State-​​Based Government Is Very Regressive

In a pre­vi­ous post I pointed out that state and local taxes are inher­ently regres­sive whereas fed­eral taxes are designed to be pro­gres­sive. It turns out that this is not the only source of regres­siv­ity in local-​​level fund­ing:

The actual yield on [local and state] tax-​​exempt bonds is higher than nec­es­sary for top-​​bracket bond buy­ers to break even. His­tor­i­cally, it’s been about 75 per­cent of the tax­able yields (accord­ing to my tax case­book — Graetz and Schenk, 6th ed., p. 224). In the exam­ple above, that would be a tax-​​free yield of 3.75 per­cent. That means that the $1.75 sub­sidy is now being shared between the state and the bond buyer. The state gets $1.25 in lower inter­est costs, and the buyer gets $0.50 in inter­est she could not have got­ten with­out the subsidy.

And who buys tax-​​exempt bonds? Rich peo­ple. So by fun­nel­ing the sub­sidy through this tax exemp­tion, part of it gets siphoned off by the rich.

He notes that a pro­posal designed to elim­i­nate the part of the sub­sidy that “gets siphoned off by the rich” was — sur­prise — opposed by Republicans.

22 January 2011 – 8:52 pm | By Benjamin Daniels | Posted in Economics, Federal Budget | Tagged , , , | Comments (166)