in our property tax bill.
That’s not a problem with our 401K investments, because the growth in their value isn’t taxable, despite the efforts of some. The only time those real investments can be taxed is when they’re sold. Not so with taxes on our homes. That bill comes due every year.
It’s reminiscent of a scene from the classic mob movie “Goodfellas”: “lose your job? Too bad; pay me. Have an expensive emergency? Boo-hoo; pay me. Paid off your mortgage? Big deal; pay me.” That’s paraphrased, but the omitted expletives apply nonetheless.
In a way, the property tax is the most egregious tax. After a day of doling out incentives to big businesses, with what they take from homeowners, local representatives roll up in their driveway, and look their neighbor straight in the eye with a pleasant greeting.
Meanwhile, their actions that day essentially said “Wanna keep being my neighbor? Pay me!”
