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Tax Gouging: The Real Problem

06/08/2006Thomas J. DiLorenzo

The single most important tax reform of the 1980s was the indexation of the federal income tax to inflation and the reduction of the number of federal income tax brackets from fifteen to three. Prior to that, ordinary middle class workers were pushed up into higher and higher tax brackets by simply receiving cost-of-living pay increases. The result was that a couple of years of cost-of-living increases actually reduced your standard of living by diminishing your overall take-home pay after taxes while enriching the state.

Under this corrupt scheme the Federal Reserve would print excessive amounts of money, which created inflation. The inflation led to cost-of-living increases that in turn led to "bracket creep" and higher tax payments. The federal government's budget became bloated while the taxpayers suffered. Politicians never had to take the heat for voting for a tax increase; inflation did it for them. It was truly a form of taxation without representation (not that taxation with representation is any better).

The federal government is no longer capable of plundering middle-class taxpayers in this particular way, thanks to indexation. But state and local governments do through the vehicle of property taxation.

The Fed's expansionary monetary policy over the past decade has caused artificially low interest rates, which have fueled the real estate boom (or bubble, as some would say). Along with extraordinary increases in property values has come equally extraordinary property tax increases all across America.

According to online reports of tax revenues in my own state of Maryland, local governments in the Baltimore area alone collect about 35 percent more in property tax revenues than they did in 2000. Are Baltimore's schools 35 percent better? Are the police 35 percent more efficient? Are citizens getting a third more services from City Hall? Of course not; they're simply paying that much more for the same crappy "services."

State and local politicians are reveling in "budget surpluses," which should be more appropriately named undeserved windfall "profits." These revenue increases are the result of an extreme form of price gouging by the state which is, after all, a monopoly in all that it does.

On top of higher property taxes, many homeowners who have sold their homes have also been snared by capital gains taxes, not to mention the confiscatory "property transfer tax" in some states, which gives the government its percentage "take" of every real estate transaction, not unlike how the Tony Soprano gang of HBO fame goes about its business of making "collections" from local merchants.

After gouging taxpayers for years in this way, this election year has suddenly turned many local politicians into "tax cutters" — sort of. Republican Governor Robert Ehrlich of Maryland has magnanimously proposed to cut the state's property tax rate so much that it would save the average Maryland homeowner as much as $40 a year, almost enough to attend a Baltimore Orioles baseball game — alone. This comes three years after he raised the state property tax rate by 57 percent.

The first Republican governor in Maryland in thirty-five years "celebrated" his victory by imposing the largest property tax increase in the state's history. Ignorant Maryland voters still believe that voting Republican is a vote against Big Government!

The property tax bonanza that is being enjoyed by state and local governmental bureaucracies creates yet another evil. Whenever state and local governments experience windfall "profits" such as this they use the money to appease more and more special interest groups by starting up myriad new programs. Then when the real estate market cools, or the economy in general slows down, the programs all remain in place while revenues shrink, creating a "deficit crisis."

This in turn leads to calls for even more tax increases, which impose further harm on the local economy. There is never any mention of making government more efficient because government cannot be made more efficient any more than a cat can be taught to bark like a dog. Thus, property tax increases today inevitably lead to even more increases in the future, while impoverishing taxpayers more and more and damaging local economies.

During the early 1990s, after the last big real estate boom (of the 1980s), states that had experienced more modest revenue growth were in the best financial condition because they were limited in their ability to go on wild spending binges. State and local politicians are monopolistic price gougers. Every one of them should be thrown out of office this fall, just for the fun of it.


Contact Thomas J. DiLorenzo

Thomas DiLorenzo is a former professor of economics at Loyola University Maryland and a member of the senior faculty of the Mises Institute. He is the author of The Real Lincoln; How Capitalism Saved America; Lincoln Unmasked; Hamilton's Curse; Organized Crime: The Unvarnished Truth About Government; and The Problem with Socialism.

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