Wednesday, February 23, 2005

Defending TABOR's right flank.

Not all critics of TABOR are from the left. There are those who view TABOR as a Tax Collector's Bill of Rights. They state it licenses the government to increase spending every year therefore driving the demand to raise taxes.


The reason why this will not happen is because of inflation and population growth will naturally drive up revenues without having to increase society's tax burden. Let us say Joe Javacoder earns $50,000 in year one and is taxed at 25%, so Joe's tax payment for year one is. . . $12,500. In order to keep Mr. Javacoder happy his employer must make sure Mr. Javacoder's spending power at least stays even (yeah yeah yeah I work too, I know I prefer to get ahead, lets keep it simple though). Remember the amount of money Mr. Javacoder is irrelevant, what is important is how much stuff Mr. Javacoder can buy that he is concerned about. This is where inflation kicks in.

Our economy has a natural tendency to inflation, that is money loses its value over time. As long as the inflation is mild and steady people can plan and deal with it. Mr. Javacoder gets a raise every year to at least keep his spending power even. Economists often use the terms "real dollars" or "constant dollars". Mr. Javacoder in year two may earn $52,000 (a 4% increase) and if inflation is 4% per year than Mr. Javacoder essentially earned the same salary he did the year before. What happens to Mr. Javacoder's tax payments? Yes, they too go up so now Mr. Javacoder's tax payments are $13,000.

Correspondingly if the government wants to pay for a service it must pay an extra 4% for it but it can do so since the bulk of the taxpayers will be kicking an extra 4%.

Population will act in a similar fashion. The government must pay more for services but the government has a larger tax base to pay for those services.

So TABOR does not cut spending but it should not. What TABOR does is to make those wanting to create new spending to prioritize the new spending alongside old spending and to make real decisions. That seems to me an ideal conservative policy!