In Which I Support a Tea Party Bill for School Funding

In my latest Patch column, I argue that a school funding reform plan being pushed by the Tea Party could actually be more distributionally progressive than the current way PA funds public education.

I qualify my support with an argument for changing the state sales tax to a progressive consumption tax:

Instead of taxing sales at the point of sale, the state would tax your consumption – the difference between your income and your savings. On their state tax forms, taxpayers would report their total income and their total savings. The difference, their consumption, would be taxable at the sales tax rate.

To make it progressive, I would exempt the first $25,000 of consumption, and tax consumption over $100,000 at progressively higher rates.

Getting rid of the sundry exemptions for specific industries would allow the state to keep the consumption tax rate very low, while preserving HB1776’s goal of a broad tax base. It would also encourage high earners to save and invest, instead of splurging on pure luxury consumption and status competition. With a progressive consumption tax, taxpayers would benefit from useless status competition between the top earners.

Now, I may have to retract this whole thing soon, because Frank Pintabone is telling me the Rendell administration studied an earlier version of this bill and found that it would raise way way less revenue than the current system. In that case I would argue that it needs to be revenue-neutral, like the bill’s advocates are promising it is, and this could be achieved through the progressive changes to the sales tax I advocated.

One thing that bugs me about this though is that it’s shifting the tax burden away from landowners, to labor and capital. That is, away from socially useless land rents to productive activity. The relative ease of collecting the consumption tax makes this change attractive, but still it rankles. I could just as easily be convinced to fund education entirely with a land value tax, which would be distributionally progressive and further my pro-density economic development goals.

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